(De)Regulation and Market Thickness
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 regulatorâ€™s optimal choice of regulatory environment. We argue that in â€˜thinâ€™, markets, regulation can correct market failure arising from mismatch between buyers and sellers. However, in â€˜thickâ€™ markets, deregulation is optimal, as a regulator can rely on market participantsâ€™ equilibrium behavior instead of explicit constraints on economic activities.
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