Corrective Regulation with Imperfect Instruments

Eduardo Dávila () and Ansgar Walther
Additional contact information
Eduardo Dávila: Cowles Foundation, Yale University, https://economics.yale.edu/people/faculty/eduardo-davila
Ansgar Walther: Imperial College London, https://www.imperial.ac.uk/
Authors registered in the RePEc Author Service: Eduardo Davila

No 2295, Cowles Foundation Discussion Papers from Cowles Foundation for Research in Economics, Yale University

Abstract: This paper studies the optimal design of second-best corrective regulation, when some agents or activities cannot be perfectly regulated. We show that policy elasticities and Pigouvian wedges are sufficient statistics to characterize the marginal welfare impact of regulatory policies in a large class of environments. We show that the optimal second-best policy is determined by a subset of policy elasticities: leakage elasticities, and characterize the marginal value of relaxing regulatory constraints. We apply our results to scenarios with unregulated agents/activities and with uniform regulation across agents/activities. We illustrate our results in applications to shadow banking, scale-invariant regulation, asset substitution, and fire sales.

Keywords: Corrective regulation; Second-best policy; Pigouvian taxation; Policy elasticities; Leakage elasticities; Regulatory arbitrage; Financial regulation (search for similar items in EconPapers)
JEL-codes: D62 G18 G28 H21 (search for similar items in EconPapers)
Pages: 68
Date: 2021-08
New Economics Papers: this item is included in nep-ban, nep-isf, nep-ore and nep-reg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Related works:
Working Paper: Corrective regulation with imperfect instruments (2022)
Working Paper: Corrective regulation with imperfect instruments (2022)
Working Paper: Corrective regulation with imperfect instruments (2022)
Working Paper: Corrective Regulation with Imperfect Instruments (2021)
Working Paper: Corrective Regulation with Imperfect Instruments (2021)
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