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Financial Systemic Risk: Taxation or Regulation?

19 Pages Posted: 27 May 2011  

Donato Masciandaro

Bocconi University - Department of Economics

Francesco Passarelli

Bocconi University; University of Teramo

Date Written: May 2011


In this paper we describe systemic financial 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 taxation. From a normative viewpoint taxation is superior in many respects. However, reality shows that financial regulation is more frequently adopted. In this paper we make a politico-economic argument. If the majority chooses a tax, then it is likely to be too low. If it chooses regulation it will possibly be too harsh. Moreover, a majority of low polluting portfolio owners may have a strategic incentive to use regulation rather than taxation in order to charge the minority a large share of the externality reduction.

Keywords: financial stability, systemic risk, financial transactions tax, financial regulation, political economy

JEL Classification: G01, G18, G28, H23, E61

Suggested Citation

Masciandaro, Donato and Passarelli, Francesco, Financial Systemic Risk: Taxation or Regulation? (May 2011). Paolo Baffi Centre Research Paper No. 2011-91. Available at SSRN: or

Donato Masciandaro (Contact Author)

Bocconi University - Department of Economics ( email )

Via Gobbi 5
Milan, 20136

Francesco Passarelli

Bocconi University ( email )

Via Sarfatti, 25
Milan, MI 20136

University of Teramo ( email )

Campus Coste S. Agostino
Via R. Balzarini 1, Località Colleparco
Teramo, TE 64100

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