nep-reg New Economics Papers
on Regulation
Issue of 2005‒05‒23
nine papers chosen by
Christian Calmes
Université du Québec en Outaouais, Canada

  1. Effective labor regulation and microeconomic flexibility By Ricardo Caballero; Kevin N. Cowan; Eduardo M. R. A. Engel; Alejandro Micco
  2. Deposit insurance, regulatory forbearance and economic growth: implications for the Japanese banking crisis By Robert Dekle; Kenneth Kletzer
  3. The macroeconomics of child labor regulation By Matthias Doepke; Fabrizio Zilibotti
  4. State Regulations, Job Search and Wage Bargaining: A Study in the Economics of the Informal Sector By Maxim Bouev; ;
  5. An analysis of the potential competitive impacts of Basel II capital standards on U.S. mortgage rates and mortgage securitization By Diana Hancock; Andreas Lehnert; Wayne Passmore; Shane M. Sherlund
  6. Margin Requirements, Volatility, and Market Integrity: What Have We Learned Since The Crash? By Paul H. Kupiec
  7. Two-part pricing under revenue cap regulation By Lantz, Björn
  8. Endogenous Institutions and the Dynamics of Corruption By Esther Bruegger
  9. The political economy of job protection and income redistribution. By Bruno Amable; Donatella Gatti

