Part One CAI Mengqi 5/30/2014 ENFORCEMENT

Page  2 Enforcement  Investor protection requires both law and the effective enforcement of law.  Academic research underscores the importance of enforcement.

Page  3 Division of Public Enforcement and Private Enforcement  Public enforcement is usually defined by a system in which the law enforcers will investigate violations and prosecute violators as government employees.  Under private enforcement, private individuals and firms would investigate violations, apprehend violators, and conduct legal proceedings to redress violations.

Page  4 Relative Value of Public Enforcement and Private Enforcement  Becker and Stigler  Landes and Posner  LLS  Howell E.Jackson and Mark J.Roe Reference:  Becker, G. S., & Stigler, G. J. (1974). Law enforcement, malfeasance, and compensation of enforces.  Landes, W. M., & Posner, R. (1974). The private enforcement of law.  Porta, R., Lopez-de-Silanes, F., & Shleifer, A. (2006). What works in securities laws?.  Jackson, H. E., & Roe, M. J. (2009). Public and private enforcement of securities laws: Resource- based evidence.

Page  5 Relative Value of Public Enforcement and Private Enforcement  Becker and Stigler – In the public enforcement, the enforcer is rewarded by a fixed, flat wage. – The essence of private enforcement is compensation of enforcers on performance, or by a piece-rate or a bounty, instead of by a straight salary.

Page  6 Relative Value of Public Enforcement and Private Enforcement  Becker and Stigler – A private enforcement system is to be preferred because it (a) reduces the cost of monitoring public enforcers; (b) avoids the need to pay them high wages; (c) removes the risk of malfeasance.

Page  7 Relative Value of Public Enforcement and Private Enforcement  Landes and Posner – Optimal public enforcement is defined as a social planner's unconstrained social-welfare-maximizing problem through the optimal choice of fines and the probability of apprehension and conviction. – Private enforcement regime will result in overinvestment in law enforcement.

Page  8 Relative Value of Public Enforcement and Private Enforcement  LLS – Highlight the significance of private enforcement – We examine the effect of securities laws on stock market development in 49 countries. We find almost no evidence that public enforcement benefits stock markets, and strong evidence that laws facilitating private enforcement through disclosure and liability rules benefit stock markets.

Page  9 Relative Value of Public Enforcement and Private Enforcement  Howell E. Jackson and Mark J. Roe –In principle, both enforcement mechanisms could have serious defects and strong advantages. – Howell E. Jackson and Mark J. Roe constructed two categories of resource-based public enforcement intensity. Resources are measured by staffing levels (per million of population) and budgets (per billion US$ of GDP). – Public enforcement correlated significantly with key financial outcomes, such as stock market capitalization, trading volumes, the number of domestic firms and IPOs.

Page  10 Relative Value of Public Enforcement and Private Enforcement  Howell E. Jackson and Mark J. Roe – Public enforcement is no less valuable for financial market outcomes than private enforcement such as disclosure. – Liability-based private enforcement is perhaps less important, given the weak results for private enforcement's liability measure.

Page  11 Conclusion  Becker and Stigler's recommendation of privatization is far from being adopted.  Landes and Posner tell us why private enforcement might not work well as compared to public enforcement. But the public enforcement outcome in this theory is the first best, which might not be implementable in practice.

Page  12 Conclusion ProsCons Public Enforcement  public-regarding  policymakers  sharp penalties  weak incentives  poor information Private Enforcement  well-informed actors  well-aligned incentives  collective action dilemma  free rider tendency  difficulty in getting full compensation Prior Indeterminacy Empirical Study LLS concluded that public enforcement is of limited value, while Howell E. Jackson & Mark J. Roe concluded otherwise.

Page  13 Conclusion  Private enforcement is often more effective than public enforcement, but the two forms of enforcement complement each other.  Public enforcement is no worse than disclosure-based private enforcement, and much better than liability-based private enforcement.  Government may choose public enforcement even though private enforcement is socially desirable, because the government loses control over enforcement intensity when law enforcement is privatized.