nep-reg New Economics Papers
on Regulation
Issue of 2005‒11‒19
seven papers chosen by
Christian Calmes
Université du Québec en Outaouais, Canada

  1. The Creation of the Rule of Law and the Legitimacy of Property: The Political and Economic Consequences of a Corrupt Privatization By Joseph E. Stiglitz; Karla Hoff
  2. Labour regulation, corporate governance and legal origina: a case of institutional complementarity? By Simon Deakin; Beth Ahlering
  3. Pricing Discretion and Price Regulation in Competitive Industries By Alberto Iozzi; Roberta Sestini
  4. Monitoring Corruption: Evidence from a Field Experiment in Indonesia By Benjamin A. Olken
  5. Pension benefit default risk and welfare effects of funding regulation By Thomas Steinberger
  6. The Behavior of Banks under the Deposit Insurance and Capital Requirements By Xiaozhong Liang
  7. Demand commitment in legislative bargaining By Maria Montero; Juan Vidal-Puga

  1. By: Joseph E. Stiglitz; Karla Hoff
    Abstract: How does the lack of legitimacy of property rights affect the dynamics of the creation of the rule of law? We investigate the demand for the rule of law in post-Communist economies after privatization under the assumption that theft is possible, that those who have "stolen" assets cannot be fully protected under a change in the legal regime towards rule of law, and that the number of agents with control rights over assets is large. We show that a demand for broadly beneficial legal reform may not emerge because the expectation of weak legal institutions increases the expected relative return to stripping assets, and strippers may gain from a weak and corrupt state. The outcome can be inefficient even from the narrow perspective of the asset-strippers.
    JEL: K0
    Date: 2005–11
  2. By: Simon Deakin; Beth Ahlering
    Abstract: We explore the finding of La Porta et al. that differences in Ôlegal originÕ account for part of cross-national diversity in labour regulation and corporate governance. We suggest that the finding needs a better historical grounding and that a mechanism which might explain it has not been adequately spelled out. In search of an explanation we focus on the role of complementarities between legal and economic institutions, and in particular the part played by the distinctive Ôlegal culturesÕ of the common law and civil law in setting national systems on separate pathways to economic development.
    Keywords: legal origin, complementarities, legal cultures, labour law, corporate governance.
    JEL: G38 K22 K31 J53 J83
  3. By: Alberto Iozzi (Universita degli Studi di Roma); Roberta Sestini (University of Rome I; Universita D'Annunzio)
    Abstract: Price capped firms enjoy a large degree of pricing discretion, which may damage captive customers and have adverse effects on the development of competition when regulated firms also operate in competitive industries. We study two alternative regulatory approaches to limit such a discretion. The first one places a fixed upper limit to the prices charged in captive markets; the other constrains the captive prices relatively to the price asset in the more competitive markets. We refer to the former approach as the Absolute regime, and to the latter as the Relative regime. We analyse the effects on prices, competition, and welfare stemming from the two regimes in a simple model where the regulated firm faces competition by a competitive fringe in some of the markets it serves. We find that the Relative regime is not much more effective in protecting captive customers since captive prices may be identical under both regimes. Moreover, since it makes more costly to the incumbent regulated firm to reduce its competitive price, this is weakly higher than under the Absolute regime. However, this is also the reason why the Relative regime turns out to be more pro-competitive: the total output supplied by competitors and/or the number of firms entering the potentially competitive market might be enhanced under this rule. The effects on aggregate welfare are ambiguous. We provide some evidence that the Relative regime is more likely to positively affect consumers' surplus and social welfare the more efficient is the competitive fringe.
    Keywords: price regulation, pricing discretion, competition
    JEL: L13 L50
    Date: 2005–04–04
  4. By: Benjamin A. Olken
    Abstract: This paper uses a randomized field experiment to examine several approaches to reducing corruption. I measure missing expenditures in over 600 village road projects in Indonesia by having engineers independently estimate the prices and quantities of all inputs used in each road, and then comparing these estimates to villages' official expenditure reports. I find that announcing an increased probability of a government audit, from a baseline of 4 percent to 100 percent, reduced missing expenditures by about 8 percentage points, more than enough to make these audits cost-effective. By contrast, I find that increasing grass-roots participation in the monitoring process only reduced missing wages, with no effect on missing materials expenditures. Since materials account for three-quarters of total expenditures, increasing grass-roots participation had little impact overall. The findings suggest that grass-roots monitoring may be subject to free-rider problems. Overall, the results suggest that traditional top-down monitoring can play an important role in reducing corruption, even in a highly corrupt environment.
