nep-reg New Economics Papers
on Regulation
Issue of 2006‒02‒12
twelve papers chosen by
Christian Calmes
Universite du Quebec en Outaouais, Canada

  1. Legal-Political Factors and the Historical Evolution of the Finance-Growth Link By Michael D. Bordo; Peter L. Rousseau
  2. Entry and Regulation - Evidence from Health Care Professions By Schaumans, Catherine; Verboven, Frank
  3. Price regulation and generic competition in the pharmaceutical market By Dalen, Dag Morten; Strøm, Steinar; Haabeth, Tonje
  4. Employment Protection, Product Market Regulation and Firm Selection By Winfried Koeniger; Julien Prat
  5. Consumer Resistance Against Regulation: The Case of Health Care By Peter Zweifel; Harry Telser; Stephan Vaterlaus
  6. Product Markets and Paychecks: Deregulation's Effect on the Compensation Structure in Banking By Abigail Wozniak
  7. Bank Size and Risk-Taking under Basel II By Hendrik Hakenes; Isabel Schnabel
  8. Deregulating Network Industries: Dealing with Price-Quality Tradeoffs By Stefan Buehler; Dennis Gaertner; Daniel Halbheer
  9. The Becker Paradox and Type I vs. Type II Errors in the Economics of Crime By Persson, Mats; Siven, Claes-Henric
  10. Corruption in Procurement Auctions By Yvan Lengwiler; Elmar Wolfstetter
  11. Myths and Truths: The «Law and Finance Theory» Revisited By Michael Graff
  12. Corruption and the Shadow Economy: An Empirical Analysis By Axel Dreher; Friedrich Schneider

  1. By: Michael D. Bordo (Rutgers University, New Brunswick, NJ USA and Research Associate, NBER.); Peter L. Rousseau (Vanderbilt University, Nashville, TN and Research Associate, NBER.)
    Abstract: Recent cross-country investigations of the role of institutional fundamentals such as the protection of property rights in promoting financial development have extended a literature that has for decades maintained that financial factors can affect real outcomes. In this paper we pursue this new direction by considering relationships between finance, growth, legal origin, and political environment in a historical cross-section of 17 countries covering the period from 1880 to 1997. We find that relationships between a county's legal origin (i.e., English, French, German, or Scandinavian) and financial development are roughly consistent with earlier findings but are not persistent. At the same time, political variables such as proportional representation election systems, frequent elections, universal female suffrage, and infrequent revolutions or coups seem linked to larger financial sectors and higher conditional rates of economic growth. Despite the explanatory power of some of our measures of the deeper "fundamentals", however, a significant part of the growth-enhancing role of financial development remains unexplained by them.
    Date: 2006–02–01
  2. By: Schaumans, Catherine; Verboven, Frank
    Abstract: The health care professions in Europe have been subject to substantial entry and conduct regulation. Most notably, pharmacies have frequently received high regulated markups over wholesale costs, and have been protected from additional competition through geographic entry restrictions. We develop an entry model to study the direct impact of the regulations on the pharmacies, and the indirect impact on the physicians who provide related services. We study the case of Belgium, which is representative for many other countries with geographic entry restrictions. We find that the entry decisions of pharmacies and physicians are strategic complements. Furthermore, the entry restrictions have directly reduced the number of pharmacies by more than 50%, and indirectly reduced the number of physicians by about 7%. A policy analysis shows that a removal of the entry restrictions, combined with a large reduction in the regulated markups (by between 10-18%, down from the current 28%) would lead to a large shift in rent to consumers, without reducing the geographic coverage of pharmacies throughout the country. These findings show that the public interest motivation for the current regime has no empirical support. Our findings are also relevant in light of the renewed attention by competition authorities to liberalize professional regulation.
    Keywords: entry; professional services; regulation
    JEL: I11 K21 L10 L43
    Date: 2006–01
  3. By: Dalen, Dag Morten (Norwegian School of Management and the Frisch Centre); Strøm, Steinar (Dept. of Economics, University of Oslo); Haabeth, Tonje (University of Oslo and the Frisch Centre)
    Abstract: In March 2003 the Norwegian government implemented yardstick based price regulation schemes on a selection of drugs experiencing generic competition. The retail price cap, termed “index price”, on a drug (chemical substance) was set equal to the average of the three lowest producer prices on that drug, plus a fixed wholesale and retail margin. This is supposed to lower barriers of entry for generic drugs and to trigger price competition. Using monthly data over the period 1998-2004 for the 6 drugs (chemical entities) included in the index price system, we estimate a structural model enabling us to examine the impact of the reform on both demand and market power. Our results suggest that the index price helped to increase the market shares of generic drugs and succeeded in triggering price competition.
