Abstract
Motivated by Sarbanes-Oxley and similar legislation in Europe, I examine the costs of regulation complexity. After briefly reviewing economic theories of information costs and bounded rationality, I focus on psychological determinants of regulation costs including perception bias, memory loss, cognitive bias, superstitious learning, learned helplessness, rejection, denial, groupthink and herding effects. In combination, these factors suggest high costs of complexity. Besides the direct costs of compliance, non-compliance and enforcement, there are potentially more important opportunity costs of distorted decisions, risk aversion, opportunism and creativity loss. Companies and individuals attempt to mitigate complexity costs by alternative strategies including non-compliance, trial and error, imitation and professional advisors. When the costs of complexity become prohibitively high, decision makers will cease to use existing markets. I hypothesize that a wave of delistings from major stock exchanges may have been caused at least partly by costs of complexity.
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Notes
- 1.
This paper has benefited from comments by Igor Filatotchev, Gunnar Eliasson and participants at a workshop on “The Economics of the Modern Firm”, Jönköping September 2007.
- 2.
“Introspective observation is what we have to rely on first and foremost and always” (James 1890, p. 185).
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Thomsen, S. (2011). Regulation Complexity and the Costs of Governance. In: Brink, A. (eds) Corporate Governance and Business Ethics. Studies in Economic Ethics and Philosophy, vol 39. Springer, Dordrecht. https://doi.org/10.1007/978-94-007-1588-2_2
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