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Financial Systemic Risk: Taxation or Regulation?

  • Donato Masciandaro, Francesco Passarelli

In this paper we describe systemic financial risk as a pollution issue. Free riding leads to excess risk production. This problem may be solved, at least partially, either with financial regulation or taxation. From a normative viewpoint taxation is superior in many respects. However, reality shows that financial regulation is more frequently adopted. In this paper we make a positive, politico-economic argument. If the majority chooses a tax, then it is likely to be too low. If it chooses regulation it will possibly be too harsh. Moreover, a majority of low polluting portfolio owners may strategically use regulation in order to charge the minority a larger share of the externality reduction.

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File URL: ftp://ftp.unibocconi.it/pub/RePEc/slp/papers/islawp38.pdf
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Paper provided by ISLA, Centre for research on Latin American Studies and Transition Economies, Universita' Bocconi, Milano, Italy in its series ISLA Working Papers with number 41.

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Length: 19 pages
Date of creation: Dec 2011
Date of revision:
Handle: RePEc:slp:islawp:islawp41
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