89 Tex. L. Rev. 227 (2010-2011)
Regulatory Arbitrage

handle is hein.journals/tlr89 and id is 233 raw text is: Articles
Regulatory Arbitrage
Victor Fleischer*
Regulatory gamesmanship typically relies on a planning technique
known as regulatory arbitrage, which occurs when parties take advantage of
a gap between the economics of a deal and its regulatory treatment, restruc-
turing the deal to reduce or avoid regulatory costs without unduly altering
the underlying economics of the deal. This Article provides the first compre-
hensive theory of regulatory arbitrage, identifying the conditions under
which arbitrage takes place and the various legal, business, professional,
ethical, and political constraints on arbitrage. This theoretical framework
reveals how regulatory arbitrage distorts regulatory competition, shifts the
incidence of regulatory costs, and fosters a lack of transparency and ac-
countability that undermines the rule of law.
I.  Introduction.............           ...................   ...... 228
II.  A Theory of Regulatory Arbitrage..................... 236
A. The Lawyer as Regulatory Arbitrageur ..............         ..... 236
1.   Three parties at the table........................... 238
2.   Quarterbacking the deal     ...................    ......... 241
B. Necessary Conditions.       ............................... 243
1.   Defining Regulatory Arbitrage Opportunities .......     ...... 243
2.   Close Economic Substitutes     ...................      ...... 250
3.   Close Strategic Substitutes..................         ........ 251
C.   Constraints on Regulatory Arbitrage  ..............      ....... 252
1.   Legal Constraints........ ........................ 252
2.   Transaction Costs ........................             ........ 257
3.   Professional Constraints........................... 264
4.   Ethical Constraints      ..........................   ..... 271
5.   Political Constraints     ........................    ...... 272
* Visiting Professor, NYU School of Law; Associate Professor, University of Colorado Law
School. I thank Mihir Desai, Dhammika Dharmapala, Miranda Fleischer, Kristin Hickman,
Michael Knoll, Sarah Lawsky, Kyle Logue, Paul Ohm, Larry Ribstein, Alex Raskolnikov, David
Walker, the participants of workshops and seminars at BYU, Cincinnati, Colorado, Emory,
Minnesota, Toronto, and Vanderbilt law schools, and Bill Henderson and the Law Firms Working
Group for useful comments and suggestions on earlier versions of this paper. I also thank the many
practitioners who shared their views and shaped this project.

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