nep-reg New Economics Papers
on Regulation
Issue of 2007‒01‒14
twenty papers chosen by
Christian Calmes
Universite du Quebec en Outaouais, Canada

  1. Understanding Tax Corruption in Transition Economies: Evidence from Bulgaria By Pashev, Konstantin
  2. Regulating a Monopoly Offering Priority Service By Matsukawa, Isamu
  3. A Modified Yardstick Competition Mechanism By Georg Meran; Christian von Hirschhausen
  4. Liquidity risk management in banks: international best practices and cases (In Spanish) By Delfiner, Miguel; Lippi, Claudia; Pailhé, Cristina
  5. Special Interest Groups and 4th Best Transport Pricing By Bernhard Wieland
  6. Avoiding Another Enron : The Role of the External Auditor in Financial Regulation and Supervision By Ojo, Marianne
  7. Macroeconomic Evolution after a Production Shock: the Role for Financial Intermediation By Dmitri V. Vinogradov
  8. Appraising transport investments in a regulatory regime By Roger Vickerman
  9. Corruption and Productivity Growth in OECD Countries By Maria Del Mar Salinas-Jimenez; Javier Salinas-Jimenez
  10. Vertical Governance between Airlines and Airports – A Transaction Cost Analysis By Johannes Fuhr; Thorsten Beckers
  11. (De)regulation of the European Ramp Handling Market – Lessons to Be Learned from an Institutional Perspective? By Johannes Fuhr
  12. Congestion Pricing vs. Slot Constraints to Airport Networks By Achim I. Czerny
  13. The Basel II IRB approach revisited: do we use the correct model? By Varsanyi, Zoltan
  14. Detection avoidance and deterrence: some paradoxical arithmetics By Langlais, Eric
  15. Bank Insolvencies, Regulatory Forbearance and Ambiguity By Dmitri V. Vinogradov
  16. When Little Things Mean a Lot: On the Inefficiency of Item Pricing Laws By Bergen, Mark; Levy, Daniel; Ray, Sourav; Rubin, Paul; Zeliger, Ben
  17. Compensation of damages and frequency of trials with asymmetric information on preferences of litigant parties By Langlais, Eric
  18. The Merits of New Pollutants and How to Get Them When Patents Are Granted By Grischa Perino
  19. Smart Technologies for Environmental Safety and Knowledge Enhancement in Intermodal Transport By Giovanni Luca Barletta; Dino Borri; Domenico Camarda; Giovanni Circella
  20. Recent International and Regulatory Decisions about Geographical Indications, The By Stephan Marette; Roxanne Clemens; Bruce A. Babcock

  1. By: Pashev, Konstantin
    Abstract: Measures of corruption are based on the concept of bribes as extra business costs. Drawing evidence from corruption surveys of business and tax service in Bulgaria, this paper looks at the bribe as a price paid by the taxpayer in exchange for income-maximizing services supplied by corrupt tax officials. It distinguishes between corruption for tax evasion and corruption related to excessive voluntary compliance costs. The latter is closer to the concept of bribes as costs imposed on business, but is limited in scale relative to the former. It is in this framework that the study analyses the drivers of the demand and supply of corruption “services” and proposes an indicator framework for “sizing up” the problem, evaluating the strength of the underlying factors and formulating anti-corruption policies whose effect can be monitored and evaluated using that framework.
    Keywords: tax corruption
    JEL: H26
    Date: 2006
  2. By: Matsukawa, Isamu
    Abstract: This paper investigates the effects of alternative forms of regulation on the market penetration and capacity, which are determined by a profit-maximizing monopolist providing priority service to consumers. For continuous priority service, a minimum reliability standard, price cap and rate of return regulation lead to larger capacity than in the absence of regulation. A minimum reliability standard reduces the market penetration while price cap and rate of return regulation increase it. The regulatory effects on the market penetration and capacity are also examined for discrete priority service, and policy implications of these effects are discussed for electricity supply industry.
