Market failure fallacies and accounting information

Proponents of increased regulation of accounting maintain that there are failures in the private market for accounting information. In this paper, it is argued that market failure theories contain a logical fallacy. The optima identified in those theories are not optima because they are defined independently of institutional arrangements necessary to attain them. Existing institutional arrangements, such as markets, should not be condemned until it can be shown that there is an alternative regime which can produce socially superior output.The paper examines theories which explicitly allege that there are failures in the private market for accounting information. In addition, early criticisms of accounting information are restated in economic terms, and it is revealed that those criticisms implicitly assume that private production of accounting information suffers from market failures. The paper concludes by suggesting that, if accounting research is to contribute to public policy formulation, researchers should focus on evaluating the type of information that can be produced by feasible regimes such as markets or government agencies.