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(De)Regulation and Market Thickness

  • Jean Guillaume Forand

    ()

    (University of Waterloo)

  • Vikram Maheshri

    ()

    (University of Houston)

Regulation is a set of constraints imposed on transactions between buyers and sellers. We introduce a dynamic frictional matching model with horizontal differentiation and nontransferable utility in which a regulator determines permissible transactions. We show the existence and uniqueness of a market equilibrium for any level of regulation and characterize the regulator’s optimal choice of regulatory environment. We argue that in ‘thin’, markets, regulation can correct market failure arising from mismatch between buyers and sellers. However, in ‘thick’ markets, deregulation is optimal, as a regulator can rely on market participants’ equilibrium behavior instead of explicit constraints on economic activities.

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File URL: http://www.uh.edu/econpapers/RePEc/hou/wpaper/2013-252-38.pdf
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Paper provided by Department of Economics, University of Houston in its series Working Papers with number 2013-252-38.

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Date of creation: 06 Sep 2013
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Handle: RePEc:hou:wpaper:2013-252-38
Contact details of provider: Postal: Houston TX 77023
Web page: http://www.uh.edu/class/economics/

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  11. Satterthwaite, Mark & Shneyerov, Art, 2004. "Dynamic Matching,Two-sided Incomplete Information, and Participation Costs: Existence and Convergence to Perfect Competition," Microeconomics.ca working papers shneyerov-04-12-17-02-54-, Vancouver School of Economics, revised 17 Dec 2004.
  12. Robert Shimer & Lones Smith, 2000. "Assortative Matching and Search," Econometrica, Econometric Society, vol. 68(2), pages 343-370, March.
  13. Baron, David P., 1989. "Design of regulatory mechanisms and institutions," Handbook of Industrial Organization, in: R. Schmalensee & R. Willig (ed.), Handbook of Industrial Organization, edition 1, volume 2, chapter 24, pages 1347-1447 Elsevier.
  14. Diamond, Peter A., 1971. "A model of price adjustment," Journal of Economic Theory, Elsevier, vol. 3(2), pages 156-168, June.
  15. Adachi, Hiroyuki, 2003. "A search model of two-sided matching under nontransferable utility," Journal of Economic Theory, Elsevier, vol. 113(2), pages 182-198, December.
  16. Ausubel, Lawrence M & Deneckere, Raymond J, 1993. "A Generalized Theorem of the Maximum," Economic Theory, Springer, vol. 3(1), pages 99-107, January.
  17. Michael M. Knetter & Matthew J. Slaughter, 2001. "Measuring Product-Market Integration," NBER Chapters, in: Topics in Empirical International Economics: A Festschrift in Honor of Robert E. Lipsey, pages 15-46 National Bureau of Economic Research, Inc.
  18. Armstrong, Mark & Sappington, David E.M., 2007. "Recent Developments in the Theory of Regulation," Handbook of Industrial Organization, Elsevier.
  19. Eeckhout, Jan, 1999. "Bilateral Search and Vertical Heterogeneity," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 40(4), pages 869-87, November.
  20. Sattinger, Michael, 1995. "Search and the Efficient Assignment of Workers to Jobs," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 36(2), pages 283-302, May.
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