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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.

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File URL: http://128.118.178.162/eps/io/papers/0504/0504004.pdf
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Paper provided by EconWPA in its series Industrial Organization with number 0504004.

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Length: 35 pages
Date of creation: 06 Apr 2005
Date of revision:
Handle: RePEc:wpa:wuwpio:0504004
Note: Type of Document - pdf; pages: 35
Contact details of provider: Web page: http://128.118.178.162

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  1. Caillaud Bernard & Jullien Bruno & Picard Pierre, 1991. "Competing vertical structures : precommitment and renegotiation," CEPREMAP Working Papers (Couverture Orange) 9125, CEPREMAP.
  2. Krugman, Paul & Taylor, Lance, 1978. "Contractionary effects of devaluation," Journal of International Economics, Elsevier, vol. 8(3), pages 445-456, August.
  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. Laffont, Jean-Jacques & Matoussi, Mohamed Salah., 1988. "Moral Hazard, Financial Constraints and Sharecropping in El Oulja," Working Papers 667, California Institute of Technology, Division of the Humanities and Social Sciences.
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