nep-reg New Economics Papers
on Regulation
Issue of 2005‒04‒16
seventeen papers chosen by
Christian Calmes
Université du Québec en Outaouais, Canada

  1. Financial Tunnelling and the Revenge of the Insider System By Jeremy Grant; Thomas Kirchmaier
  2. A Whiter Shade of Pale: on the Political Economy of Regulatory Instruments By Baldursson, Fridrik M; von der Fehr, Nils-Henrik M
  3. On the Nature of the Corrupt Firm: Where to Situate Liability? By Raphaela Seubert
  4. Hard Core Cartels and Avoidance of Investigation in the Presence of an Antitrust Authority By Gianmaria Martini
  5. Endogenous Antitrust: Cross-Country Evidence on the Impact of Competition-Enhancing Policies on Productivity By Joan-Ramon Borrell; Mara Tolosa
  6. Inflation, Central Bank Independence and the Legal System. By Bernd Hayo; Stefan Voigt
  7. Trade Balance Constraints and Optimal Regulation By Lucia Quesada; Omar Chisari
  8. Ulysses and the Rent-Seekers: The Benefits and Challenges of Constitutional Constraints on Leviathan By Kurrild-Klitgaard, Peter
  9. How do Institutions Affect Corruption and the Shadow Economy? By Axel Dreher; Christos Kotsogiannis; Steve McCorriston
  10. A Note on Wealth as a Corruption-Controlling Device By Rafael Di Tella; Federico Weinschelbaum
  11. The socio-cultural and political-economic causes of corruption: a cross-country analysis By Aida Isabel Tavares
  12. Bureaucratic Corruption and Mass Media By Suphachol Suphachalasai
  13. Labeling Regulations and Segregation of First- and Second-Generation Genetically Modified Products: Innovation Incentives and Welfare Effects By Moschini, GianCarlo; Lapan, Harvey E.
  14. A Model of Endogeneous Oil Spill Regulation By Ayla Ogus
  15. Deregulation, Restructuring and Changing R&D Paradigms in the US Electric Utility Industry By Paroma Sanyal; Linda R. Cohen
  16. Demand for and Regulation of Cardiac Services By Justin G. Trogdon
  17. Organization, Program and Structure: An Analysis of the Chinese Innovation Policy Framework By Can Huang; Celeste Amorim; Joaquim Borges Gouveia; Mark Spinoglio; Augusto Medina

  1. By: Jeremy Grant; Thomas Kirchmaier
    Abstract: In this paper, we document how European companies can use financial tunnelling to the disadvantage of minority shareholders, despite improved legislation directed at eliminating such activities. In four case studies, two German and two Italian, we document how newly established corporate governance standards were successfully circumvented by dominant shareholders, major financial institutions, politicians, and in the worst case the regulator. These cases demonstrate that for effective Corporate Governance to work, one not only has to change the law, but even more importantly, one has to ensure the widespread acceptance of new rules. The litmus test of corporate governance reforms in any country is whether the rules are applied objectively in situations where powerful elites perceive they are disadvantaged under the new regulations.
    Date: 2005–04
  2. By: Baldursson, Fridrik M (University of Iceland); von der Fehr, Nils-Henrik M (Dept. of Economics, University of Oslo)
    Abstract: We consider an intertemporal policy game between changing governments that differ in their attitudes towards a particular feature of market outcomes, exemplified with environmental pollution. When in power, a government will choose policy instruments and set strictness of regulation with a view to influencing the policy of future, possibly different, governments. We demonstrate that a ‘brown’ government favours emission quotas over effluent taxes, as quotas establish property rights that are costly to reverse. Conversely, a ‘green’ government prefers to regulate by taxes, in order to limit the incentives of future ‘brown’ governments to ease regulations. Strategic behaviour tends to exaggerate policy differences (making ‘green’ governments ‘greener’ and ‘brown’ governments ‘browner’) compared to when such strategic considerations were not an issue.
