(De)Regulation and Market Thickness
AbstractRegulation 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 regulatorâ€™s optimal choice of regulatory environment. We argue that in â€˜thinâ€™, markets, regulation can correct market failure arising from mismatch between buyers and sellers. However, in â€˜thickâ€™ markets, deregulation is optimal, as a regulator can rely on market participantsâ€™ equilibrium behavior instead of explicit constraints on economic activities.
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Bibliographic InfoPaper provided by Department of Economics, University of Houston in its series Working Papers with number 2013-252-38.
Date of creation: 06 Sep 2013
Date of revision:
Regulation; Search; Thickness; Horizontal Differentiation;
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This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-09-26 (All new papers)
- NEP-IND-2013-09-26 (Industrial Organization)
- NEP-REG-2013-09-26 (Regulation)
- NEP-UPT-2013-09-26 (Utility Models & Prospect Theory)
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