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on Regulation |
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Issue of 2005‒06‒14
fifteen papers chosen by Christian Calmes Université du Québec en Outaouais, Canada |
| By: | Freixas, Xavier; Lóránth, Gyöngyi; Morrison, Alan |
| Abstract: | We investigate the optimal regulation of financial conglomerates that combine a bank and a non-bank financial institution. The conglomerate’s risk-taking incentives depend upon the level of market discipline it faces, which in turn is determined by the conglomerate’s liability structure. We examine optimal capital requirements for standalone institutions, for integrated financial conglomerates, and for financial conglomerates that are structured as holding companies. For a given risk profile, integrated conglomerates have a lower probability of failure than either their standalone or decentralized equivalent. However, when risk profiles are endogenously selected conglomeration may extend the reach of the deposit insurance safety net and hence provide incentives for increased risk-taking. As a result, integrated conglomerates may optimally attract higher capital requirements. In contrast, decentralized conglomerates are able to hold assets in the socially most efficient place. Their optimal capital requirements encourage this. Hence, the practice of ‘regulatory arbitrage’, or of transferring assets from one balance sheet to another, is welfare-increasing. We discuss the policy implications of our finding in the context not only of the present debate on the regulation of financial conglomerates but also in the light of existing US bank holding company regulation. |
| Keywords: | capital regulation; financial conglomerate; regulatory arbitrage |
| JEL: | G21 G22 G28 |
| Date: | 2005–05 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5036&r=reg |
| By: | Claessens, Stijn; Underhill, Geoffrey R D |
| Abstract: | The international financial system has been the subject of much debate following the financial crises of the 1990s. While many reforms have been proposed for and implemented by mostly developing countries, few changes have been made to the international financial system itself. Fundamentally, the design, institutions, and governance of the international system remain very similar to those of two decades ago. The major changes in global financial markets, financial services industries and economies during this period, however, have rendered the international financial system and its governance of out date. In this paper, we analyse the causes and consequences of the failure to reform. We highlight the forces driving the need for changes in the governance of the international financial system, in particular the combination of the global integration processes and the increased role of the private sector. We then provide insights into the desirable institutional structure for international financial decision-making, also as it relates to the legitimacy of the international system in the eyes of the public worldwide. We also discuss the (political economy) factors inhibiting reform. We conclude with suggestions for future research. |
| Keywords: | international financial arrangements; international financial institutions; international governance; legitimacy; political economy |
| JEL: | F33 F34 K33 N20 O19 P50 |
| Date: | 2005–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:4970&r=reg |
| By: | Javorcik, Beata Smarzynska; Spatareanu, Mariana |
| Abstract: | This study takes a new look at the regulatory determinants of foreign direct investment (FDI) by asking whether labour market flexibility affects FDI flows across 19 Western and Eastern European countries. The analysis is based on firm-level data on new investments undertaken during the 1998-2001 period. The study employs a variety of proxies for labour market regulations reflecting the flexibility of individual and collective dismissals, the length of the notice period and the required severance payment along with a comprehensive set of controls for the business climate characteristics. The results suggest that greater flexibility in the host country’s labour market in absolute terms or relative to that in the investor’s home country is associated with larger FDI flows. The findings indicate that as the labour market flexibility in the host country increases from inflexible (e.g. France) to flexible (e.g. United Kingdom), the volume of investment goes up by between 12% and 26%. FDI in services sectors appears to be more sensitive to labour market regulations than investment in manufacturing. |
| Keywords: | firm-level data; foreign direct investment; labour market regulation |
| JEL: | F21 F23 J00 |
| Date: | 2005–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:4839&r=reg |
| By: | John W. Dawson (Appalachian State University); John J. Seater |
| Abstract: | We introduce a new measure of the extent of federal regulation in the U.S. and use it to investigate the relationship between federal regulation and macroeconomic performance. We find that regulation has statistically and economically significant effects on aggregate output and the factors that produce it - total factor productivity, physical capital, and labor. The effects are multifaceted and complex. Regulation changes the way output is produced by changing the mix of inputs. It also affects both the trends and deviations about the trends in output and its factors of production, and the effects differ across dependent variables. The effects display interesting intertemporal dynamics. Changes in regulation and marginal tax rates offer an explanation for the productivity slowdown of the 1970s. Regulation also has substantial opportunity costs in the form of foregone output. |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:apl:wpaper:05-02&r=reg |
| By: | Battaglini, Marco |
