nep-reg New Economics Papers
on Regulation
Issue of 2007‒02‒17
eighteen papers chosen by
Christian Calmes
University of Quebec in Otawa

  1. Growth, public investment and corruption with failing institutions. By David De la Croix; Clara Delavallade
  2. Universal Service Obligations: The Role of Subsidization Schemes and the Consequences of Accounting Separation By François MIRABEL; Jean-Christophe POUDOU; Michel ROLAND
  3. Bureaucratic Corruption, MNEs and FDI By Dahlström, Tobias; Johnson, Andreas
  4. Efficiency and Productivity Analysis in Regulation and Governance By Thomas Weyman-Jones
  5. The Drivers of Deregulation in the Era of Globalization By Heinemann, Friedrich
  6. Regulatory Benchmarking with Panel Data By Necmiddin Bagdadioglu; Thomas Weyman-Jones
  7. Fighting Corruption with Asymmetric Penalties and Leniency By Johann Graf Lambsdorff; Mathias Nell
  8. Towards a new Approach to Regulation and Supervision in the EU: Post-FSAP and Comitology By Gualandri, Elisabetta; Grasso, Alessandro Giovanni
  9. Simulating the enforcement policies for irregular sector in the Italian labour reform By Bonaventura, Luigi
  10. Infrastructure Investments and Resource Adequacy in the Restructured US Natural Gas Market – Is Supply Security at Risk? By Christian von Hirschhausen
  11. Who Pay for the Cleaner Air? Distributional Impact of Environmental Policy in a Dualistic Economy By Yusuf, Arief Anshory
  12. Detection avoidance and deterrence: some paradoxical arithmetics. By Eric Langlais
  13. Why environmental regulation may lead to no-regret pollution abatement? By Thierry Bréchet; Pierre-André Jouvet
  14. Regulatory Actions under Adjustment Costs and the Resolution of Scientific Uncertainty By Hennessy, David A.; Moschini, GianCarlo
  15. Conditions of Employment and Small Business: Coverage, Compliance and Exemptions By Shane Godfrey; Johann Maree; Jan Theron
  16. Pricing and Trust By Steffen Huck; Gabriele K. Ruchala; Jean-Robert Tyran
  17. The Impact of Tax Morale and Institutional Quality on the Shadow Economy By Benno Torgler; Friedrich Schneider
  18. Deregulating Job Placement in Europe: A Microeconometric Evaluation of an Innovative Voucher Scheme in Germany By Winterhager, Henrik; Heinze, Anja; Spermann, Alexander

  1. By: David De la Croix (CORE, Université Catholique de Louvain); Clara Delavallade (Centre d'Economie de la Sorbonne)
    Abstract: Corruption is thought to prevent poor countries from catching-up. We analyze one channel through which corruption hampers growth : public investment can be distorted in favor of specific types of spending for which rent-seeking is easier and better concealed. To study this distorsion, we propose an optimal growth model where households vote for the composition of public spending subject to an incentive constraint reflecting individuals' choice between productive activity and rent-seeking. At equilibrium, the intensity of corruption and the structure of public investment are determined by the predatory technology and the distribution of political power. Among different regimes, the model shows a possible scenario of distortion without corruption in which there is no effective corruption yet still the possibility of corruption distorts the allocation of public investment, thus hampering growth. We test the implications of the model on a panel of countries estimating a system of equations with instrumental variables. We find that countries with a high predatory technology invest more in housing and physical capital in comparison with health and education. For equal initial conditions, such countries grow slower and have higher corruption, in particular when political power is concentrated.
    Keywords: Public investment, optimal growth, corruption, political power.
    JEL: O41 H50 D73
    Date: 2006–10
  2. By: François MIRABEL; Jean-Christophe POUDOU; Michel ROLAND
    Abstract: This paper (i) highlights the role that unit subsidies can play in the compensation scheme of a Universal Service Obligation (USO), and (ii) shows that welfare may be reduced when regulation requires accounting separation of network activities for vertically integrated USO providers. This suggests that accounting separation should be avoided when a USO is implemented.
    Keywords: Universal Service Obligations, Network Industries, Regulation.
