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The Redistributive Effects of Financial Deregulation, Anton Korinek, Jonathan Kreamer

Financial regulation is often framed as a question of economic efficiency. This paper, by contrast, puts the distributive implications of financial regulation center stage. We develop a model in which the financial sector benefits from risk-taking by earning greater expected returns. However, risktaking also increases the incidence of large losses that lead to credit crunches and impose negative externalities on the real economy. We describe a Pareto frontier along which different levels of risktaking map into different levels of welfare for the two parties. A regulator has to trade off efficiency in the financial sector, which is aided by deregulation, against efficiency in the real economy, which is aided by tighter regulation and a more stable supply of credit. We also show that financial innovation, asymmetric compensation schemes, concentration in the banking system, and bailout expectations enable or encourage greater risk-taking and allocate greater surplus to the financial sector at the expense of the rest of the economy
Table Of Contents
Cover; Contents; 1 Introduction; List of Figures; 1 Bank equity, interest rate spread and wage bill; 2 Bank Capital and Workers; 2.1 Model Setup; 2.2 First-Best Allocation; 2.3 Financial Constraint; 2 Timeline; 3 Laissez-Faire Equilibrium; 3.1 Period 1 Equilibrium; 3.2 Marginal Value of Bank Capital; 3 Welfare and marginal value of bank capital e; 3.3 Determination of Period 0 Risk Allocation; 4 Pareto Frontier; 4.1 Market Incompleteness and the Distributive Conflict; 4 Pareto frontier; 4.2 Financial Regulation; 5 Risk-Taking and Redistribution; 5.1 Asymmetric Compensation Schemes
Literary Form
non fiction
Description based upon print version of record
Physical Description
1 online resource (43 p.)
Specific Material Designation
Form Of Item

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