Bank capital for market risk: a study in incentive compatible regulation
Traditionally, government regulation in the United States follows a straightforward command approach. The government states the desired activities of the regulated firm, the allowable actions, and the prohibited actions. The firm is punished if it violates these strictures. Regulatory economists have identified many problems with this approach. First, there is the problem of asymmetry in information: Regulations cannot be enforced if they require information from the firm that the regulator cannot elicit reliably and at reasonable cost.
The Pre-Commitment Approach in a Model of Regulatory Banking Capital
The pre-commitment approach offers a novel way to improve bank capital regulation. It requires that banks choose their capital levels and that regulators fine them if losses exceed this level. In essence, the approach is a proposal to use menus of contracts, a device commonly employed in other economic settings. Using a private-information model, the author derives optimal fine schedules and compares them to the proposal's schedules. He shows the latter schedules to be inefficient and potentially to require high levels of fines.
The Use of Qualitative Information in Macro-Economic Policy Analysis
The majority of macro-economic policy models takes for granted that conflicts among objectives can be assessed by means of a tradeoff analysis. Such tradeoffs imply that sacrifices and benefits of various impacts of decisions can be measured on a cardinal scale, so that a conventional macro-economic utility or welfare analysis can be applied.