Efficient Regulation, Andrei Shleifer
NBER Working Paper, January 2010
Abstract: Regulation of economic activity is ubiquitous around the world, yet standard theories predict it should be rather uncommon. I argue that the ubiquity of regulation is explained not so much by the failure of markets, or by asymmetric information, as by the failure of courts to solve contract and tort disputes cheaply, predictably, and impartially. The approach accounts for the ubiquity of regulation, for its growth over time, as well as for the fact that contracts themselves are heavily regulated. It also makes predictions, both across activities and across jurisdictions, for the efficiency of regulation and litigation as strategies of enforcing efficient conduct.
Actually, it's easy to explain. Regulation makes it possible for felons like Andrei Shleifer to steal millions. There, that puzzle is solved!
(Nod to Kevin L)