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on Regulation |
| By: | Wagner,Wolf (Tilburg University, Center for Economic Research) |
| Abstract: | Conglomeration and consolidation in the financial system broaden the activities financial institutions are undertaking and cause them to become more homogenous.Although resulting diversification gains make each institution appear less risky, we argue that financial stability may not improve as total risk in the financial system remains the same. Stability may even fall as institution' incentives for providing liquidity and limiting their risk taking worsen. Optimal regulation may thus not provide a relief for diversification. However, we also identify important benefits of a broadening of activities. By reducing the differences among institutions, it lowers the need for inter-institutional risk sharing. This mitigates the impact of any imperfections such risk sharing may be subject to. The reduced importance of such risk sharing, moreover, lowers externalities across institutions. As a result, institutions' incentives are improved and there is less need for regulating them. |
| Keywords: | conglomeration;financial consolidation;homogenization;stability |
| JEL: | G21 G28 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:kubcen:200672&r=reg |
| By: | Kristopher Gerardi; Harvey S. Rosen; Paul Willen |
| Abstract: | The U.S. mortgage market has experienced phenomenal change over the last 35 years. Most observers believe that the deregulation of the banking industry and financial markets generally has played an important part in this transformation. One issue that has received particular attention is the role that the housing Government Sponsored Enterprises (GSEs), Fannie Mae and Freddie Mac, have played in the development of a secondary market in mortgages. This paper develops and implements a technique for assessing the impact of changes in the mortgage market on individuals and households. ; Our analysis is based on an implication of the permanent income hypothesis: that the higher a household’s future income, the more it desires to spend and consume, ceteris paribus. If we have perfect credit markets, then desired consumption matches actual consumption and current spending on housing should forecast future income. Since credit market imperfections mute this effect, we can view the strength of the relationship between housing spending and future income as a measure of the “imperfectness” of mortgage markets. Thus, a natural way to determine whether mortgage market developments have actually helped households by decreasing market imperfections is to see whether this link has strengthened over time. ; We implement this framework using panel data going back to 1969. We find that over the past several decades, housing markets have become less imperfect in the sense that households are now more able to buy homes whose values are consistent with their long-term income prospects. However, we find no evidence that the GSEs’ activities have contributed to this phenomenon. This is true whether we look at all homebuyers, or at subsamples of the population whom we might expect to benefit particularly from GSE activity, such as low-income households and first-time homebuyers. |
| Keywords: | Mortgage loans |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedbpp:06-6&r=reg |
| By: | Luigi Guiso; Paola Sapienza; Luigi Zingales |
| Abstract: | We use exogenous variation in the degree of restrictions to bank competition across Italian provinces to study both the effects of bank regulation and the impact of deregulation. We find that where entry was more restricted the cost of credit was higher and - contrary to expectations- access to credit lower. The only benefit of these restrictions was a lower proportion of bad loans. Liberalization brings a reduction in rates spreads and an increased access to credit at a cost of an increase in bad loans. In provinces where restrictions to bank competition were most severe, the proportion of bad loans after deregulation raises above the level present in more competitive markets, suggesting that the pre-existing conditions severely impact the effect of liberalizations. |
| JEL: | E0 G0 |
| Date: | 2006–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:12501&r=reg |
| By: | Bradley Herring; Mark V. Pauly |
| Abstract: | Some states have implemented community rating regulations to limit the extent to which premiums in the individual health insurance market can vary with a person�s health status. Community rating and guaranteed issues laws were passed with hopes of increasing access to affordable insurance for people with high-risk health conditions, but there are concerns that these laws led to adverse selection. In some sense, the extent to which these regulations ultimately affected the individual market depends in large part on the degree of risk segmentation in unregulated states. In this paper, we examine the relationship between expected medical expenses, individual insurance premiums, and the likelihood of obtaining individual insurance using data from both the National Health Interview Survey and the Community Tracking Study Household Survey. We test for differences in these relationships between states with both community rating and guaranteed issue and states with no such regulations. While we find that people living in unregulated states with higher expected expense due to chronic health conditions pay modestly higher premiums and are somewhat less likely to obtain coverage, the variation between premiums and risk in unregulated individual insurance markets is far from proportional; there is considerable pooling. In regulated states, we find that there is no effect of having higher expected expense due to chronic health conditions on neither premiums nor coverage. Overall, our results suggest that the effect of regulation is to produce a slight increase in the proportion uninsured, as increases in low risk uninsureds more than offset decreases in high risk uninsureds. Community rating and guaranteed issue regulations produce only small changes in risk pooling because the extent of pooling in the absence of regulation is substantial. |
| JEL: | I11 I18 I19 |
| Date: | 2006–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:12504&r=reg |
| By: | Michele Moretto; Paolo M. Panteghini; Carlo Scarpa |
| Abstract: | We analyse the effects of different regulatory schemes (price cap and profit sharing) on a firm's investment of endogenous size. Using a real option approach in continuous time, we show that profit sharing does not delay a firm's start-up investment relative to a pure price cap scheme. Profit sharing does not necessarily affect total investment either, if the threshold for profit sharing is high enough. Onlya profit sharing intervening for low profit levels may delay further investments. We also evaluate the effects of profit sharing on social welfare, determining the level of profit that should optimally trigger tighter regulation: profit sharing should be less stringent in sectors where investment opportunities are larger. |
| URL: | http://d.repec.org/n?u=RePEc:ubs:wpaper:ubs0612&r=reg |
| By: | Luca Colombo; Michele Grillo |
| Abstract: | In antitrust analysis it is generally agreed that a small number of firms operating in the industry is an essential precondition for collusive behavior to be sustainable. However, the Italian Competition Authority (AGCM) challenged this view in the recent case RCA (2000), when an information exchange among forty-four firms in the car insurance market was assessed as having an anticompetitive object. The AGCM’s basic argument was that an information exchange facilitates collusion because it changes the market environment in such a way as to relax the incentive compatibility constraint for collusion, thus circumventing the decrease in the critical discount factor when the number of firms in the industry increases. In this paper we model collusive behavior in a “dispersed” oligopoly. We prove that, when the technology exhibits decreasing returns to scale, collusion can always be sustained, regardless of the number of firms, provided the marginal cost function is sufficiently steep. Moreover, we show how an information exchange can sustain collusive behavior when the number of firms is “large” independently of the assumptions on technology. |
| Keywords: | Collusion, Industry structure, Facilitating practices |
| JEL: | L41 L13 L11 K21 |
| Date: | 2006–03 |
| URL: | http://d.repec.org/n?u=RePEc:sac:wpaper:660306&r=reg |