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(De)Regulation and Market Thickness

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  • Jean Guillaume Forand

    ()
    (University of Waterloo)

  • Vikram Maheshri

    ()
    (University of Houston)

Abstract

Regulation is a set of constraints imposed on transactions between buyers and sellers. We introduce a dynamic frictional matching model with horizontal differentiation and nontransferable utility in which a regulator determines permissible transactions. We show the existence and uniqueness of a market equilibrium for any level of regulation and characterize the regulator’s optimal choice of regulatory environment. We argue that in ‘thin’, markets, regulation can correct market failure arising from mismatch between buyers and sellers. However, in ‘thick’ markets, deregulation is optimal, as a regulator can rely on market participants’ equilibrium behavior instead of explicit constraints on economic activities.

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Paper provided by Department of Economics, University of Houston in its series Working Papers with number 2013-252-38.

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Date of creation: 06 Sep 2013
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Handle: RePEc:hou:wpaper:2013-252-38

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Postal: Houston TX 77023
Web page: http://www.uh.edu/class/economics/
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Keywords: Regulation; Search; Thickness; Horizontal Differentiation;

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  16. Diamond, Peter A., 1971. "A model of price adjustment," Journal of Economic Theory, Elsevier, vol. 3(2), pages 156-168, June.
  17. Adachi, Hiroyuki, 2003. "A search model of two-sided matching under nontransferable utility," Journal of Economic Theory, Elsevier, vol. 113(2), pages 182-198, December.
  18. Dirk Hofmann & Salmai Qari, 2011. "The Law of Attraction: Bilateral Search and Horizontal Heterogeneity," SFB 649 Discussion Papers SFB649DP2011-017, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
  19. George J. Stigler, 1971. "The Theory of Economic Regulation," Bell Journal of Economics, The RAND Corporation, vol. 2(1), pages 3-21, Spring.
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