    Keywords: regulation; political economy; effluent taxes; tradable quotas; property rights; commitment; environmental management
    JEL: D81 H23 L51 Q28 Q38
    Date: 2004–12–04
  3. By: Raphaela Seubert (University of Passau, Germany)
    Abstract: Applying the modern Property Rights Approach to depict employment and firm-internal delegation relationships, this paper addresses the question how to prevent corporate bribery. The analysis and the answers that follow take into account interaction effects between firm-internal delegation relationships, the possibly devilish side function of formal corporate ethics efforts (namely to shield firms or superiors from criminal accountability by shifting it onto their subordinate employees), the distribution of criminal liability, and the necessity for courts to rely on available evidence. From the simple theoretical framework, a bundle of implications follows: (1) conditions under which formal corporate ethics guidelines can take on a Janus-faced nature, i.e. lack credibility, (2) suggestions how firms can enhance the credibility of their corporate ethics efforts, (3) starts how to avoid the possible “second-order” lack of credibility of such credibility- enhancing measures, (4) clear-cut statements as to (a) where criminal liability should be situated within the firm and (b) how corporate and individual liabilities should be combined to both restrain corruption and to sustain the credibility of corporate ethics. These implications allow comparatively evaluating the effectiveness of international anti- corruption laws – specifically the desirability of corporate vs. personal criminal liabilities.
    Keywords: Non-verifiable contracts, bribery, hard-copy evidence, delegation, mixed incentives, exit, voice, corporate ethics, all-for- one, victimize, Janus-faced, corporate liability
    JEL: K42 L20 M12 M14
    Date: 2005–03–18
  4. By: Gianmaria Martini (University of Bergamo)
    Abstract: Hard Core Cartels aim to design, being aware of the presence of an antitrust authority, market practices granting avoidance of antitrust investigations. We show, in a dynamic game, that they can reach this goal and get extra--normal profits. However, the bulk of this opportunity does not lay, here, in limiting price changes across periods (as in Harrington [2004b]), but rather in sending a signal to the authority which has a twofold effect: (1) it does make evident that cartel's members are currently not engaged in an ``excessive'' degree of collusion, (2) it credibly shows that this moderate collusive activity has a persistence effect, i.e. it will be maintained also in future periods. We also show that antitrust remedies (e.g. behavioral constraints or injunction reliefs) are more powerful, in limiting the collusive activity, than fines. Last, we show that social welfare is higher if Hard Core Cartels have limited information about the type of authority (i.e. tough or accommodating) they are facing.
    JEL: D43 L13 L41
    Date: 2005–02–23
  5. By: Joan-Ramon Borrell (University of Barcelona); Mara Tolosa (University of Barcelona)
    Abstract: This paper presents empirical evidence regarding the effect of simultaneous antitrust and trade policy on productivity. We find that treating antitrust across countries as an exogenous policy overestimates the impact of competition on productivity by as much as 18%.
    Keywords: Antitrust,Productivity,Political economy
    JEL: D7 L4 O4
    Date: 2005–04–08
  6. By: Bernd Hayo; Stefan Voigt
    Abstract: We argue that a higher degree of de facto independence of the legal system from the other government branches as well as public trust in the legal system may reduce the average inflation record of countries through a direct and an indirect channel. The direct channel works by affecting potential output, while the indirect channel helps to increase the de facto independence of the central bank. In the empirical section of the paper, we present evidence in favor of both channels in a sample containing both industrial and Third World countries. A model that contains legal trust in addition to de jure central bank independence, checks and balances within government, and openness can explain 60% of the variation in the logarithm of the inflation rate.
    Keywords: Judicial Independence; Legal Trust; Central Bank Independence; Inflation
    JEL: D D H K
    Date: 2005–01
  7. By: Lucia Quesada (University of Wisconsin Madison); Omar Chisari (Universidad Argentina de la Empresa)
    Abstract: We investigate the interactions between optimal regulation and external credit constraints. When part of a regulated ¯rm is owned by foreign investors, a credit-constrained country who wants to send pro¯ts abroad has to generate enough surplus in the trade account in order to compensate capital out°ows. We show that the credit constraint translates into a constraint of maximum profits for the regulated firm. Overall e±ciency in the regulated sector is reduced to maintain incentive compatibility. A flexible exchange rate helps relaxing the credit constraint. E±ciency is higher than with a fixed exchange rate, but still lower than without credit constraints.
    Keywords: Optimal regulation, Credit constraints, International trade
    JEL: D82 F32 L51
    Date: 2005–04–06
  8. By: Kurrild-Klitgaard, Peter (University of Southern Denmark)
    Abstract: . A constitutionally constrained government may be viewed as an attractive arrangement in that it may limit the rent-seeking behavior by narrowly motivated special interest groups and instead support policies of a Pareto-improving character. However, the introduction of constitutional constraints may themselves turn out to be problematic, since institutional solutions to suboptimal arrangements presuppose that the agents are capable of overcoming problems of the very nature that the solutions are intended to overcome in the first place. This makes it unlikely that general interest promoting constitutional constraints on governments will be successfully adopted.
