Accounting for Financial Innovation and Borrower Confidence in Financial Rule Making: Analogies from Health Policy

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In an industrial context where new products may appear regularly, the regulator—and the analyst who seeks to judge the benefit-cost ratio of the regulator’s proposals—faces at least two variables relevant to decision making: the rate of new-product innovation and the distribution governing the market’s beliefs in those future products. Following an analogy to health policy, where discussions of regulation’s effects on innovation and consumer confidence are common, I propose that these variables be systematically taken into account in the kind of net-present-value analysis of proposed rules that currently characterizes benefit-cost analysis (BCA) of rules in environmental and health regulation and that characterizes the Office of Information and Regulatory Affairs (OIRA) review of these BCAs and the associated rules. This requires models of innovation and market beliefs under varying conditions of regulation, models that are often industry specific and draw on intuition and empirical research from a number of disciplines.

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