Corrective Regulation with Imperfect Instruments

Environmental Regulation: Choice of Instruments under Imperfect Compliance∗

Compliance is an important issue in environmental regulation. We discuss some of the key elements of the problem and analyze a situation where emissions are not random and firms are risk-neutral. We study the firm’s decision on emissions and compliance when the environmental regulation is based on standards and the enforcement agency audits the firm with a certain probability. We compare total ...

Optimal Regulation with Exemptions and Corrective Taxes

Regulation produces enormous benefits and costs, both of which are greatly influenced by myriad exemptions and preferences for small firms that contribute a significant minority of output in many sectors. These firms may generate a disproportionate share of harm due to their being exempt and because exemption induces additional harmful activity to be channeled their way. This article analyzes o...

Banking Regulation and Prompt Corrective Action

We explore the rationale for regulatory rules that prohibit banks from developing some of their natural activities when their capital level is low, as epitomized by the US Prompt Corrective Action (PCA). This paper is built on two insights. First, in a moral hazard setting, capital requirement regulation may force banks to hold a large fraction of safe assets which, in turn, may lower their inc...

Regulation with Direct Benefits of Information Disclosure and Imperfect Monitoring

Assessing the Credibility of Instrumental Variables Inference with Imperfect Instruments Via Sensitivity Analysis

Consistent instrumental variables (IV) estimation requires instruments uncorrelated with the model errors, but this assumption is usually both suspect and untestable. Here the asymptotic sampling distribution of the IV parameter estimator is derived for any specified instrument-error covariance vector. This result makes it possible to quantify the sensitivity of any particular IV inference resu...