    Keywords: rent-seeking; constitutions; institutions; self-interest; Prisoners' Dilemma; constraints
    JEL: D72
    Date: 2005–04–06
  9. By: Axel Dreher (Konstanz University); Christos Kotsogiannis (Exeter University); Steve McCorriston (Exeter University)
    Abstract: This paper analyzes a simple model that captures the relationship between institutional quality, the shadow economy and corruption. It shows that an improvement in institutional quality reduces the shadow economy and affects the corruption market. The exact relationship between corruption and institutional quality is, however, ambiguous and depends on the relative effectiveness of the institutional quality in the shadow and corruption markets. The predictions of the model are empirically tested - by means of Structural Equation Modelling that treats the shadow economy and the corruption market as latent variables - using data from OECD countries. The results show that an improvement in institutional quality reduces the shadow economy directly and corruption both directly and indirectly (through its effect on the shadow market).
    Keywords: Corruption, Shadow Economies, OECD countries, Latent Variables, Structural Equation Modelling
    JEL: H10 O1 K49 C39
    Date: 2005–02–22
  10. By: Rafael Di Tella (Harvard Business School); Federico Weinschelbaum (Universidad de San Andrés)
    Abstract: In the standard moral hazard model, withholding of effort by the agent is not observable to the principal. We argue that this assumption has to be changed in applications that study corruption. The overwhelming majority of cases where corrupt politicians have been punished involve the detection of consumption levels that appear to be too high. The informativeness of an agent’s level of consumption depends on his initial level of wealth as conspicuous consumption of luxuries by wealthy agents leads to little updating of the principal’s belief about their honesty. This introduces a tendency to choose poor agents as they are easier to monitor. More generally, we show that, even if agents have similar preferences, there are contractual advantages to selecting particular types. We describe the basic problem of choosing agents and monitoring consumption, and discuss a number of features of the practical applications. We show that selecting rich politicians may not help fight corruption and that the political class will exhibit lower variance in consumption than the population. In settings were formal contracts matter, we show that monitoring consumption introduces a tendency towards low powered incentive schemes (and more generally low wages) and that the measure of “moral” costs that is often employed in the literature can be derived (not assumed).
    Keywords: Choosing agents, monitoring consumption, low wages, moral costs
    JEL: K42 D82 L52
    Date: 2005–03–08
  11. By: Aida Isabel Tavares (Departamento de Economia, Gestão e Engenharia Industrial, Universidade de Aveiro)
    Abstract: This paper presents an empirical analysis about the economic-political and socialcultural factors that determine the perceived level corruption on a cross country basis. Regressing the Corruption Perception Index on the culture dimensions proposed by Hofstede and by Schwartz and on the social-economic variables such as the human development index, gini coefficient, openness index and political stability indicator, it is found a significant statistical relationship between cultural variables and perceived corruption as well as for the political and economic variables, of which development seems to be the most important factor. Also the cluster analysis shows that as the level of perceived corruption increases, the level of development and openness of countries decreases and the hierarchic, the collectivism and the conservative cultural characteristics tend to be more significant.
    Keywords: corruption, culture, cross-countries
    Date: 2004
  12. By: Suphachol Suphachalasai (University of Cambridge)
    Abstract: This paper investigates the relationship between a bureaucracy and mass media industry, and its implications to corruption. We develop a bureaucratic model of corruption with mass media. A representative profit maximizing media firm seeks for corruption news to be printed and sold. Channels through which competition in media industry and press freedom affect equilibrium corruption in a bureaucracy are modeled. Different degrees of media freedom and competition affect production and employment decisions of media firms, and this in turn affects the effectiveness of media in monitoring corruption. Competition and freedom in media sector also have an influence on bureaucratic structure and consequently on equilibrium corruption. We find that the degree of competition in media market plays a significant role in controlling corruption. Freedom of media also reduces corruption. Empirical results support these findings. Media competition appears to be a more important tool to combat corruption than press freedom. The corruption problem in Italy could be reduced to the level experienced by France if the competitiveness of its media industry was to be improved to the same level as that of United Kingdom.
