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Let's consider an example (that may not describe how these entities actually work, but humor me): You are the Financial Stability Board (FSB), you need to designate systemically important financial institutions (SIFIs), and when you do, there's going to be costs associated with that decision since those companies now undergo extra scrutiny, increasing costs both for the regulator and the company. Presumably there's an even longer list of companies that might be SIFIs, and the regulator needs to research these companies before deciding which of them need to be designated SIFIs and deserve the extra scrutiny (and the costs associated with that decision). The regulator does not have the resources to monitor everyone, and even amongst those it monitors, it likely allocates unequal effort to those on oversight.

Is there economic theory and modeling on how this decision should be made? I asked some economists and they suggested that this sounds like a multi-armed bandit problem, and the multi-armed bandits appear to be a part of the answer. That said, are there any papers that tie multi-armed bandits to regulation, assuming that's even the right approach?

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  • $\begingroup$ Welcome to the site. Although the text of your question is clear enough, your original title without the word 'financial' was rather confusing as regulators, without that qualification, include regulators of industries such as water, electricity or telecomms where a main purpose of regulation is to protect consumers from overcharging by natural monopolies. Often therefore such regulators just monitor every company within their industry, so no economic theory or model is needed to select whom to regulate. $\endgroup$ Commented Apr 12 at 21:14
  • $\begingroup$ @AdamBailey Well, while the example I mentioned refers to financial regulation, that's not the real-world situation I am thinking of. The one I am thinking of is not a financial regulator, and they do not monitor everyone they could in theory monitor because they do not have the resources to do that. I mention a financial regulator because I bet there would be papers on this related to financial regulation. $\endgroup$
    – cgmil
    Commented Apr 12 at 23:40
  • $\begingroup$ Apologies - I misunderstood and didn't note that your Financial Stability Board was just an example. You are free to reverse my edit. It might be helpful to indicate in the question what situation you are thinking of. $\endgroup$ Commented Apr 13 at 10:59

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