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Is Bad Regulatory Competition Better than No Regulatory Competition?

I had an interesting conversation about regulatory competition in the context of insurance. A lawyer I was speaking with argued that any regulatory competition structure—even a deeply flawed one—would help move towards a more liberal, less regulated insurance market. He told me that even a “bad” Optional Federal Charter for insurance companies would get things going in the right direction. (OFC would let insurance companies subject under federal regulation and sell the same product throughout the country without worrying about complying with every state regulatory regime.) Although I'm not altogether sold on this position, it does have some solid academic support. The literature on regulatory competition—in particular Dale Murphy's very good 2004 look at offshore finance—suggests that even initially minimal international regulatory competition tends to result in more liberal regulatory regimes in the long run. But what works in an international context may not work within a nation's boundaries. An overreaching central government can slow down or even stop competition between states. And the "worst" regulatory competition could, in theory, subject just about everyone to both federal and state regulation. Between the 1930s and the late 1970s, after all, banks had a choice of chartering authorities but faced so many regulatory obstacles and outright price controls that bankers worked only a few hours a day and “competed” by seeing who could hand out the most feature-packed toaster. The chartering options may have helped to build support for roughly 20 years of genuine banking reform culminating in the 1999 Financial Modernization Act (Graham-Leach-Bailey) that erased most of the restrictions on the range of businesses financial services firms could enter. But 60 years seems like a long time to wait.