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Watch What They Do, Not What They Say: Estimating Regulatory Costs from Revealed Preferences*
| Content Provider | Semantic Scholar |
|---|---|
| Copyright Year | 2019 |
| Abstract | We propose a revealed preference approach to estimate the cost of banking regulation. Our methodology takes advantage of the fact that regulations usually do not apply until a regulated party reaches a certain size threshold. To avoid regulation, regulated parties around the threshold can downsize their assets to stay below the threshold if the regulatory cost outweigh the profits that they can earn from the additional assets. We can therefore infer the regulatory cost from the extent to which regulated parties downsize their assets to avoid regulation. Our estimator can be easily calculated using moments of the asset size distribution. Using simulation exercise, we show our estimator is robust to alternative data generating processes and exhibit superior performance compared to reduced-form estimators such as Difference-in-Differences and Regression Discontinuity design when endogeneous selection is severe and a valid instrument is absent. We apply our estimator to estimate the regulatory cost of the Dodd-Frank Act. Our estimates shows that the Dodd-Rank Act imposes a compliance cost of $1 million per year for banks above the $10 billion threshold. This estimate is significantly lower than self-reported estimates in surveys of banks. JEL Classification Codes: G21, G28 |
| File Format | PDF HTM / HTML |
| Alternate Webpage(s) | https://openconf.s3.amazonaws.com/MFA2020/papers/402.pdf?AWSAccessKeyId=AKIAQY37HFC6IY5GEPRE&Expires=1582096514&Signature=/yR3sQSTlfoFzEUyHBrN2yV0714%3D |
| Language | English |
| Access Restriction | Open |
| Content Type | Text |
| Resource Type | Article |