| Abstract: | We characterize the optimal renegotiation-proof contract in a dynamic Principal-Agent model in which the type of the agent may change stochastically over time. Contrary to the case with constant types, the ex ante optimal contract may be renegotiation-proof even if types are highly correlated. The marginal benefit of having some pooling of types in the first period is not monotonic in their persistence level, but the equilibrium level of pooling is non-decreasing in persistence; and, for any level persistence, it is always optimal to partially screen the types by offering a menu of choices to the agent. Despite the non-linearity of the problem, the optimal equilibrium allocation is unique. |
| Keywords: | contract theory; dynamic contracts; regulation; renegotiation |
| JEL: | D42 L51 |
| Date: | 2005–04 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5014&r=reg |
| By: | Clark, Andrew E; Postel-Vinay, Fabien |
| Abstract: | We construct indicators of the perception of job security for various types of jobs in 12 European countries using individual data from the European Community Household Panel (ECHP). We then consider the relation between reported job security and OECD summary measures of Employment Protection Legislation (EPL) strictness on one hand, and Unemployment Insurance Benefit (UIB) generosity on the other. We find that, after controlling for selection into job types, workers feel most secure in permanent public sector jobs, least secure in temporary jobs, with permanent private sector jobs occupying an intermediate position. We also find that perceived job security in both permanent private and temporary jobs is positively correlated with UIB generosity, while the relationship with EPL strictness is negative: workers feel less secure in countries where jobs are more protected. These correlations are absent for permanent public jobs, suggesting that such jobs are perceived, by and large, to be insulated from labour market fluctuations. |
| Keywords: | employment protection legislation; perceived job security; unemployment insurance benefits |
| JEL: | I31 J28 J65 |
| Date: | 2005–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:4927&r=reg |
| By: | Acharya, Viral V; John, Kose; Sundaram, Rangarajan K |
| Abstract: | We conduct a theoretical and empirical investigation of the impact of bankruptcy codes on firms’ capital-structure choices. In our theoretical framework, costs of financial distress are endogenously determined as a function of the bankruptcy code. Anticipated liquidation values emerge as the key variable in the capital structure-bankruptcy code link: among other things, the theory predicts that the difference in leverage between a debt-friendly bankruptcy code (such as the UK’s) and a more equity-friendly code (such as the US’s) should be a monotone function of liquidation values. We examine empirical support for the theory by comparing leverages in the US and the UK for the period 1990 to 2002. Our tests use two (inverse) proxies of liquidation values: asset-specificity of the firm, and the fraction of the firm’s assets that are intangibles. We find the theory is strongly backed by the data. The results are robust to considerations such as employing net leverage (debt net of cash holdings) and controlling for other firm characteristics that affect leverage. |
| Keywords: | asset-specificity; bankruptcy costs; financial distress; intangibles; leverage |
| JEL: | F30 G32 G33 |
| Date: | 2005–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:4916&r=reg |
| By: | Dolado, Juan José; Jansen, Marcel; Jimeno-Serrano, Juan Francisco |
| Abstract: | In many countries, Employment Protection Legislation (EPL) establishes different regulations for certain groups of workers who face more disadvantages in the labour market (young workers, women, unskilled workers, etc.) with the aim of improving their employability. Well-known examples are the introduction of atypical employment contracts (e.g. temporary and determined-duration contracts), which ease firing restrictions for some, but not all, workers. This paper discusses the effects of EPL varying among workers of different skills on the level and composition of unemployment, job flows, productivity and welfare. By using an extension of Mortensen-Pissarides’ (1994) search model where heterogeneous workers compete for the same jobs, we are able to identify several key channels through which changing firing costs for some groups of workers affects hiring and firing of all workers and, hence, may have a different impact on aggregate labour market variables than reducing firing costs across the board. Some analytical and simulation results also show that these effects of differentiated firing costs by workers’ skills may be different depending upon the initial state of the labour market. |
| Keywords: | firing costs; matching; unemployment |
| JEL: | J63 J64 |
| Date: | 2005–05 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5033&r=reg |
| By: | Spagnolo, Giancarlo |
| Abstract: | Leniency programmes (or policies) reduce sanctions against cartel members that self-report to the Antitrust Authority. We focus on their ability to directly deter cartels and analogous criminal organizations by undermining internal trust, increasing individual incentives to ‘cheat’ on partners. Optimally designed ‘courageous’ leniency programmes reward the first party that reports sufficient information with the fines paid by all other parties, and with finitely high fines achieve the first best. ‘Moderate’ leniency programmes that only reduce or cancel sanctions, as implemented in reality, may also destabilize and deter cartels by (a) protecting agents that defect (and report) from fines; (b) protecting them from other agents’ punishment; and (c) increasing the riskiness of taking part to a cartel. |
