The Redistributive Effects of Financial Deregulation

Anton Korinek and Jonathan Kreamer

No 2013/247, IMF Working Papers from International Monetary Fund

Abstract: Financial regulation is often framed as a question of economic efficiency. This paper, by contrast, puts the distributive implications of financial regulation center stage. We develop a model in which the financial sector benefits from risk-taking by earning greater expected returns. However, risktaking also increases the incidence of large losses that lead to credit crunches and impose negative externalities on the real economy. We describe a Pareto frontier along which different levels of risktaking map into different levels of welfare for the two parties. A regulator has to trade off efficiency in the financial sector, which is aided by deregulation, against efficiency in the real economy, which is aided by tighter regulation and a more stable supply of credit. We also show that financial innovation, asymmetric compensation schemes, concentration in the banking system, and bailout expectations enable or encourage greater risk-taking and allocate greater surplus to the financial sector at the expense of the rest of the economy.

Keywords: WP; credit crunch; bank capital; expected return; Financial Regulation; Distributive Conflict; Rent Extraction; Growth of the Financial Sector; Introducing bailout transfer; transfer policy; capital investment; bailout expectation; capital requirement; policies center stage; market power; Financial sector; Stocks; Wages; Credit (search for similar items in EconPapers)
Pages: 42
Date: 2013-12-17
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (12)

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Related works:
Journal Article: The redistributive effects of financial deregulation (2014)
Working Paper: The Redistributive Effects of Financial Deregulation (2013)
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