Reputation, commitment, and financial market regulation

Qinyuan Xue, Peng Zhan, Yifei Jin and Hui He

International Review of Financial Analysis, 2024, vol. 96, issue PB

Abstract: This paper explores the interplay between reputation mechanisms, pre-commitment strategies, and financial market regulation. Through a theoretical model, we analyze how repeated interactions between market participants, combined with regulatory oversight, can lead to improved compliance and market efficiency. The study demonstrates that reputation mechanisms serve as powerful self-regulatory tools, as negative reputational feedback exerts a stronger influence on market behavior than positive feedback, particularly when the cost of non-compliance is high. Additionally, we investigate the role of pre-commitment in promoting market cooperation and separating equilibria, where high-quality suppliers distinguish themselves from lower-quality competitors. However, in the absence of stringent regulatory enforcement, pre-commitments may be exploited by low-quality suppliers, leading to market inefficiencies. Our findings suggest that a reputation-based, tiered regulatory framework can optimize resource allocation and enhance the effectiveness of financial market regulation. The paper concludes with policy recommendations for integrating these mechanisms into current regulatory practices and outlines areas for future research.

Keywords: Financial market regulation; Reputation mechanisms; Pre-commitment; Asymmetric information; Market efficiency (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finana:v:96:y:2024:i:pb:s1057521924005994

DOI: 10.1016/j.irfa.2024.103667

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