Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/278212 
Year of Publication: 
2022
Series/Report no.: 
ESRB Working Paper Series No. 139
Publisher: 
European Systemic Risk Board (ESRB), European System of Financial Supervision, Frankfurt a. M.
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.
Subjects: 
corrective regulation
second-best policy
Pigouvian taxation
policy elasticities
leakage elasticities
regulatory arbitrage
financial regulation
environmental externalities
JEL: 
H23
Q58
G28
D62
Persistent Identifier of the first edition: 
ISBN: 
978-92-9472-261-4
Document Type: 
Working Paper

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