    Keywords: priority service; monopoly; minimum reliability standard; price cap; rate of return regulation
    JEL: L51
    Date: 2006–11–17
  3. By: Georg Meran (DIW Berlin (German Institute for Economic Research)); Christian von Hirschhausen (Chair of Energy Economics and Public Sector Management, Technische Universität Dresden)
    Abstract: This paper analyzes a modified yardstick competition mechanism (MYC), where the yardstick employed consists of a tariff basket and total costs. This mechanism has a significant information advantage: the regulator ”only” needs to observe total costs and output of all firms. The modified yardstick competition mech- anism can ensure a socially optimal outcome when allowing for spatial and second degree price discrimination, without increas- ing the informational requirements. We also introduce regulatory lags in the model. A systematic comparison between the results of traditional yardstick regulation and modified yardstick regu- lation is carried out. Finally, we discuss the applicability of the mechanism.
    Keywords: regulation, yardstick competition, mechanism design, information asymmetry
    JEL: L51 L11 D40
  4. By: Delfiner, Miguel; Lippi, Claudia; Pailhé, Cristina
    Abstract: This paper studies the best practices related to the management of liquidity risk in financial institutions from the viewpoint of the standards, as well as its treatment in a series of countries. Firstly it reviews the best practices suggested by the Basel Committee on Banking Supervision, the developments in European countries observed by the European Central Bank, and sound practices for liquidity risk management proposed in the supervision manuals of the US regulatory agencies. Secondly, it examines particular experiences of countries that apply policies for the management of liquidity risk, through their supervision manuals or their regulation. The paper also includes the experiences of some Latin-American countries that rely on a specific regulation of liquidity, together with the Argentine case. Although the importance of liquidity risk is well known, given the idiosyncratic characteristics shown in different banks, the organisms in charge of establishing the best practices regarding the subject prefer to give general principles that can be used as a guide in the management of the risk rather than to specify a quantitative regulation. Most of the analysed countries have adopted these recommendations, in some cases giving some freedom for the banks to apply internal methods, in others providing guidance for banks that don’t have advanced developments in the subject yet. In other countries, instead, quantitative regulations have been implemented.
    Keywords: Liquidity Risk; Liquidity Mismatches; Regulation
    JEL: G21
    Date: 2006–10
  5. By: Bernhard Wieland (Faculty of Transportation Sciences “Friedrich List”, Dresden Technical University)
    Keywords: transport, political economy, regulation
    JEL: H54 L51 L91
  6. By: Ojo, Marianne
    Abstract: Following the collapse of Enron, many questions have been raised as to why the UK has avoided its Enron. Many commentators have considered whether this is due to the fact that the UK's system of financial regulation relies more on a principles based system, which promotes more fairness in its application as opposed to a rules based system. However, the crucial role played by auditors in financial reporting and the system of financial regulation and supervision have been overlooked to an extent. In view of a spate of financial scandals such as those of Enron, Worldcom, Tyco etc, the US Congress acted swiftly by enacting the Sarbanes Oxley Act on July 30 2002 with the aim of protecting investors and restoring their confidence in the financial system. Amongst the provisions within the Sarbanes Oxley Act, the prohibition of non-audit services by auditors providing audits at that particular time, is a main feature of the Act. This provision not only highlights the importance of the role of the external auditor, but also emphasizes the fact that safeguards are essential in order to prevent that role from being abused. Much as there are lessons which could be learned from the supervisory approaches adopted by various jurisdictions, there are also considerations on whether these jurisdictions could benefit from the measures implemented by US regulators and accounting bodies in the aftermath of Enron.
    Keywords: Enron; collapse; auditors
    JEL: M42
    Date: 2006–06
  7. By: Dmitri V. Vinogradov (Universität Heidelberg, Alfred-Weber-Institut für Wirtschaftswissenschaften; Universität Heidelberg, Alfred-Weber-Institut für Wirtschaftswissenschaften)
    Abstract: Financial intermediaries may increase economic efficiency through intertemporal risk smoothing. However without an adequate regulation, intermediation may fail to do this. This paper studies the effects of a production shock in a closed economy and compares abilities of market-based and bank-based financial systems in processing the shock. Unregulated banking system may collapse in absence of a proper regulation. The paper studies several types of regulatory interventions, which may improve the performance of the banking system.
