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Trade balance constraints and optimal regulation

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  • Chisari, Omar O.

    ()
    (Universidad Argntina de la Empresa)

  • Quesada, Lucía

    ()
    (Université de Toulouse)

Abstract

In this paper we develop a model to understand the interactions between optimal regulation and external credit constraints. If a big proportion of the regulated sector is owned by foreign investors, a credit-constrained country who wants to send profits abroad has to generate enough surplus in the trade account in order to compensate capital outflows. This may be a real problem in developing countries, in which regulated sectors are big and foreign ownership is very important. We show that the credit constraint translates into a constraint of maximum profits for the regulated firm. As a consequence, overall efficiency in the regulated sector is reduced to maintain incentive compatibility. With a flexible exchange rate, devaluation is an additional instrument to relax the credit constraint, but the country is not in general willing to relax it completely. Efficiency is higher than with a fixed exchange rate, but it’s still lower than without credit constraints.

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Bibliographic Info

Paper provided by Instituto de Economía, Universidad Argentina de la Empresa in its series UADE Working Papers with number 18_2005.

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Length: 23 pages
Date of creation: 01 Mar 2005
Date of revision:
Handle: RePEc:ris:uadewp:2005_018

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Web page: http://www.uade.edu.ar/paginas/InstEconomiaIDE.aspx
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Keywords: Optimal regulation; Credit constraint; Trade;

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  1. David E. M. Sappington & Tracy R. Lewis, 2000. "Motivating Wealth-Constrained Actors," American Economic Review, American Economic Association, vol. 90(4), pages 944-960, September.
  2. Caillaud, Bernard & Jullien, B & Picard, P, 1995. "Competing Vertical Structures: Precommitment and Renegotiation," Econometrica, Econometric Society, vol. 63(3), pages 621-46, May.
  3. Krugman, Paul & Taylor, Lance, 1978. "Contractionary effects of devaluation," Journal of International Economics, Elsevier, vol. 8(3), pages 445-456, August.
  4. Laffont, Jean-Jacques & Matoussi, Mohamed Salah., 1988. "Moral Hazard, Financial Constraints and Sharecropping in El Oulja," Working Papers 667, California Institute of Technology, Division of the Humanities and Social Sciences.
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Cited by:
  1. Gustavo Ferro & Omar Chisari, 2010. "Tópicos de Economía de la Regulación de los Servicios Públicos," Working Papers hal-00473038, HAL.
  2. Omar Chisari & Antonio Estache & Germán Lambardi & Carlos Romero, 2013. "The trade balance effects of infrastructure services regulation," International Economics and Economic Policy, Springer, vol. 10(2), pages 183-200, June.

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