Regulation and Sarbanes-Oxley

On the question of why we get regulation Oliver Hart has a paper which looks at the Sarbanes-Oxley Act (SOX) in the US. Hart argues that rather than being based on sound principles, regulation often seems to be a consequence of the public’s need for action in response to a crisis, and that this was the case with Sarbanes-Oxley Act. Hart writes,

What does explain SOX then? Probably the best explanation is that the pressure on politicians to act—from the public, interest groups, and the politicians themselves—was so great that nonintervention was not an option. To quote Coates [2007, p. 91]: “In a democracy in which most voters own stock either directly or indirectly through their pension and retirement funds, government was certain to react. The only question was the shape the reaction would take.” The good news is that the intervention does not seem to have been a disaster; in fact, it may even have been a mild success (see, e.g., Coates [2007], Leuz [2007], Hochberg, Sapienza, and Vissing-Jørgensen [2009]). At the same time, as Ball [2009] points out, we still do not know definitively whether the 1933 to 1934 Securities Acts were a good thing 75 years after the event! Thus, we will not have the final word on SOX for a while.

So its the old, "we must do something and this is something, so lets do it" (no matter how bad the something may be) approach to government action. Interestingly he also argues that the recent financial meltdown provides another example of the same phenomenon.