(De)Regulation and Market Thickness
AbstractIn this paper, we develop a general view of regulation as a set of constraints imposed on market transactions by a welfare-maximizing authority. We present a novel frictional search model with horizontal differentiation and nontransferable utility in which a regulator determines the set of permitted match-specific production functions. Once the dynamic market opens, buyers and sellers are matched and sellers propose transactions from among those that are allowed. We show the existence and uniqueness of a marketequilibrium for any choice of regulatory constraints and characterize the regulator’s exante optimal choice of regulatory environment. We argue that in less developed, or ‘thin’, markets, regulation is an important tool to correct market failure arising from mismatch between buyers and sellers. However, if markets develop and become ‘thick’, regulations can become onerous vestiges and deregulation is welfare-enhancing. In this case, a regulator can rely on market participants’ equilibrium behavior instead of explicit constraints on economic activities to ensure that transactions occur efficiently.
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Bibliographic InfoPaper provided by University of Waterloo, Department of Economics in its series Working Papers with number 1202.
Length: 34 pages
Date of creation: Apr 2012
Date of revision: Oct 2012
Other versions of this item:
- D04 - Microeconomics - - General - - - Microeconomic Policy: Formulation; Implementation; Evaluation
- L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
- C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
- C78 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Bargaining Theory; Matching Theory
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-09-03 (All new papers)
- NEP-DGE-2012-09-03 (Dynamic General Equilibrium)
- NEP-MIC-2012-09-03 (Microeconomics)
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