Coasean Cost-Benefit Analysis of Financial Regulation : The Fiduciary Standard

U.S. law requires federal regulators to perform cost-benefit analysis of new rules proposed to correct market failure. As Coase convincingly showed decades ago, the inefficiencies of market failure can be usefully attributed to the costs of transacting. This essay proposes a novel and relatively simple complement to traditional cost-benefit analysis where market participants face transaction costs sufficiently low that direct bargaining or competitive market forces will drive them toward efficiency. The Coasean approach requires regulators to identify the relevant parties, the economic good they seek to exchange, and the nature of the transaction cost equilibrium that inhibits them from capturing all possible gains from trade. A rule is justified under this approach only if the regulator can show it is likely to reduce transaction costs. Facing lower transaction costs, the parties will adjust their private arrangements to correct inefficiencies and increase the gains from trade. There is no need for the regulator to quantify and weigh total costs and benefits. This is information the parties—the men and women “on the spot”—are best able to identify on their own