Reduction of Systemic Risk by Means of Pigouvian Taxation

Vinko Zlatić; Giampaolo Gabbi; Hrvoje Abraham

doi:10.1371/journal.pone.0114928

Reduction of Systemic Risk by Means of Pigouvian Taxation

PLoS One. 2015 Jul 15;10(7):e0114928. doi: 10.1371/journal.pone.0114928. eCollection 2015.

Authors

Vinko Zlatić¹, Giampaolo Gabbi², Hrvoje Abraham³

Affiliations

¹ Theoretical Physics Division, Rudjer Bošković Institute, P.O.Box 180, HR-10002 Zagreb, Croatia.
² University of Siena, Department of Management and Law, Piazza S. Francesco, 53100 Siena, Italy; SDA Bocconi School of Management, via Bocconi 8, 20136 Milan, Italy.
³ Artes Calculi, Derenčinova 1, HR-10002 Zagreb, Croatia.

Abstract

We analyze the possibility of reduction of systemic risk in financial markets through Pigouvian taxation of financial institutions, which is used to support the rescue fund. We introduce the concept of the cascade risk with a clear operational definition as a subclass and a network related measure of the systemic risk. Using financial networks constructed from real Italian money market data and using realistic parameters, we show that the cascade risk can be substantially reduced by a small rate of taxation and by means of a simple strategy of the money transfer from the rescue fund to interbanking market subjects. Furthermore, we show that while negative effects on the return on investment (ROI) are direct and certain, an overall positive effect on risk adjusted return on investments (ROIRA) is visible. Please note that the taxation is introduced as a monetary/regulatory, not as a _scal measure, as the term could suggest. The rescue fund is implemented in a form of a common reserve fund.

Publication types

Research Support, Non-U.S. Gov't

MeSH terms

Financial Management
Investments
Probability
Risk Reduction Behavior*
Taxes*

Grants and funding

The authors acknowledge support from EU FP7 FET OPEN project FOC (Forecasting financial crises, grant no. 255987). VZ also acknowledges support from EU FP7 FET project MULTIPLEX (Foundational Research on MULTIlevel comPLEX networks and systems, grant no. 317532). The funders had no role in study design, data collection and analysis, decision to publish, or preparation of the manuscript. Hrvoje Abraham is employed by Artes Calculi. Artes Calculi provided support in the form of salary for author HA, but did not have any additional role in the study design, data collection and analysis, decision to publish, or preparation of the manuscript. The specific roles of this author are articulated in the author contributions section.