This paper describes financial systemic risk as a pollution issue. Free riding leads to excess risk production. This problem may be solved, at least partially, either with financial regulation or with taxation. From a normative viewpoint taxation is superior in many respects. However, reality shows that financial regulation is adopted more frequently. This paper makes a positive, politico-economic argument. If the majority chooses regulation, the level will possibly be too harsh. If it chooses a tax, then the level is likely to be too low. Due to regressive effects, a tax on financial transactions receives low support from a majority of low polluting portfolio owners. The same kind of majority may strategically choose regulation in order to charge the minority a larger share of the cost of reducing systemic risk

Financial System Risk: Taxation or Regulation?, Journal of Banking and Finance

PASSARELLI, Francesco
2013-01-01

Abstract

This paper describes financial systemic risk as a pollution issue. Free riding leads to excess risk production. This problem may be solved, at least partially, either with financial regulation or with taxation. From a normative viewpoint taxation is superior in many respects. However, reality shows that financial regulation is adopted more frequently. This paper makes a positive, politico-economic argument. If the majority chooses regulation, the level will possibly be too harsh. If it chooses a tax, then the level is likely to be too low. Due to regressive effects, a tax on financial transactions receives low support from a majority of low polluting portfolio owners. The same kind of majority may strategically choose regulation in order to charge the minority a larger share of the cost of reducing systemic risk
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Utilizza questo identificativo per citare o creare un link a questo documento: https://hdl.handle.net/11575/13378
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