Better Responses to Financial Crises

How can regulators best respond to financial crises? In a forthcoming article in the Duke Law Journal, I show how a law-and-economics framework can guide regulators’ responses. There are two kinds of remedies for failing to comply with a law: property rules and liability rules.  Liability rules require compensation, such as money damages.  Property rules impose draconian penalties, such as injunctions, punitive damages, or large fines.  Property rules can make sense during normal times, because the threat of harsh penalties ensures compliance.  But financial crises upend many normal assumptions and prevent some entities from complying with all of their legal … Read more