    Keywords: Financial intermediation, overlapping generations, general equilibrium, intertemporal smoothing
    JEL: D50 G21 G28 E44 E53 O16
    Date: 2006–08
  8. By: Roger Vickerman (Centre for European, Regional and Transport Economics, University of Kent, UK)
    Abstract: The traditional approach to transport investment appraisal assumed that such investments were taking place in a world where transport users were operating under perfect competition. There has been considerable work in recent years improving the methods for the economic and financial appraisal of transport investments where this assumption does not hold and thus there are wider economic benefits. This paper examines the situation where the market for transport provision operates under a regulatory regime. The impact of regulation has tended to focus on the price and output decision rather than the investment decision. In this paper we look in more detail at the implications for appraisal. This develops further the issues which arise in the appraisal of investments by public-private partnerships where essentially different objectives may be used by the private and public sectors, for example differential consideration of the wider economic benefits arising from the investment. The paper discusses the theoretical issues involved in different forms of regulatory regime and examines the experience with investments in regulated transport markets in the UK and in the case of appraising Trans-European Networks to provide some empirical evidence and the implications for the development of appraisal.
    Keywords: Transport investment appraisal, regulation, wider economic benefits, public-private partnerships
    JEL: D61 H44 L51 R42
  9. By: Maria Del Mar Salinas-Jimenez; Javier Salinas-Jimenez
    Abstract: The study of corruption is attracting lot of attention in recent years. Focusing on the economic consequences of corruption, the empirical evidence points to a positive relation between institutional integrity, or absence of corruption, and economic growth. Although most developed countries tend to have lower corruption than less developed ones, there exists significant variation within OECD countries. As an example, it may be observed that the gap in perceived corruption between the Nordic countries and southern Europe is larger than the gap between southern Europe and the average of the emerging economies. In this context, the objective of this paper is to analyze the impact of corruption on economic performance in a sample of OECD countries during the period 1980-2000. Specifically, we study the effect of corruption on productivity and efficiency change, trying to determine whether productivity growth is greater in countries with lower corruption. To this end, different productivity measures are compared by considering both output per worker and Total Factor Productivity (TFP). Furthermore, TFP change is decomposed into efficiency change and technological progress by means of Malmquist productivity indices. On the basis of this of this decomposition we will analyze whether corruption affect TFP growth via efficiency gains or technological change, thus gaining insight into the channels through which corruption influence economic growth.
    Date: 2006–08
  10. By: Johannes Fuhr (Workgroup for Infrastructure Policy (WIP), Technische Universität Berlin); Thorsten Beckers (Workgroup for Infrastructure Policy (WIP), Technische Universität Berlin)
    Abstract: With airport privatization and infrastructure expansion projects taking place in the liberalized European air transport market, airport and airline companies are critically reevaluating their vertical governance structures. This paper analyzes the comparative efficiency of vertical governance structures in the airport-airline supply relationship. Using transaction cost economics as the lens of analysis, we develop propositions and present supporting qualitative case studies. Our propositions state that hub airlines and hub airports seek specialized governance structures, while value-based carriers and base airports enter into long-term contracts supported by complementary safeguards. These privately crafted governance modes complement or even replace external regulation.
    Keywords: vertical integration, transaction cost, airlines, airports, competition
    JEL: L22 D23 L93
  11. By: Johannes Fuhr (Workgroup for Infrastructure Policy (WIP), Technische Universität Berlin)
    Abstract: Ten years have passed since the European Commission obliged its member states to open their national handling markets to competition. This paper analyzes whether the policy has allowed airlines to design efficient contractual and organizational solutions with their ramp handling suppliers. Applying transaction cost economics as the lens of analysis, we propose that the award of temporary limited operating licenses to new entrants results in inferior economic performance. The presented econometric results on the duration of 42 ramp handling contracts and a qualitative case study on the award practices at German airports are largely supportive of this proposition.
    Keywords: Transaction cost, contract, deregulation, air transport, ramp handling
    JEL: D23 L93 L42
  12. By: Achim I. Czerny (Workgroup for Infrastructure Policy (WIP), Technische Universität Berlin)
    Abstract: Congestion has become a problem for many airports throughout the world. Two different policy options to control congestion are analyzed in this paper: slot constraints and congestion pricing. In particular, our model takes into account that the airline industry is characterized by significant demand uncertainty. Furthermore, due to the network character of the airline industry, the demand for airport capacities normally is complementary. We show that this favors the use of slot constraints compared to congestion pricing from a social point of view. In contrast, for monopolistic airports, prices as instruments constitute a dominant choice.
