Trade balance constraints and optimal regulation
AbstractIn 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 InfoPaper provided by Instituto de Economía, Universidad Argentina de la Empresa in its series UADE Working Papers with number 18_2005.
Length: 23 pages
Date of creation: 01 Mar 2005
Date of revision:
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Web page: http://www.uade.edu.ar/paginas/InstEconomiaIDE.aspx
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Optimal regulation; Credit constraint; Trade;
Other versions of this item:
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
- F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
- L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
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