Thursday, April 26, 2007

How To Compensate Regulators

Steve Landsburg suggests that we could improve the performance of various regulatory agencies by forcing the regulators to hold stock portfolios of the industry which they regulate. This is a case of "good idea, bad implementation". I can't support telling people that they have to invest in a particular way; that's not a game that government should be playing. However, can't we achieve a similar effect by tying their compensation package to an index of the relative industry? Index goes up, compensation goes up. Index goes down, compensation goes down. In that case we'd not be telling anyone how to invest the money they already have, but at the same time they'd have an incentive to ensure that the industry was effectively regulated. And, by using an index rather than actual stocks, it also works around the Viagra/Cialis problem that Steve brought up.

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