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Transaction Cost-Benefit Analysis, With Applications To Financial Regulation, D. Bruce Johnsen
Transaction Cost-Benefit Analysis, With Applications To Financial Regulation, D. Bruce Johnsen
D. Bruce Johnsen
As Coase convincingly showed, transaction costs inhibit the ability of market participants to achieve first-best outcomes. This paper proposes a novel and relatively simple alternative to traditional cost-benefit analysis when regulated parties face sufficiently low transaction costs that they can bargain directly or rely on competitive markets to set efficient terms of trade. In these settings, the only informational burdens financial market regulators need bear to assess corrective rules is to identify the relevant parties, the “good” they hope to exchange, and the transaction costs that inhibit them from maximizing joint gains from trade. A rule is justified only if …
Myths About Mutual Fund Fees: Economic Insights On Jones V. Harris, D. Bruce Johnsen
Myths About Mutual Fund Fees: Economic Insights On Jones V. Harris, D. Bruce Johnsen
D. Bruce Johnsen
Mutual funds stand ready at all times to sell and redeem common stock to the investing public for the net value of their assets under management. In the language of transaction cost economics, they are open-access common pools subject to virtually free investor entry and exit. The Investment Company Act (1940) requires mutual funds to be managed by an outside advisory firm pursuant to a written contract, which normally pays the adviser a small share of net asset value, say, one-half of one percent per year. Following 1970 amendments to the Investment Company Act imposing a fiduciary duty on advisers …
Directed Brokerage, Conflicts Of Interest, And Transaction Cost Economics, D. Bruce Johnsen
Directed Brokerage, Conflicts Of Interest, And Transaction Cost Economics, D. Bruce Johnsen
D. Bruce Johnsen
This paper relies on the economics of transaction costs to assess the likely effect on investor welfare of the U.S. Securities and Exchange Commission’s (SEC’s) prohibition on a puzzling business practice known as directed brokerage. Its key insight is that the quality of a broker’s execution of portfolio trades is difficult for a mutual fund adviser to assess until it is too late ─ that is, execution quality is an “experience good.” Low-quality brokerage can substantially reduce investor returns. To have the incentive to provide high-quality execution, a broker must expect to receive a stream of premium portfolio commissions in …