    Keywords: Slots, uncertainty, monopolistic airports, regulation
    JEL: D42 L93
  13. By: Varsanyi, Zoltan
    Abstract: In this paper I question whether the risk weights in the advanced (IRB) approach of the Basel 2 regulation are appropriate, on a strictly theoretical ground. The major concern is that the model behind the regulation considers defaults only at the end of the time horizon for which capital is to be held - whereas defaults in the whole time interval should be taken into consideration. This latter approach is represented by a model that is different from the Basel model. It follows, as I show, that the Basel model should be viewed just as a technical tool to turn the expected value of the unconditional loss distribution into a given percentile of the same distribution - making use of conditional (on the systemic factor) default probabilities - and should not be interpreted as describing even 'virtual' firms and asset values. More importantly, I also show that a logical step in the theoretical foundation of the model is missing which raises the question whether the risk weights calculated with the model are indeed appropriate. Due to difficulties in the calculation in the alternative approach of the percentiles of the loss distribution no clean-cut answer is given in this paper.
    Keywords: Basel II; credit risk
    JEL: G28
    Date: 2006–08
  14. By: Langlais, Eric
    Abstract: This paper extends Malik's (1990) analysis to the case where criminals' avoidance efforts and public expenditures in the detection of criminals are strategic complements in the aggregate technology of control of illegal behaviours. In this set up, we show that whenever criminals' avoidance efforts are more sensitive to the frequency than to the severity of sanctions, it is always socially efficient to set the fine at the maximal possible level. However, several paradoxical consequences occur: there may exist overdeterrence at optimum; more repressive policies lead to less arrestations of offenders while more crimes may be committed; at the same time, the society may be closer to the first best number of crimes.
    Keywords: deterrence; avoidance activities; optimal enforcement of law.
    JEL: K42 K40
    Date: 2006–03
  15. By: Dmitri V. Vinogradov (Universität Heidelberg, Alfred-Weber-Institut für Wirtschaftswissenschaften; Universität Heidelberg, Alfred-Weber-Institut für Wirtschaftswissenschaften)
    Abstract: Banking regulators often practice forbearance and ambiguity in insolvency resolutions. The paper examines the effects of regulatory forbearance and ambiguity in a context of allocational efficiency. Bailouts, liquidations and their stochastic policy mix lead to suboptimal allocations if banks do not internalize insolvency costs. The policy of forbearance may make banks internalizing such costs and improves the efficiency of intermediation.
    Keywords: Banks, insolvency resolution, forbearance, constructive ambiguity
    JEL: D50 E44 G21 G28
    Date: 2006–09
  16. By: Bergen, Mark; Levy, Daniel; Ray, Sourav; Rubin, Paul; Zeliger, Ben
    Abstract: Item pricing laws (IPLs) require a price tag on every item sold by a retailer. We study IPLs and assess their efficiency by quantifying their costs and comparing them to previously documented benefits. On the cost side, we posit that IPLs should lead to higher prices because they increase the cost of pricing as well as the cost of price adjustment. We test this prediction using data collected from large supermarket chains in the Tri-State area of New York, New Jersey and Connecticut, which offer a unique setting because these states vary in their use of IPLs, but otherwise offer geographical proximity with each other and similar markets, supermarket chains, and socioeconomic environments. We find that IPL store prices are higher by about 20¢–25¢ or 8.0%–9.6% per item on average, in comparison to non-IPL stores. As a control, we use data from stores that are exempt from IPL requirements (because they use electronic shelf labels), and find that their prices fall between IPL and non-IPL store prices. To assess the efficiency of IPLs, we compare these costs to existing measures of the benefits of IPLs which are based on measurements of the frequency and the magnitude of pricing errors the IPLs are supposed to prevent. We find that the costs of IPLs are an order of magnitude higher than the upper bound of these estimate benefits.