    JEL: L43 L51 L52
    Date: 2007
  3. By: Dahlström, Tobias (Jönköping International Business School (JIBS), Jönköping); Johnson, Andreas (Jönköping International Business School (JIBS), Jönköping)
    Abstract: This paper adds to the limited number of studies analysing the relationship between host country corruption and FDI inflows. A model describes the incentives foreign MNEs and host country bureaucrats have for engaging in corruption and shows how corruption increases the MNE costs of operations in the host country. The model predicts that the costs caused by corruption reduce FDI inflows. Regression analysis using panel data finds that host country corruption has a significant negative effect on FDI inflows to developing economies but not for developed economies.
    Keywords: corruption; foreign direct investment; multinational enterprises
    JEL: D73 F21 F23
    Date: 2007–02–13
  4. By: Thomas Weyman-Jones (Dept of Economics, Loughborough University)
    Abstract: This paper surveys the application of efficiency and productivity analysis to recent regulatory experience, especially in Europe. From a review of regulatory case studies, particularly of network industries, it is clear that regulatory practice differs from theoretical precedent in choice of methodology, sample size, model specification and price or revenue control implementation. A principal-agent model of linear regulatory contracts is used to understand this discrepancy, suggesting that efficiency and productivity analysis has been used to capture economic rent rather than to provide incentives for efficiency. Predictions of the model are used to investigate other assumptions in efficiency and productivity analysis.
    Keywords: regulation, data envelopment analysis, stochastic frontier analysis.
    JEL: D24 L25 L51
    Date: 2007–01
  5. By: Heinemann, Friedrich
    Abstract: This paper treats the question to what extent globalization trends restrict a countryspecific regulation policy in industrial countries. The empirical analysis makes use of recently collected regulation indicators for four policy fields: financial market, product markets, labour markets and trade. After a short discussion of the link between globalization and deregulation and a descriptive view at the correlations, a panel analysis for OECD countries for the period 1975 to 2001 is executed. The evidence shows that globalization in the narrow sense of trade openness and capital mobility has a rather limited impact as an immediate driver of deregulation. However, in a wider sense globalization definitions also comprise the easier flow of knowledge and information across borders resulting in more effective cross-border learning processes.
    Keywords: economic policy reforms, structural reforms, regulation
    JEL: E H00
    Date: 2006
  6. By: Necmiddin Bagdadioglu (Dept of Public Finance, Haceteppe University, Turkey); Thomas Weyman-Jones (Department of Economics, Loughborough University, UK)
    Abstract: This paper considers panel data procedures for regulatory benchmarking that allow for both latent heterogeneity and inefficiency, encapsulating the regulatory dilemma in comparative efficiency analysis for incentive regulation. It applies a distance function model with appropriate concavity properties for econometric estimation to a panel of electricity distribution utilities in Turkey, since electricity industry reform is a major policy issue there. The results confirm the importance of allowing simultaneously for heterogeneity and inefficiency and emphasise the need for specific time-invariant heterogeneity information, such as geographical data, on regulated utilities in different regions.
    Keywords: efficiency and productivity analysis, regulation, electricity distribution.
    JEL: L51 D24 C23
    Date: 2007–01
  7. By: Johann Graf Lambsdorff; Mathias Nell
    Abstract: Corrupt arrangements are characterized by a high risk of opportunism: double-dealing, whistle-blowing and extortion are significant uncertainties for participants in corrupt transactions. This paper demonstrates how legislators may use an asymmetric design of (criminal) sanctions and leniency programs to amplify these inherent risks, thereby destabilizing corrupt arrangements. It is also shown that asymmetric penalties and (ex-ante) leniency do not necessarily interfere with the goal of deterrence and may be a useful tool to disband the ‘pact of silence’ characteristic of corrupt arrangements. In particular, we show that bribe-takers should less be penalized for taking and more for reciprocating a bribe. Likewise, bribe-givers should be punished for giving bribes, but not for accepting the bribetakers’ reciprocity.
