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Trade Balance Constraints and Optimal Regulation


  • Lucia Quesada

    (University of Wisconsin Madison)

  • Omar Chisari

    (Universidad Argentina de la Empresa)


We investigate the interactions between optimal regulation and external credit constraints. When part of a regulated ¯rm is owned by foreign investors, a credit-constrained country who wants to send pro¯ts abroad has to generate enough surplus in the trade account in order to compensate capital out°ows. We show that the credit constraint translates into a constraint of maximum profits for the regulated firm. Overall e±ciency in the regulated sector is reduced to maintain incentive compatibility. A flexible exchange rate helps relaxing the credit constraint. E±ciency is higher than with a fixed exchange rate, but still lower than without credit constraints.

Suggested Citation

  • Lucia Quesada & Omar Chisari, 2005. "Trade Balance Constraints and Optimal Regulation," Industrial Organization 0504004, EconWPA.
  • Handle: RePEc:wpa:wuwpio:0504004
    Note: Type of Document - pdf; pages: 35

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    References listed on IDEAS

    1. Krugman, Paul & Taylor, Lance, 1978. "Contractionary effects of devaluation," Journal of International Economics, Elsevier, vol. 8(3), pages 445-456, August.
    2. 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.
    3. 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.
    4. Caillaud, Bernard & Jullien, B & Picard, P, 1995. "Competing Vertical Structures: Precommitment and Renegotiation," Econometrica, Econometric Society, vol. 63(3), pages 621-646, May.
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    Cited by:

    1. Gustavo Ferro & Omar Chisari, 2010. "Tópicos de Economía de la Regulación de los Servicios Públicos," Working Papers hal-00473038, HAL.
    2. Omar Chisari & Antonio Estache & Germán Lambardi & Carlos Romero, 2013. "The trade balance effects of infrastructure services regulation," International Economics and Economic Policy, Springer, vol. 10(2), pages 183-200, June.

    More about this item


    Optimal regulation; Credit constraints; International trade;

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation

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