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Financial systemic risk: Taxation or regulation?

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  • Masciandaro, Donato
  • Passarelli, Francesco

Abstract

This paper describes financial systemic risk as a pollution issue. Free riding leads to excess risk production. This problem may be solved, at least partially, either by financial regulation or by taxation. From a normative viewpoint, taxation is superior in many respects. However, reality shows that financial regulation is adopted more frequently. This paper makes a positive, politico-economic argument. If the majority chooses regulation, the level is likely to be too harsh. If it chooses taxation, then the level is likely to be too low. Due to regressive effects, a tax on financial transactions receives low support from a majority of low polluting portfolio owners. The same kind of majority may strategically choose regulation in order to burden the minority with a larger share of the cost of reducing systemic risk.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Banking & Finance.

Volume (Year): 37 (2013)
Issue (Month): 2 ()
Pages: 587-596

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Handle: RePEc:eee:jbfina:v:37:y:2013:i:2:p:587-596

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Web page: http://www.elsevier.com/locate/jbf

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Keywords: Financial crisis; Systemic risk; Banking regulation; Financial transaction taxes; Political economy;

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Cited by:
  1. Alesina, Alberto & Passarelli, Francesco, 2014. "Regulation versus taxation," Journal of Public Economics, Elsevier, vol. 110(C), pages 147-156.
  2. Charles A. E. Goodhart, 2013. "Global Macroeconomic and Financial Supervision: Where Next?," NBER Chapters, in: Globalization in an Age of Crisis: Multilateral Economic Cooperation in the Twenty-First Century, pages 343-363 National Bureau of Economic Research, Inc.
  3. Charles Goodhart, 2011. "Global Macroeconomic and Financial Supervision: Where Next?," NBER Working Papers 17682, National Bureau of Economic Research, Inc.

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