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Competition among Exchanges and Enforcement Policy

Competition among Exchanges and Enforcement Policy by Cecilia Caglio
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In this paper, we explore how competition among stock exchanges, operated as self-regulatory organizations (SROs), affects the design of their members' surveillance. We develop a model where two for-profit SROs compete for trading volume, while brokers execute transactions on behalf of the investors and may misreport the true cash flow. The SROs can deter a fraud by announcing an investigation and imposing a monetary penalty.The success of the investigation depends upon both the amount of resources devoted to monitoring and the efficiency of monitoring technologies. We show that when contracts are incomplete and investors do not have perfect information about the monitoring efficiency, competition among exchanges induces a race to the bottom in enforcement policy and a reduction in total welfare, compared to the case of a monopolist SRO.
International Monetary Fund; February 2013
31 pages; ISBN 9781475520002
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Title: Competition among Exchanges and Enforcement Policy
Author: Cecilia Caglio; Andrea Pescatori
 
ISBNs
147552000X
9781475516784
9781475520002
9781475583700