Stitched on the Edge: Rule Evasion, Embedded Regulators, and the Evolution of Markets1

While the role of laws and regulations in structuring markets is well established, it is less understood how rule evasion affects the evolution of markets or how the interaction between regulators and the regulated about the meaning of compliance influences this effect. The authors study this issue by looking at the development of the asset-backed commercial paper (ABCP) market in France, Germany, and the Netherlands from 1999 to 2009. In all three countries, this market involved financial innovations designed to evade regulations. The authors identify diverging trends in the ABCP market that are a result of whether and how regulators were embedded in the different interpretive communities that defined regulatory compliance, such embeddedness being dependent on their discretionary and sanctioning power as well as their expertise. Focusing on these regulatory networks that embed institutions in markets, they propose a synthesis of relational and institutional accounts of the embeddedness of markets.