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The Redistributive Effects of Financial Deregulation

Author

Listed:
  • Mr. Anton Korinek
  • Mr. Jonathan Kreamer
Abstract
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.

Suggested Citation

  • Mr. Anton Korinek & Mr. Jonathan Kreamer, 2013. "The Redistributive Effects of Financial Deregulation," IMF Working Papers 2013/247, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:2013/247
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    More about this item

    Keywords

    WP; credit crunch; bank capital; expected return; Financial Regulation; Distributive Conflict; Rent Extraction; Growth of the Financial Sector; Introducing bailout transfer; transfer policy; capital investment; bailout expectation; capital requirement; policies center stage; market power; Financial sector; Stocks; Wages; Credit;
    All these keywords.

    JEL classification:

    • E25 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Aggregate Factor Income Distribution
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies

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