Self-regulation and governmental oversight: a theoretical and experimental study

Abstract

A self-regulatory organization (SRO) is a non-governmental organization owned and operated by its members, with the power to create and enforce industry regulations and standards for its members. A key question is whether oversight by an SRO can replace governmental oversight, or whether supplementary governmental oversight is necessary. Using a formal model for the financial sector, and solving simultaneous games, I show that a lack of commitment by the SRO may necessitate governmental oversight of both SRO members and the SRO itself. The core of the model is supported by economics experiments.