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European Financial Integration: A Framework for Policy Analysis


  • Mayer, Colin
  • Neven, Damien J


In this paper, we investigate the design and implementation of financial regulation where market failures are created by asymmetric information between investors and firms. We argue that reputation, while providing some correction for imperfect information, should be supplemented by financial regulation. We focus on two regulatory tools: direct penalties and capital requirements (where capital includes all assets that can be appropriated by the regulators and those whose value is extinguished in case of revealed misconduct). We find that capital requirements have an advantage over penalties when there is a relation between firms' quality and their capital. Capital requirements will, however, be more onerous where there is a close relation between capital and quality and when there is less precision in imposing penalties.Next, we analyse whether self-regulatory organizations have adequate incentives to implement regulation. We find that such incentives do exist when firms have sufficient capital at stake, for example in the form of industry-specific assets, and where the benefits from cheating are limited.

Suggested Citation

  • Mayer, Colin & Neven, Damien J, 1990. "European Financial Integration: A Framework for Policy Analysis," CEPR Discussion Papers 429, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:429

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    References listed on IDEAS

    1. Miller, Marcus & Salmon, Mark, 1985. "Dynamic Games and the Time Inconsistency of Optimal Policy in Open Economies," Economic Journal, Royal Economic Society, vol. 95(380a), pages 124-137, Supplemen.
    2. Miller, Marcus H, 1985. "Monetary Stabilization Policy in an Open Economy," Scottish Journal of Political Economy, Scottish Economic Society, vol. 32(3), pages 220-233, November.
    3. Currie, David & Holtham, Gerald & Hughes, Gordon, 1989. "The Theory and Practice of International Policy Coordination: Does Coordination Pay?," CEPR Discussion Papers 325, C.E.P.R. Discussion Papers.
    4. Dornbusch, Rudiger, 1976. "Expectations and Exchange Rate Dynamics," Journal of Political Economy, University of Chicago Press, vol. 84(6), pages 1161-1176, December.
    5. Rogoff, Kenneth, 1985. "Can international monetary policy cooperation be counterproductive?," Journal of International Economics, Elsevier, vol. 18(3-4), pages 199-217, May.
    6. Currie, David & Levine, Paul L & Vidalis, Nic, 1987. "International Cooperation and Reputation in an Empirical Two-Bloc Model," CEPR Discussion Papers 198, C.E.P.R. Discussion Papers.
    7. Levine, Paul & Currie, David, 1987. "Does International Macroeconomic Policy Coordination Pay and Is It Sustainable?: A Two Country Analysis," Oxford Economic Papers, Oxford University Press, vol. 39(1), pages 38-74, March.
    8. Daniel Cohen & Philippe Michel, 1988. "How Should Control Theory Be Used to Calculate a Time-Consistent Government Policy?," Review of Economic Studies, Oxford University Press, vol. 55(2), pages 263-274.
    9. Levine, Paul & Currie, David, 1987. "The design of feedback rules in linear stochastic rational expectations models," Journal of Economic Dynamics and Control, Elsevier, vol. 11(1), pages 1-28, March.
    10. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 473-491, June.
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    Cited by:

    1. Andersson, Fredrik & Skogh, Goran, 2003. "Quality, self-regulation, and competition: the case of insurance," Insurance: Mathematics and Economics, Elsevier, vol. 32(2), pages 267-280, April.


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