Corrective Regulation with Imperfect Instruments

Eduardo Davila and Ansgar Walther

No 29160, NBER Working Papers from National Bureau of Economic Research, Inc

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.

JEL-codes: D62 G18 G28 H21 (search for similar items in EconPapers)
Date: 2021-08
New Economics Papers: this item is included in nep-ban, nep-cba, nep-isf, nep-ore and nep-reg
Note: AP CF EFG PE
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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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