    Keywords: Discrete choice; demand for pharmaceuticals; monopolistic competition; evaluation of yardstick based price regulation
    JEL: C35 D43 I18 L11
    Date: 2005–11–25
  4. By: Winfried Koeniger (IZA Bonn and University of Bonn); Julien Prat (University of Vienna and IZA Bonn)
    Abstract: This paper analyzes the effect of labor and product market regulation in a dynamic stochastic equilibrium with search frictions. Modeling multiple-worker firms allows us to distinguish between the exit-and-entry (extensive) margin, and the hiring-and-firing (intensive) margin. We characterize analytically how both margins depend on regulation before we calibrate the model to the US economy. We find that firing costs matter most for the intensive margin. Fixed or set-up costs in the product market instead alter primarily the behavior of firms at the extensive margin. Moreover, we find important interactions between the policies through firm selection. Finally, the opposite effect of product and labor market regulation on job turnover rationalizes the empirically observed similarity of turnover rates across countries.
    Keywords: firing cost, product market regulation, firm selection, firm turnover, job turnover
    JEL: E24 J63 J64 J65
    Date: 2006–02
  5. By: Peter Zweifel (Socioeconomic Institute, University of Zurich); Harry Telser (Socioeconomic Institute, University of Zurich); Stephan Vaterlaus (Plaut Economics, Regensdorf)
    Abstract: Regulation fostering Managed Care alternatives in health insurance is spreading. This work reports on an experiment designed to measure the amounts of compensation asked by the Swiss population (in terms of reduced premiums) for Managed-Care type restrictions in the provision of health care. It finds that restrictions on the freedom of physician choice would require an average compensation of more than one-third of the premium, while generic substitution even meets with a small willingness to pay. Marked preference heterogeneity is an argument against regulation imposing uniformity of contract in Swiss social health insurance.
    Keywords: health insurance, health care, regulation, preference measurement, discrete choice experiments
    JEL: L51 D61 C93 I11 I18
    Date: 2005–02
  6. By: Abigail Wozniak (University of Notre Dame and IZA Bonn)
    Abstract: This paper asks how deregulation intended to promote competition in the commercial banking industry affected the compensation structure for banking employees. Using establishment-based data from the Employment Cost Index Survey of the U.S. Bureau of Labor Statistics, I obtain measures of the level and distribution of wage and benefits compensation within industries. I then compare changes in compensation in the banking industry to changes in unaffected industries across states and over time to identify the effects of deregulation. Banking deregulation had no effect on compensation levels or inequality in the industry as a whole, but this masks conflicting changes within the compensation structure. Manager wages fell while non-manager wages held steady, leading to a large decline in between-occupation compensation inequality. In contrast, between-establishment inequality increased dramatically. Deregulation also led to increases in inequality among managers despite their falling wages and to significant shifts in the types of non-wage benefits banking employees received.
    Keywords: total compensation, compensation inequality, product market competition, commercial banking
    JEL: J31 L11
    Date: 2006–01
  7. By: Hendrik Hakenes (MPI for Research on Collective Goods, Kurt-Schumacher-Str. 10, 53113 Bonn, Germany.; Isabel Schnabel (MPI for Research on Collective Goods, Kurt-Schumacher-Str. 10, 53113 Bonn, Germany.
    Abstract: We analyze the relationship between bank size and risk-taking under the New Basel Capital Accord. Using a model with imperfect competition and moral hazard, we show that the introduction of an internal ratings based (IRB) approach improves upon flat capital requirements if the approach is applied uniformly across banks and if the costs of implementation are not too high. However, the banks’ right to choose between the standardized and the IRB approaches under Basel II gives larger banks a competitive advantage and, due to fiercer competition, pushes smaller banks to take higher risks. This may even lead to higher aggregate risk-taking.