    Keywords: Item Pricing Law; Cost of Item Pricing Law; Cost of Price Adjustment; Menu Cost; Retail Pricing;
    JEL: L11 K20 L81 E31
    Date: 2006–10–08
  17. By: Langlais, Eric
    Abstract: The paper addresses the issue of the impact of asymmetric information on risk aversion of litigant parties in a model à la Bebchuk. First we study the case where the plaintif is the informed party, and characterize the equilibrium with and without a pretrial negociation round. Then, we focuse on the comparative statics of the model and analyse the role of the choice of a cost allocation rule. Finally, we discuss several extensions: the case where the defendant is the informed party, the influence of the assumption on the representation of preferences, and the role of self-serving bias.
    Keywords: litigation; asymmetric information on preferences; self-serving bias
    JEL: K10 K41 K13 K40 K4
    Date: 2005–10
  18. By: Grischa Perino (University of Heidelberg, Department of Economics)
    Abstract: The performance of market based environmental regulation is affected by patents and vice versa. This interaction is studied for a new type of innovation where new technologies reduce emissions of a specific pollutant but at the same time cause a new type of damage. A robust finding is that the efficiency of permits is affected by monopoly pricing of the patent-holding firm. This result carries over to other types of innovation. Taxes are inefficient if technologies produce perfect substitutes and share all scarce inputs. Moreover, the optimal tax on pollution might be negative.
    Keywords: Innovation; Environment; Instrument Choice; Patents; Monopoly Pricing
    JEL: Q55 L5 H23 O3
    Date: 2006–07
  19. By: Giovanni Luca Barletta; Dino Borri; Domenico Camarda; Giovanni Circella
    Abstract: International concerns about security in transport systems are leading to a new international regulation in this field. This introduces new requirements for operators and authorities as well as it opens new challenges, in particular when referred to seaports and maritime transport in the Mediterranean area, where many seaport terminals and infrastructures are affected by a noteworthy technological divide from North European contexts. In such contexts, the adoption of the new regulations can represent the right chance for upgrading the local operative standards, increasing latu sensu the quality of maritime transport performances, while conferring a greater level to security and safety checks. This paper explores the chances for increasing the level of Mediterranean seaport competitiveness allowed by technological innovations in transport systems, both in operations and organization of these infrastructures. The aim of the work is to study the effects of the adoption of technological solutions such as wireless communications and radiofrequency identification on the competitiveness of Mediterranean seaport infrastructures. Technological solutions designed to identify good items help operators in organizing activities in terminals and make maritime transport faster in delivering goods, by cutting the handling time and costs in seaport terminals. Seaports that adopt this kind of technologies, and the surrounding economic areas connected to seaports, have a greater attractiveness on shipping companies and operators, since they allow faster handling activities and easier checks on goods. Besides, the analysis of direct and indirect effects of the use of such technologies specifically focuses on the contribution that the use of these solutions gives in ensuring higher security levels, by increasing the level of information and knowledge associated to goods. The different types of security provided (e.g. for people, environment and goods) and the extreme flexibility of the technologies involved give the overall worth of the challenge. It seems to be a great chance of growth for the Mediterranean area, more than a mere compliance to the international security regulations.
    Date: 2006–08
  20. By: Stephan Marette (Center for Agricultural and Rural Development (CARD); Food and Agricultural Policy Research Institute (FAPRI)); Roxanne Clemens (Center for Agricultural and Rural Development (CARD); Midwest Agribusiness Trade Research and Information Center (MATRIC)); Bruce A. Babcock (Center for Agricultural and Rural Development (CARD); Midwest Agribusiness Trade Research and Information Center (MATRIC))
    Abstract: As worldwide consumer demand for high-quality products and for information about these products increases, labels and geographical indications (GIs) can serve to signal quality traits to consumers. However, GI systems among countries are not homogeneous and can be used as trade barriers against competition. Philosophical differences between the European Union and the United States about how GIs should be registered and protected led to the formation of a WTO dispute settlement panel. In this paper we discuss the issues behind the dispute, the World Trade Organization (WTO) panel decision, and the EU response to the panel decision leading to the new Regulation 510/2006. Given the potential for GI labels to supply consumer information, context is provided for the discussion using recent literature on product labeling. Implications are drawn regarding the importance of the panel decision and the EU response relative to GI issues yet to be negotiated under the Doha Round.
    Keywords: geographical indications, product labels, trade barriers.
    Date: 2007–01

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