    JEL: D73
    Date: 2005–11
  5. By: Thomas Steinberger (CSEF, University of Salerno)
    Abstract: This paper analyzes the welfare effects of funding regulation for defined benefit pension plans subject to pension benefit default risk in an incomplete financial markets OLG-setting with aggregate uncertainty and idiosyncratic pension default risk. The financial market incompleteness arises from the inability to trade human capital claims. Using numerical methods to solve for equilibrium, we show first that default-free defined benefit pension plans are welfare-improving even in a dynamically efficient economy. Second, we show that in the presence of default risk funding regulations improve aggregate welfare by making larger size plans more attractive and that full funding is not necessarily the optimal policy. Our results provide a rationale for the widespread underfunding of defined benefit pension plans and might explain the decline of these plans after the introduction of stringent funding regulation in the US
    Keywords: generations, pension default, funding regulation
    JEL: H21 H31 H55
    Date: 2005–11–01
  6. By: Xiaozhong Liang (Economics University of Connecticut)
    Abstract: Deposit insurance and capital requirements are two focuses in banking literature. Many researchers criticize these two important schemes using moral hazard theory: Under the protection of the deposit insurance, banks have incentive to take deposits as much as they can for some debt-favor reasons such as tax deduction on interest payment, and let the FDIC pay for the deposits if it turns out banks do not have enough capital to pay the deposits back. One the other hand, banks also have incentive to take riskier investment in hope of having higher returns. When capital requirements are imposed, insured banks may shift priced risks to unpriced risks. Therefore, capital requirements actually will lead banks to take more risks, and hence lead to higher probability of bank failure. However, this criticism does not consider the implicit costs of bankruptcy. If a bank is bankrupt, it will lose the benefit of deposit insurance. Moreover, it will lose the possible future earnings. In this paper, I take into account the implicit costs of bankruptcy, and investigate how banks react to the fixed and risk-based capital requirements under deposit insurance. In my basic model, I adopt one factor option pricing model and find a closed-form solution for bank equity in terms of asset-to-debt ratio. In my extension model, I relax the assumption of constant interest rate in the basic model. Thus, the uncertainty of bank equity comes from two sources: capital ratio and interest rate. I adopt a general form of term structure and find the numerical solution for the bank equity value as a function of both asset-to-debt ratio and interest rate. Through the stochastic term structure, interest rate risk is also involved. The results show that banks actually prefer to use more capital even there are no capital requirements. Moreover, banks tend to take lower risk instead of high risk no matter there are capital requirements or not, if they are solvent. However, for insolvent banks, they may take riskier investment. Under the risk-based capital requirements, banks would prefer lower capital requirements by taking lower risk. Lastly, capital requirements only have impact on banks with low capital. For those well capitalized banks, capital requirements will not affect their behavior too much.
    Keywords: numerical analysis, capital ratio, risk-taking, interest rate risk, deposit insurance, capital requirements
    JEL: G21
    Date: 2005–11–11
  7. By: Maria Montero (University of Nottingham); Juan Vidal-Puga (University of Vigo)
    Abstract: Morelli (American Political Science Review, 1999) provides a majoritarian bargaining model in which the parties make payoff demands and the order of moves is chosen by the leading party. Morelli's main proposition states that the ex post distribution of payoffs inside the coalition that forms is proportional to the homogeneous representation of the game. We provide a counterexample and prove a weaker result: proportional payoffs hold if the rules are modified so that the parties must move in decreasing order of weight.
    Keywords: demand commitment majority games politics
    JEL: C7 D8
    Date: 2005–11–14

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