# kaal:claim:2714974-028

**Claim.** Direct regulation of hedge fund leverage increases moral hazard costs, because lenders and counterparties relax their own vigilance once they rely on government rules to constrain fund risk taking.

**Type.** failure  **Support.** argued

**Holds when.**

- applies where government rules substitute for private monitoring

**Source quote.**

> Direct regulation could also increase moral hazard costs as lenders and counterparties may relax their vigilance in reliance on the government rules.

**From.** Kaal and Oesterle, *The History of Hedge Fund Regulation in the United States* (2016), INDIRECT HEDGE FUND REGULATION, page 25

**Cite as.** Kaal and Oesterle, The History of Hedge Fund Regulation in the United States (2016). SSRN: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2714974

**Verify.** sha256 of source PDF `7764601d3ed5bb056b58949e8411eff9dfb9855f143719062030c980c5fa801b` at https://raw.githubusercontent.com/wulfkaal/Academic-Papers/main/papers/pdf/Kaal%20and%20Oesterle%20-%202016%20-%20The%20History%20of%20Hedge%20Fund%20Regulation%20in%20the%20United%20States.pdf

**Failure mode.** Regulatory crowding out of private monitoring  (family: moral-hazard-and-bailout-expectation)

**Topics.** risk-and-incentives, economics, compliance

**Keywords.** moral-hazard, leverage, market-discipline, counterparty-monitoring

**Related claims.**

- extends: https://wulfkaal.github.io/claims/1806252-013

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