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The Redistributive Effects of Financial Deregulation

  • Anton Korinek
  • Jonathan Kreamer

Financial regulation is often framed as a question of economic efficiency. This paper, by contrast, puts the distributive implications of financial regulation center stage. We develop a model in which the financial sector benefits from risk-taking by earning greater expected returns. However, risktaking also increases the incidence of large losses that lead to credit crunches and impose negative externalities on the real economy. We describe a Pareto frontier along which different levels of risktaking map into different levels of welfare for the two parties. A regulator has to trade off efficiency in the financial sector, which is aided by deregulation, against efficiency in the real economy, which is aided by tighter regulation and a more stable supply of credit. We also show that financial innovation, asymmetric compensation schemes, concentration in the banking system, and bailout expectations enable or encourage greater risk-taking and allocate greater surplus to the financial sector at the expense of the rest of the economy.

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Paper provided by International Monetary Fund in its series IMF Working Papers with number 13/247.

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Length: 42
Date of creation: 17 Dec 2013
Date of revision:
Handle: RePEc:imf:imfwpa:13/247
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