    Keywords: Basel II, IRB approach, bank competition, capital requirements, SME financing
    JEL: G21 G28 L11
    Date: 2006–02
  8. By: Stefan Buehler (Socioeconomic Institute, University of Zurich); Dennis Gaertner (Socioeconomic Institute, University of Zurich); Daniel Halbheer (Socioeconomic Institute, University of Zurich)
    Abstract: This paper examines the e®ects of introducing competition into monopolized network industries on prices and infrastructure quality. Analyzing a model with reduced-form demand, we ¯rst show that deregulating an integrated monopoly cannot simultaneously decrease the retail price and increase infrastructure quality. Second, we derive conditions under which reducing both retail price and infrastructure quality relative to the integrated monopoly outcome increases welfare. Third, we argue that restructuring and setting very low access charges may yield welfare losses, as infrastructure investment is undermined. We provide an extensive analysis of the linear demand model and discuss policy implications.
    Keywords: infrastructure quality, deregulation, investment incentives, access charges, regulation
    JEL: D43 L43
    Date: 2004–01
  9. By: Persson, Mats (Institute for International Economic Studies, Stockholm University); Siven, Claes-Henric (Department of Economics)
    Abstract: Two real-world observations are not easily replicated in models of crime. First, although capital punishment is optimal in Becker’s (1968) model, it is rarely observed in the real world. Second, criminal procedure and the evaluation of evidence vary across societies and historical periods, the standard of proof being sometimes very high and sometimes quite low. In this paper, we develop a general equilibrium model of judicial procedure allowing for innocent persons being convicted. We show that the median voter theorem applies to this model, making judicial procedure endogenous. So formulated, the model can replicate both empirical observations.
    Keywords: Criminal law; Judicial error; Burden of proof
    JEL: K40
    Date: 2006–01–01
  10. By: Yvan Lengwiler (University of Basel, Dept. of Economics (WWZ), Petersgraben 51, CH–4003 Basel, Switzerland.; Elmar Wolfstetter (Humboldt University at Berlin, Institute of Economic Theory I, Spandauer Str. 1, D–10178 Berlin, Germany.
    Abstract: We review different kinds of corruption that have been observed in procurement auctions and categorize them. We discuss means to avoid corruption, by choice of preferable auction formats, or with the help of technological tools, such as secure electronic bidding systems. Auctions that involve some soft elements, such as complex bids consisting of technical and financial proposals, are particularly prone to corruption. We do not believe that it is possible to eradicate corruption altogether in such situations, but we discuss means to make it less likely.
    Date: 2006–01
  11. By: Michael Graff (Swiss Institute for Business Cycle Research (KOF), Swiss Federal Institute of Technology Zurich (ETH))
    Abstract: The "law and finance theory" predicts that the common law system provides the best basis for financial development and economic growth, followed by Scandinavian and German origin civil law and finally French origin civil law. Referring to a number of sceptical views, this paper argues that the theory faces an identification problem, since the majority of common law countries have a market-based financial system, whereas the majority of civil law countries have a bank-based financial system. Moreover, there are plausible alternative hypotheses to explain the quality of the financial system; but that they cannot rule out that the theory refers to a relevant link between the legal tradition and financial development. Finally it is argued that the corner stone of the law and finance theory is the proposition that different legal traditions imply different degrees of investor protection. It is demonstrated that a few minor, but sensible modifications in aggregating the original indicator set produce results that are different from those reported so far and contradictory to the theory's ranking of the four major legal families in terms of investor protection. Accordingly, the validity of the theory's investor protection measures for international comparisons, the supremacy of the common law legacy in protecting investors and, consequently, the validity of legal origin variables to instrument for financial development, have to be regarded as myths rather than truths.
    Keywords: Financial Development, Legal System, Investor Protection
    JEL: K22 G20 P00
    Date: 2006–01
  12. By: Axel Dreher (Swiss Institute for Business Cycle Research (KOF), Swiss Federal Institute of Technology Zurich (ETH)); Friedrich Schneider (Department of Economics, University of Linz, Austria)
    Abstract: This paper analyzes the influence of the shadow economy on corruption and vice versa. We hypothesize that corruption and shadow economy are substitutes in high income countries while they are complements in low income countries. The hypotheses are tested for a crosssection of 120 countries and a panel of 70 countries for the period 1994-2002. Our results show that the shadow economy reduces corruption in high income countries, but increases corruption in low income countries. We also find that stricter regulations increase both corruption and the shadow economy.
    Keywords: Corruption, Shadow Economy, Regulation, Tax Burden
    JEL: D73 H26
    Date: 2006–01

This nep-reg issue is ©2006 by Christian Calmes. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
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