  1. By: Ricardo Caballero; Kevin N. Cowan; Eduardo M. R. A. Engel; Alejandro Micco
    Abstract: Microeconomic flexibility, by facilitating the process of creative destruction, is at the core of economic growth in modern market economies. The main reason why this process is not infinitely fast is the presence of adjustment costs, some of them technological, others institutional. Chief among the latter is labor market regulation. While few economists would object to such a view, its empirical support is rather weak. In this paper we revisit this hypothesis and find strong evidence for it. We use a new sectoral panel for 60 countries and a methodology suitable for such a panel. We find that job security regulation clearly hampers the creative-destructive process, especially in countries where regulations are likely to be enforced. Moving from the 20th to the 80th percentile in job security, in countries with strong rule of law, cuts the annual speed of adjustment to shocks by a third while shaving off about one percent from annual productivity growth. The same movement has negligible effects in countries with weak rule of law.
    Keywords: Labor market ; Productivity
    Date: 2004
  2. By: Robert Dekle; Kenneth Kletzer
    Abstract: An endogenous growth model with financial intermediation is used to show how public deposit insurance and weak prudential regulation can lead to banking crises and permanent declines in economic growth. The impact of regulatory forbearance on investment, saving and asset price dynamics under perfect foresight are derived in the model. The assumptions of the theoretical model are based on essential features of the Japanese financial system and its regulation. The model demonstrates how banking and growth crises can evolve under perfect foresight. The dynamics for economic aggregates and asset prices predicted by the model are shown to be generally consistent with the experience of the Japanese economy and financial system through the 1990s. We also test our maintained hypothesis of rational expectations using asset price data for Japan over the 1980s and 1990s. An implication of our analysis is that delaying the resolution of banking crises adversely affects future economic growth.
    Keywords: Financial crises - Japan ; Deposit insurance ; Bank supervision ; Economic development
    Date: 2004
  3. By: Matthias Doepke; Fabrizio Zilibotti
    Abstract: We develop a positive theory of the adoption of child labor laws. Workers who compete with children in the labor market support the introduction of a child labor ban, unless their own working children provide a large fraction of family income. Since child labor income depends on family size, fertility decisions lock agents into specific political preferences, and multiple steady states can arise. The introduction of child labor laws can be triggered by skill-biased technological change that induces parents to choose smaller families. The model replicates features of the history of the U.K. in the nineteenth century, when regulations were introduced after a period of rising wage inequality, and coincided with rapidly declining fertility rates.
    Date: 2005
  4. By: Maxim Bouev; ;
    Abstract: This paper analyses the emergence of the informal economy in the environment characterised by non-competitive labour markets with wage bargaining. We develop a simple extension of the standard search model à la Pissarides (2000) with formal and informal sectors to show how a government’s auditing of informal firms and barriers to firms’ entry erected in the formal sector by corrupt bureaucracy can make for stable coexistence of formal and informal jobs in the long term. In equilibrium, wage differentials for homogeneous and risk-neutral workers emerge because different types of jobs have different lifetimes and/or have different creation costs. The former are explained by the auditing activities of the government that in the simple set-up destroy informal matches, while keeping formal jobs intact; the latter are due to varying capital costs, or costs associated with red tape and bureaucratic extortion (bribing). Search frictions introduce rent sharing between firms and workers in both formal and informal sectors. This has an important implication for policy making. In particular, we show that if ceteris paribus a firms’ bargaining position vis-à-vis workers is stronger in the formal rather than in the informal sector, governments can afford to appropriate a larger part of a productive match surplus (e.g. by levying higher taxes), without endangering the qualitative outcome in the long run. Rent sharing also implies that both formal and informal sector employees may receive wages above marginal product. We investigate efficiency properties of an equilibrium with formal and informal jobs and discuss the role of the government in creating and eliminating such inefficiencies partially arising from a version of the hold-up problem (Grout, 1984). Some lessons are drawn for normative analyses of policies aimed at reduction of informality in set-ups with non-competitive labour markets. In particular, the conditions are given under which a reduction in size of the informal sector is likely to be detrimental for economic welfare.
    Keywords: informal economy, regulations, wage bargaining, labour markets, search models
    JEL: E24 H26 J31 J41 J42 J64 O17
    Date: 2005–04–01
  5. By: Diana Hancock; Andreas Lehnert; Wayne Passmore; Shane M. Sherlund
    Keywords: Bank capital - Law and legislation ; Mortgages ; Mortgage-backed securities
    Date: 2005
  6. By: Paul H. Kupiec (Division of Research and Statistics, Board of Governors of the Federal Reserve System)
    Abstract: This study assesses the state of the policy debate that surrounds the Federal regulation of margin requirements. A relatively comprehensive review of the literature finds on undisputed evidence that supports the hypothesis that margin requirements can be used to control stock return volatility and correspondingly little evidence that suggests that margin-related leverage is an important underlying source of "excess" volatility. The evidence does not support the hypothesis that there is a stable inverse relationship between the level of Regulation T margin requirements and stock returns volatility nor does it support the hypothesis that the leverage advantage in equity derivative products is a source of additional returns volatility in the stock market.
    JEL: G0
  7. By: Lantz, Björn (Department of Business Administration, School of Economics and Commercial Law, Göteborg University)
    Abstract: This paper aims at developing the theoretical understanding of revenue capping as a way of regulating monopolistic firms. It is shown that the fact that a standard monopolist regulated by a fixed revenue cap will raise its price above the unregulated monopoly level is robust to two-part pricing. It is also shown that when regulation of a two-part pricing monopolist is based on a hybrid revenue cap defined as a linear function of quantity, it is the slope of the cap that determines its incentives for efficiencient behaviour while the intercept of the cap only affects the profit level of the firm. This also holds if the cap is defined as a hybrid price-revenue cap. The general conclusion of this is that the slope of the hybrid cap needs to be steeper that the slope of the firm’s cost function in order to prevent the incentive to raise price above the unregulated monopoly level. <p>
    Keywords: Monopoly regulation; incentive regulation; revenue cap regulation
    Date: 2005–05–17
  8. By: Esther Bruegger
    Abstract: While empirical studies which analyze large cross section country data find that corruption lowers investment and thereby economic growth, this result cannot be established for certain subsamples of countries. We argue that one reason for these mixed findings may be that a country's corruption and growth rates are tightly linked as variables of a dynamic process which can have several equilibria or have different sets of equilibria. In order to understand the circumstances in which a country converges towards a certain equilibrium, we model the individual decisions to invest and corrupt as an evolutionary game. In this model the quality of government institutions is an endogenous variable, depending on the corruption rate, the population income, and the type of institutions; the quality of institutions itself then determines the future incentives to corrupt. The comprehension of these feedback effects allows us to study the role of the type of institutions for the dynamics of corruption. We present the equilibria for different types of institutions and discuss the resulting dynamics. The results suggest that cross country studies may significantly underestimate the impact of corruption on growth for certain countries. Depending on how the quality of institutions depends on corruption and income, corruption can either lower growth, suppress it entirely, or be positively correlated with growth in some special situations
    Keywords: Corruption; Institutions; Feedback Effects; Evolutionary Game
    JEL: C73 D73
    Date: 2005–02
  9. By: Bruno Amable; Donatella Gatti
    Abstract: This paper presents a model allowing to analyze voting, welfare institutions and economic performance. We consider a political economy framework with three classes of agents: entrepreneurs, employed workers and unemployed workers. Agents vote on alternative institutional options: the degree of labour market flexibility and the intensity of redistribution. We show that the welfare state configuration depends on the nature of the political system - majoritarian, coalition, twoparty. Because internationalization reduces the possibility for national government to e.ectively tax profits, the existing political coalition is fragilized by the process of globalization. The model generates results concerning the macroeconomic equilibrium employment level. Hence we can assess the effects of internationalization on macroeconomic performance. The impact of internalization depends on the nature of the political system (majoritarian versus coalition government) and on the institutional configuration (positive flexibility versus positive redistribution).
    Date: 2005

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