| Keywords: | amnesty; antitrust; cartels; collusion; competition policy; corruption; immunity; law enforcement; leniency; oligopoly; organized crime; repeated games; risky cooperation; whistleblowers |
| JEL: | L13 L44 |
| Date: | 2004–12 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:4840&r=reg |
| By: | Repullo, Rafael |
| Abstract: | This paper studies the strategic interaction between a bank whose deposits are randomly withdrawn, and a lender of last resort (LLR) that bases its decision on supervisory information on the quality of the bank’s assets. The bank is subject to a capital requirement and chooses the liquidity buffer that it wants to hold and the risk of its loan portfolio. The equilibrium choice of risk is shown to be decreasing in the capital requirement, and increasing in the interest rate charged by the LLR. Moreover, when the LLR does not charge penalty rates, the bank chooses the same level of risk and a smaller liquidity buffer than in the absence of a LLR. Thus, in contrast with the general view, the existence of a LLR does not increase the incentives to take risk, while penalty rates do. |
| Keywords: | bank supervision; capital requirements; central bank; deposit insurance; lender of last resort; moral hazard; penalty rates |
| JEL: | E58 G21 G28 |
| Date: | 2005–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:4967&r=reg |
| By: | W. Robert Reed (University of Oklahoma) |
| Abstract: | I examine the wage effects of Right-To-Work (RTW). Using state-level data, I estimate that, ceteris paribus, RTW states have average wages that are significantly higher than non-RTW states. This result is robust is across a wide variety of specifications. An important distinctive of this study is that it controls for state economic conditions at the time states adopted RTW. States that adopted RTW were generally poorer than other states. Failure to control for these initial conditions may be the reason that previous studies have not identified a positive wage impact for RTW. |
| Keywords: | Right-to-Work |
| JEL: | J |
| Date: | 2005–06–08 |
| URL: | http://d.repec.org/n?u=RePEc:wpa:wuwpla:0506005&r=reg |
| By: | Hawdon, David; Hunt, Lester; Levine, Paul L; Rickman, Neil |
| Abstract: | This paper examines optimal price (i.e. ‘sliding scale’) regulation of a monopoly when efficiency and managerial effort are not observed. We show how to operationalize this model of incentive regulation and use actual data from electricity distribution in England and Wales to make welfare comparisons of sliding scale regulation with a price cap regime and the First-Best (the full information case). Our method enables us to quantify technical uncertainty as faced by the electricity regulator in the 1990s and shows that there are significant welfare gains from a sliding scale relative to the price cap regime. |
| Keywords: | electricity distribution; regulation; sliding scale |
| JEL: | L51 |
| Date: | 2005–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:4934&r=reg |
| By: | Bruno José Marques Pinto (Graduate School of Economics at Fundacao Getulio Vargas - EPGE/FGV) |
| Abstract: | The paper examines the economic and regulatory factors that led to an explosion in the wholesale power prices, supply shortages, and utility insolvencies in California’s electricity sector. A necessary first step in determining the lessons learned from the California electricity crisis is a diagnosis of its causes. This requires a clear understanding of the federal and state regulatory infrastructure that governs the US electricity supply industry. The structure of California’s restructured electricity sector and its performance are discussed. The effects on wholesale market prices are analyzed. The regulatory responses leading to utility credit problems and supply shortages are also discussed. The paper concludes with a set of lessons from the California electricity crisis. |
| Keywords: | Electricity, eletricidade, regulation, regulação, California, deregulation |
| JEL: | L9 L5 L1 |
| Date: | 2005–06–07 |
| URL: | http://d.repec.org/n?u=RePEc:wpa:wuwpio:0506003&r=reg |
| By: | Alessandro Ragazzoni (Alma Mater Studiorum-Università di Bologna); Maurizio Canavari (Alma Mater Studiorum-Università di Bologna) |
| Abstract: | This paper is concerned with analyzing the CAP policies involving environmental issues and simulating probable results at a farm level of the adoption of agri-environmental measures. |
| JEL: | P Q Z |
| Date: | 2005–06–04 |
| URL: | http://d.repec.org/n?u=RePEc:wpa:wuwpot:0506001&r=reg |
| By: | Productivity Commission |
| Abstract: | The Productivity Commission's final research report, released December 2004, responds to a request by the Australian Government to examine the contribution that national reform of building regulation has made and further reform could make to the performance of the building and construction industry. The Commission found that the Australian Building Codes Board has made progress in reducing regulatory differences across jurisdictions and in basing the Building Code of Australia to performance-based requirements. However, there is scope for further reforms to enhance productivity and to benefit the broader community. The Commission recommends the Australian Government, as well as the State and Territory Governments, continue to be actively involved in reform of building regulation and to negotiate a new Intergovernmental Agreement. The agreement would clarify the objectives of building regulation reform; strengthen the commitment to national consistency; and also affirm the importance of a whole-of-government approach to building regulation. |
| Keywords: | Australia; Commissioned study; Australian Building Codes Board (ABCB); Building; Construction; Economics; Inter-Government Agreement; Policy; Reform; Regulation; |
| JEL: | A D K |
| Date: | 2005–06–06 |
| URL: | http://d.repec.org/n?u=RePEc:wpa:wuwpot:0506007&r=reg |