Corrective regulation with imperfect instruments

Arbeitspapier

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.

Object Details

• ISBN: 978-92-899-5310-8
• Language: Englisch

References and Relationships

• Bibliographic citation: Series: ECB Working Paper ; No. 2723

Classification and Topics

• Classification: Wirtschaft ; Taxation and Subsidies: Externalities; Redistributive Effects; Environmental Taxes and Subsidies ; Environmental Economics: Government Policy ; Financial Institutions and Services: Government Policy and Regulation ; Externalities
• Subject: corrective regulation ; second-best policy ; Pigouvian taxation

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Dávila, Eduardo ; Walther, Ansgar
• Event: Veröffentlichung
• (who): European Central Bank (ECB)
• (where): Frankfurt a. M.
• (when): 2022

Further information

• DOI: doi:10.2866/254795
• Handle: http://hdl.handle.net/10419/269130
• Last update: 10.03.2025, 11:41 AM CET