Determinants of Transnational Regulatory Regimes

Abstract

A conceptual framework for cross-country regulatory regimes is modeled through the interplay between the private sector, government, and civil society. Our goal is to provide a baseline economic foundation for discussions of transnational regulation. A cross-country or transnational regulatory apparatus is demanded by some parties based on cost and benefits while other parties may meet the demand by supplying regulation based on cost and benefits. One of the contributions of the paper is an economic classification of the drivers that assists in identifying sources of conflicts between the different parties as well as identifying the factors causing divergence between public and private optimum levels of regulation. It also clarifies why some efforts at transnational regulatory regimes fail while others succeed. A graphical model shows how the interaction between demand and supply as seen from the perspective of private financial firms, government (and the public from which their power is derived), and civil society establishes the optimal level of transnational regulation. We analyze the emergence of various regulatory structures as a result of the interaction of supply of and demand for regulation. We further assess the effects of changes in the drivers that cause shifts in the demand and supply curves for regulation that make the creation of transnational regulation more or less likely. Those include the evolution of a common currency and globalization of trade that changes the level of economic integration over time. The results of the model are applied to and used to discuss the evolution of regulatory processes related to the Markets In Financial Instruments Directive (MIFID) as a process of shifting demand and supply curves that moves the optimal solution. We address how the shifting characteristics of the political and macroeconomic environments, legacy national cultures, and attitudes toward the regulation of financial services and markets affected the path of MIFID.