Working Paper: CEPR ID: DP16448
Authors: Ansgar Walther; Eduardo Davila
Abstract: This paper studies the optimal design of second-best corrective regulation, when some agents or 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 the optimal second-best policy is determined by a subset of policy elasticities: leakage elasticities, and characterize the marginal value of relaxing regulatory constraints. We apply our results to scenarios with unregulated agents/activities and with uniform regulation across agents/activities. We illustrate our results in several applications.
Keywords: corrective regulation; second-best policy; pigouvian taxation; policy elasticities; leakage elasticities; regulatory arbitrage; financial regulation
JEL Codes: G28; G21; D62
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| policy elasticities (H30) | marginal welfare impact (D69) |
| pigouvian wedges (H23) | marginal welfare impact (D69) |
| optimal second-best policy (H21) | welfare outcomes (I38) |
| relaxing regulatory constraints (G18) | marginal welfare impact (D69) |
| regulatory actions (G18) | welfare implications (I30) |