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Corrective Regulation with Imperfect Instruments

Author

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  • Walther, Ansgar
  • Dávila, Eduardo

Abstract

This paper studies the optimal design of second-best corrective regulation, when some agents or activities cannot be perfectly regulated. We show that policy elasticities and Pigouvian wedges are sufficient statistics to characterize the marginal welfare impact of regulatory policies in a large class of environments. We show that the optimal second-best policy is determined by a subset of policy elasticities: leakage elasticities, and characterize the marginal value of relaxing regulatory constraints. We apply our results to scenarios with unregulated agents/activities and with uniform regulation across agents/activities. We illustrate our results in several applications.

Suggested Citation

  • Walther, Ansgar & Dávila, Eduardo, 2021. "Corrective Regulation with Imperfect Instruments," CEPR Discussion Papers 16448, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:16448
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    Cited by:

    1. is not listed on IDEAS
    2. Giovanardi, Francesco & Kaldorf, Matthias, 2024. "Climate change and the macroeconomics of bank capital regulation," Discussion Papers 13/2024, Deutsche Bundesbank.
    3. Döttling, Robin & Rola-Janicka, Magdalena, 2025. "Too Levered for Pigou: Carbon pricing, financial constraints, and leverage regulation," Journal of Financial Economics, Elsevier, vol. 172(C).
    4. Döttling, Robin & Rola-Janicka, Magdalena, 2023. "Too levered for Pigou: carbon pricing, financial constraints, and leverage regulation," Working Paper Series 2812, European Central Bank.
    5. Eduardo Dávila, 2023. "Optimal Financial Transaction Taxes," Journal of Finance, American Finance Association, vol. 78(1), pages 5-61, February.
    6. Clayton, Christopher & Schaab, Andreas, 2023. "Regulation with Externalities and Misallocation in General Equilibrium," TSE Working Papers 23-1445, Toulouse School of Economics (TSE).
    7. repec:osf:osfxxx:ds7bx_v1 is not listed on IDEAS

    More about this item

    Keywords

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    JEL classification:

    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • D62 - Microeconomics - - Welfare Economics - - - Externalities

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