Watch What They Do, Not What They Say: Estimating Regulatory Costs from Revealed Preferences
IMF Working Papers, February 25, 2022
Source details
- Canonical URL
- Watch What They Do, Not What They Say: Estimating Regulatory Costs from Revealed Preferences
Other formats
Bibliographic details
- Authors: Adrien Alvero, Sakai Ando, Kairong Xiao
- Published: February 25, 2022
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9798400202346.001
Summary
- Authors: Adrien Alvero, Sakai Ando, Kairong Xiao
- February 25, 2022
- We show that distortion in the size distribution of banks around regulatory thresholds can be used to identify costs of bank regulation.
- We build a structural model in which banks can strategically bunch their assets below regulatory thresholds to avoid regulations.
- The resulting distortion in the size distribution of banks reveals the magnitude of regulatory costs.
- Using U.S. bank data, we estimate the regulatory costs imposed by the Dodd-Frank Act.
- Although the estimated regulatory costs are substantial, they are significatnly lower than those in self-reported estimates by banks.
Methodology
- Structural model of bank behavior that allows strategic bunching of assets below regulatory thresholds.
- Identification strategy: use observed distortions in the size distribution of banks around thresholds to back out the implicit regulatory cost that generates the distortion.
- Empirical implementation: estimation using U.S. bank data to quantify costs associated with the Dodd-Frank Act.
Key findings
- Distortions in the size distribution of banks near regulatory thresholds provide observable revealed-preference evidence on regulatory costs.
- Estimated regulatory costs imposed by the Dodd-Frank Act are substantial.
- Estimated costs are significatnly lower than banks' self-reported estimates.
Policy implications and interpretation
- Revealed-preference approaches offer an alternative to self-reported measures for assessing regulatory burden, leveraging behavioral responses observable in cross-sectional distributions.
- Policymakers can use bunching-based estimates to quantify trade-offs between regulatory stringency and its costs as revealed by firm-level choices.
- Results suggest care in relying solely on self-reported cost measures when evaluating regulatory impact; revealed-preference estimates may provide a more disciplined benchmark.
IMF Working Papers — “Watch What They Do, Not What They Say: Estimating Regulatory Costs from Revealed Preferences”, Adrien Alvero, Sakai Ando, Kairong Xiao, February 25, 2022.
Content in this bundle
- Working Paper