The Redistributive Effects of Financial Deregulation

December 17, 2013

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Format: Chicago

Anton Korinek, and Jonathan Kreamer. The Redistributive Effects of Financial Deregulation, (USA: International Monetary Fund, 2013) accessed November 12, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

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.

Subject: Banking, Credit, Economic sectors, Financial crises, Financial institutions, Financial sector, Labor, Money, Stocks, Wages

Keywords: Bailout expectation, Bank capital, Capital investment, Capital requirement, Credit, Credit crunch, Distributive Conflict, Expected return, Financial Regulation, Financial sector, Growth of the Financial Sector, Introducing bailout transfer, Market power, Policies center stage, Rent Extraction, Stocks, Transfer policy, Wages, WP

Publication Details

Pages:

42
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2013/247
Stock No:

WPIEA2013247
ISBN:

9781475546088
ISSN:

1018-5941

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