    Keywords: Corruption, Asymmetric Penalties, Leniency, (Self-) Reporting, Whistle-blowing
    JEL: K42 D73
    Date: 2007–02–14
  8. By: Gualandri, Elisabetta; Grasso, Alessandro Giovanni
    Abstract: The aim of this paper is to analyse the progress made in the process of European integration from two points of view: regulation and supervision. We first briefly outline the main steps in the development of the Financial Services Action Plan - FSAP and the process of Comitology, defined by the Committee of Wise Men (Lamfalussy Committee). We then provide an initial evaluation of the new regulatory system, with its merits and flaws: while the definition and completion of the FSAP has been an undoubted success, some aspects still have to be dealt with, several of them with problematical connotations, considered in the Financial Services Agenda 2005-2010 The transposition into national regulations of a complex body of wide-ranging standards is a difficult process in terms of both times and procedures, although the functioning of the Comitology structure has been met with general approval. There is also the problem of a supervisory structure which retains its national basis, but onto which the output generated by the Committees envisaged by the Lamfalussy process is gradually being grafted, possibly leading towards a new framework of controls at a European level.
    Keywords: Single Financial Market; FSAP; Lamfalussy Report; Committee of Wise Men; Comitology; Regulation; Supervision; Eu directives; Financial Services Agenda 2005-2010.
    JEL: G18 G2 G1
    Date: 2006–03
  9. By: Bonaventura, Luigi
    Abstract: In this paper an agent-based model (abm) will be used to study the effects of enforcement policy in Italy: d.lgs. 124/2004. Three kinds of policy will be tested in the model: control, sanction and legitimacy-regulation. The first policy is based on the number of inspectors present in the economy; the second is defined by the magnitude of punishment; the third is measured by the social legitimacy of regulation. This simulation has produced a number of results, the most important of which are: the negligible influence of control increasing to enforce irregularity; the strong influence of the level of punishment on the irregularity ratio in all Italian areas; the good political choice to increase the social legitimacy to regulation in promoting regularity.
    Keywords: enforcement policies; irregular sector; agent-based model
    JEL: C63 O17 K42 E61
    Date: 2006–12
  10. By: Christian von Hirschhausen
    Abstract: The objective of this paper is to analyze the development of US natural gas infrastructure over the last two decades and to discuss its perspectives. In particular, we focus on the relationship between the regulatory framework for the natural gas sector and the development of investment in LNG terminals, interstate pipelines, and storage facilities. We also discuss some cross-sectional investment issues related to financing (cost of capital, financial markets) and regulation (price caps, siting). We conclude that while some improvements in the regulatory framework might enhance investments in the US natural gas sector, there is no reason to be overly concerned about infrastructure investments, resource adequacy, or supply security.
    Date: 2006–12
  11. By: Yusuf, Arief Anshory
    Abstract: Using a technology where pollution is regarded as by-product of industry's activity and applied in a simple setup of Heckscher-Ohlin-Copeland-Taylor model, this paper analyses the possible distributional impacts of stricter environmental policy in a developing country characterized by the presence of labor-intensive informal sector which may not be a subject to the environmental regulation, and capital intensive formal sector which may face minimum wage policy. The comparative static analysis illustrates that stricter environmental regulation if enforced uniformly accross industries in undistorted labor market, hurts both labor and capital owner, leaving income ditribution unchanged. On the contrary, when economy is dualistic, income distribution may change due to labor reallocation. When the stricter regulation can only be enforced in formal sector, capital owner will be worse-off while labor are better-off. If initially capital reward is higher, the environmental policy will improve income distribution in favor of labor. The change in income distribution is greater when economy is dualistic.
    Keywords: Environmental Policy; Dualistic Economy; Distribution
    JEL: Q52 O17
    Date: 2007–02–10
  12. By: Eric Langlais
    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: D81 K42
    Date: 2007
  13. By: Thierry Bréchet; Pierre-André Jouvet
    Abstract: Empirical evidence support the existence of pollution abatement possibilities at negative costs, the so-called 'no-regret options'. We provide a microeconomic rationale for the existence of such potential at the firm's level under environmental regulation. An econometric application confirms that marginal pollution abatement cost curves with no-regret options are compatible with a standard production function, as stated in our theoretical model.
