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Cafe Hayek examines proposed regulation of hedge funds, applying a mode of analysis that they won't teach you at the Kennedy School:
Suppose you want to figure out why a particular regulation passes and the way that it's written. Imagine the Legislature putting that regulation up for auction. Suppose people could bid on the terms of the regulation and the outcome went to the highest bidder.
Pretty crass, isn't it? But what a useful way to organize your thinking about the political process. There isn't a literal auction. But what the example does is focus your mind on two questions:
Who has the incentive to show up and be heard? Who is going to make the most noise? The answer is mutual funds and bank asset managers, which charge a lot for little in the way of service (and much of that little, poor). Of course, the hedge funds themselves are split, since the big ones know well that high compliance costs will help keep out smaller competitors.
posted by James DeLong @ 8:15 AM | Accounting
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