    Keywords: Corrupton; Bureaucracy; Mass Media
    JEL: D73 D8 H11
    Date: 2005–02–24
  13. By: Moschini, GianCarlo; Lapan, Harvey E.
    Abstract: We review some of the most significant issues and results on the economic effects of genetically modified (GM) product innovation, with emphasis on the question of GM labeling and the need for costly segregation and identity preservation activities. The analysis is organized around an explicit model that can accommodate the features of both first-generation and second-generation GM products. The model accounts for the proprietary nature of GM innovations and for the critical role of consumer preferences vis-à-vis GM products, as well as for the impacts of segregation and identity preservation and the effects of a mandatory GM labeling regulation. We also investigate briefly a novel question in this setting, the choice of “research direction”when both cost-reducing and quality-enhancing GM innovations are feasible.
    JEL: O3 D0 Q1
    Date: 2005–04–11
  14. By: Ayla Ogus (Izmir University of Economics)
    Abstract: This paper presents a model of endogenous oil spill regulation where the severity of regulations is shown to be a function of the size of recent spills. The regulator chooses how much to regulate in order to maximize political capital when regulations are rigid downwards and the distribution of spills is not known with certainty. Very large spills are shown to cause large increases in the regulation level. In the event that an unlikely disastrous spill is realized, major regulatory reform may take place which would take the regulations to too high a level.
    Keywords: general equilibrium, endogeneous
    JEL: D9
    Date: 2005–04–08
  15. By: Paroma Sanyal (Brandeis University); Linda R. Cohen (University of Califirnia, Irvine)
    Abstract: This paper studies the impact of electricity deregulation and restructuring on research and development (R&D) expenditures of investor owned utilities. The differing pace of deregulation in the fifty states provides heterogeneity in institutional structure and competitive forces, and showcases the response of R&D funding to changing institutional environments. Based on a panel of all major investor-owned utilities from 1989-1997, this paper analyzes various political constraints, institutional change, and firm-specific financial and structural factors that have contributed to the decline of R&D expenditure in the U.S. electric utility industry. R&D is modeled as a two-stage process where firms first decide whether to invest in research depending on their critical mass and state characteristics, and then conditional on a positive decision, decide on the level of expenditure. A variation of the Heckman model is estimated in a panel data setting, allowing for separate effects of selection and intensity. The primary findings are: First, greater deregulation and competition has a positive effect on R&D whereas a higher probability of deregulation adversely affects research spending. The start date for retail competition and level and policies for stranded cost recovery do affect spending. Second, the response of R&D to financial and other firm attributes varies with the state of deregulation and provides insights into firm behavior in a regulated context. Third, the institutional and competitive factors interact in a way that suggest that full deregulation, coupled with effective retail competition may mitigate the problem of declining electricity R&D by the utilities.
    Keywords: Electricity Deregulation, Competition, R&D
    JEL: O30 O31 L50 L94
    Date: 2005–04–13
  16. By: Justin G. Trogdon (School of Economics, University of Adelaide)
    Abstract: Efforts to regionalize cardiac services can increase access costs for patients. This study quantifies this trade off by estimating the effects of changes in the regulation of hospital services on treatments and outcomes. A demand model for surgery services is specified in which heart attack victims form expectations of the need for and productivity of surgery in their choice of hospital and treatment. The results indicate that mortality is relatively insensitive to moderate changes in policy: changes in travel costs and volume offset one another. Despite similar health outcomes, the competing policies have different implications for taxpayers.
    Keywords: heart attack, Medicare, dynamic discrete choice estimation
    JEL: I12 I18 C35
    Date: 2005–02–03
  17. By: Can Huang; Celeste Amorim; Joaquim Borges Gouveia (Departamento de Economia, Gestão e Engenharia Industrial, Universidade de Aveiro); Mark Spinoglio; Augusto Medina (Sociedade Portuguesa de Inovação)
    Abstract: The paper first identifies the stakeholders involved in the design and implementation of China’s innovation policy and compares them with different government systems in selected Organization for Economic Co-operation and Development (OECD) countries. In order to disclose the relative strength and weaknesses inside China’s innovation policy framework, we proceed to utilize policy practices in the OECD countries as a guideline to examine China's innovation policy in five categories: reform in the public S&T institutions, financial policy, business innovation support structure, human resource policy and legislative actions. Subsequently, several weak components of the Chinese innovation policy framework are identified and two of them are selected for further analysis: education and human resource policy, and protection of Intellectual Property Rights (IPR). Finally, the paper provides some priorities and possible actions for future innovation policy developments in China.
    Date: 2004

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