Ansgar Walther-Corrective Regulation with Imperfect Instruments

Finance

Speaker : Ansgar Walther (Imperial College, London)

Room: T025

Abstract

This paper studies optimal second-best corrective regulation, when some agents/activities
cannot be perfectly regulated. We show that policy elasticities and Pigouvian wedges
are sufficient statistics to characterize the marginal welfare impact of regulatory policies
in a large class of environments. We show that a subset of policy elasticities, leakage
elasticities, determine optimal second-best policy, and characterize the marginal value of relaxing
regulatory constraints. We apply our results to scenarios with unregulated agents/activities,
uniform regulation across agents/activities, and costly regulation. We illustrate our results in
applications to financial regulation with environmental externalities, shadow banking, behavioral
distortions, asset substitution, and fire sales.