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Trade balance constraints and optimal regulation

  • Chisari, Omar O.


    (Universidad Argntina de la Empresa)

  • Quesada, Lucía


    (Université de Toulouse)

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.

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Paper provided by Instituto de Economía, Universidad Argentina de la Empresa in its series UADE Working Papers with number 18_2005.

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Length: 23 pages
Date of creation: 01 Mar 2005
Date of revision:
Handle: RePEc:ris:uadewp:2005_018
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  1. Caillaud, Bernard & Jullien, B & Picard, P, 1995. "Competing Vertical Structures: Precommitment and Renegotiation," Econometrica, Econometric Society, vol. 63(3), pages 621-46, May.
  2. P. Krugman & L. Taylor, 1976. "Contractionary Effects of Devaluations," Working papers 191, Massachusetts Institute of Technology (MIT), Department of Economics.
  3. Laffont, Jean-Jacques & Matoussi, Mohamed Salah, 1995. "Moral Hazard, Financial Constraints and Sharecropping in El Oulja," Review of Economic Studies, Wiley Blackwell, vol. 62(3), pages 381-99, July.
  4. 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.
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