He writes,
Market-replacing regulatory strategies seek to limit choice and competition through prohibitions or restrictions. . .A market-reinforcing regulatory strategy, by contrast, seeks to promote competition and choice
That is from his essay in the compendium, Reframing Financial Regulation.
Think of the government as giving guidance to consumers. This could be justified for financial products, for medical care, or for nearly any product or service that poses cognitive challenges for consumers. Market-replacing regulation provides guidance in the form of prohibition. Market-reinforcing regulation is intended to provide guidance in the form of disclosure.
It strikes me that one approach might be for the government to create an artificial intelligence program to advise consumers in these areas. You could make a phone call to the advisory service, speak in natural language, and get advice. Once you get the advice, you can take it or leave it.
This advisory service need not be perfect. The question is whether it could be better than market-replacing regulation or with other imperfect attempts at market-reinforcing regulation.
Wouldn’t it still be susceptible to capture problems?
They used to have the state university cooperative extensions….
But standardization can enhance competition while customization can reduce it, so is the choice desirable and useful or opaque and stultifying? Choice does not necessarily mean competition, nor competition choice.
In addition to money incentives in the form of taxes and subsidies, governments can regulate the intermediate or final use of any good by (a) mandatory disclosure of information relevant to its use by producers and sellers, (b) conditional authorisation of production, trade and/or use, and (c) prohibition of production, trade and/or use. I believe that by far governments rely more on (b) than on (a) + (c) + money incentives (in addition, reliance on (a) appears to have been increasing but on (c) decreasing). I believe heavy reliance on (b) is due to politicians’ perceptions of greater opportunities for graft. In all countries, both the systems of payments and the systems of financial intermediation are good examples of heavy reliance on (b).
But why would we expect the government be better at offering guidance than organizations like Consumer Reports or crowd-sourced reviews as on Amazon and IMDB? Is good guidance in consumer finance really hard to come by?
If you could graph quality of consumer guidance versus government involvement I wonder what the graph would look like.
What about a high school course on the subject?