Although it is often summarily dismissed by critics, regulation does serve an important role in correcting so-called “market failures” such as economic externalities or asymmetric information.  When a buyer (investor) makes a bad purchase decision, not only do they lose out, but the economy itself suffers from the resulting misallocation of resources (a.k.a. “adverse selection”).

But when regulations stray beyond the bounds of simply fixing these market failures, they too can lead to suboptimal results for buyers (investors) and the economy as a whole.  In other words, the medicine can be worse than the disease.

So goes an argument made recently by Jeff Schwartz in the Spring 2009 George Mason Law Review called “Reconceptualizing Investment Management Regulation“.

“Awkward Response”

Schwartz writes: More…