Trade balance constraints and optimal regulation
In this paper we develop a model to understand the interactions between optimal regulation and external credit constraints. If a big proportion of the regulated sector is owned by foreign investors, a credit-constrained country who wants to send profits abroad has to generate enough surplus in the trade account in order to compensate capital outflows. This may be a real problem in developing countries, in which regulated sectors are big and foreign ownership is very important. We show that the credit constraint translates into a constraint of maximum profits for the regulated firm. As a consequence, overall efficiency in the regulated sector is reduced to maintain incentive compatibility. With a flexible exchange rate, devaluation is an additional instrument to relax the credit constraint, but the country is not in general willing to relax it completely. Efficiency is higher than with a fixed exchange rate, but it’s still lower than without credit constraints.
|Date of creation:||01 Mar 2005|
|Date of revision:|
|Contact details of provider:|| Web page: http://www.uade.edu.ar/paginas/InstEconomiaIDE.aspx|
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Krugman, Paul & Taylor, Lance, 1978.
"Contractionary effects of devaluation,"
Journal of International Economics,
Elsevier, vol. 8(3), pages 445-456, August.
- Laffont, Jean-Jacques & Matoussi, Mohamed Salah., 1988.
"Moral Hazard, Financial Constraints and Sharecropping in El Oulja,"
667, California Institute of Technology, Division of the Humanities and Social Sciences.
- Jean-Jacques Laffont & Mohamed Salah Matoussi, 1995. "Moral Hazard, Financial Constraints and Sharecropping in El Oulja," Review of Economic Studies, Oxford University Press, vol. 62(3), pages 381-399.
- Caillaud Bernard & Jullien Bruno & Picard Pierre, 1991.
"Competing vertical structures : precommitment and renegotiation,"
CEPREMAP Working Papers (Couverture Orange)
- Caillaud, Bernard & Jullien, B & Picard, P, 1995. "Competing Vertical Structures: Precommitment and Renegotiation," Econometrica, Econometric Society, vol. 63(3), pages 621-46, May.
- David E. M. Sappington & Tracy R. Lewis, 2000. "Motivating Wealth-Constrained Actors," American Economic Review, American Economic Association, vol. 90(4), pages 944-960, September.
When requesting a correction, please mention this item's handle: RePEc:ris:uadewp:2005_018. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Mariano E. Gonzalez)
If references are entirely missing, you can add them using this form.