Corrective regulation with imperfect instruments
Eduardo Dávila and
No 139, ESRB Working Paper Series from European Systemic Risk Board
This paper studies optimal second-best corrective regulation, when some agents/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 a subset of policy elasticities, leakage elasticities, determine optimal second-best policy, and characterize the marginal value of relaxing regulatory constraints. We apply our results to scenarios with unregulated agents/activities, uniform regulation across agents/activities, and costly regulation. We illustrate our results in applications to financial regulation with environmental externalities, shadow banking, behavioral distortions, asset substitution, and fire sales. JEL Classification: H23, Q58, G28, D62
Keywords: corrective regulation; environmental externalities; financial regulation; leakage elasticities; Pigouvian taxation; policy elasticities; regulatory arbitrage; second-best policy (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ban and nep-reg
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Persistent link: https://EconPapers.repec.org/RePEc:srk:srkwps:2022139
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