    Keywords: No-regret options, pollution, regulation
    JEL: D20 Q50
    Date: 2006
  14. By: Hennessy, David A.; Moschini, GianCarlo
    Abstract: Food system regulators often decide whether to ban existing practices or approve new technologies without conclusive scientific evidence on possible damage and knowing that resolution is likely in the future. In a model with three decision points and stochastic resolution of uncertainty, we study interactions between expected losses due to regulation and information availability when a regulator is deciding on an early reversible ban and on a later reversible ban. Adjustment costs create inertia concerning intermediate signals such that earlier decisions are not overturned, and also a bias against imposing an early ban. The prospect of more later-stage information can increase or decrease the incentive to ban early, but research decreases the incentive to ban early.
    Date: 2007–02–14
  15. By: Shane Godfrey; Johann Maree; Jan Theron (Institute of Development and Labour Law,University of Cape Town)
    Abstract: Abstract: The research examines the different forms of regulation of conditions of employment (i.e. bargaining council agreements, the Basic Conditions of Employment Act (BCEA), and sectoral determinations) and what sort of accommodation they make for small firms. Three key areas are examined - the coverage of the regulations (and the representivity of bargaining councils) as well as non-compliance with the regulations; the enforcement of regulations; and exemptions (or variations) from the regulations. Furthermore, most exemptions come from small firms and many more exemptions come from non-party than party firms. A number of bargaining councils also have ‘blanket’ exemptions for small and new firms. It is not possible to compare the exemptions data with the data on variations from the BCEA and sectoral determinations because of the high number of pending variation applications..
    Keywords: Regulations, Conditions of employment, Bargaining Councils
    JEL: A1
    Date: 2006–03
  16. By: Steffen Huck (University College London); Gabriele K. Ruchala (University College London); Jean-Robert Tyran (Department of Economics, University of Copenhagen)
    Abstract: We experimentally examine the effects of flexible and fixed prices in markets for experience goods in which demand is driven by trust. With flexible prices, we observe low prices and high quality in competitive (oligopolistic) markets, and high prices coupled with low quality in non-competitive (monopolistic) markets. We then introduce a regulated intermediate price above the oligopoly price and below the monopoly price. The effect in monopolies is more or less in line with standard intuition. As price falls volume increases and so does quality, such that overall efficiency is raised by 50%. However, quite in contrast to standard intuition, we also observe an efficiency rise in response to regulation in oligopolies. Both, transaction volume and traded quality are, in fact, maximal in regulated oligopolies.
    Keywords: markets; price competition; price regulation; reputation; trust; moral hazard; experience goods
    JEL: C72 C90 D40 D80 L10
    Date: 2007–01
  17. By: Benno Torgler (University of California, Berkeley and CREMA); Friedrich Schneider (Johannes Kepler University of Linz, CREMA and IZA)
    Abstract: This paper analyses how tax morale and countries’ institutional quality affect the shadow economy, controlling in a multivariate analysis for a variety of potential factors. The literature strongly emphasizes the quantitative importance of these factors to understand the level and changes of shadow economy. Relatively new available data sources offer the unique opportunity to shed more light in the understanding of a topic that has received an increased attention. We find strong support that a higher tax morale and a higher institutional quality lead to a smaller shadow economy.
    Keywords: shadow economy, tax morale, institutional quality, government intervention, corruption
    JEL: D73 D78 H2 H26 O17 O5
    Date: 2007–01
  18. By: Winterhager, Henrik; Heinze, Anja; Spermann, Alexander
    Abstract: Job placement vouchers can be regarded as a tool to spur competition between public and private job placement activities. The German government launched this instrument in order to end the public placement monopoly and to subsidize its private competitors. We exploit very rich administrative data provided for the first time by the Federal Employment Agency and apply propensity score matching as a method to solve the fundamental evaluation problem and to estimate the effect of the vouchers. We find positive treatment effects on the employment probability after one year of 6.5 percentage points in Western Germany and give a measure for deadweight loss.
    Keywords: Job Placement, Active Labor Market Policy, Matching
    JEL: H25 J68
    Date: 2006

This nep-reg issue is ©2007 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.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.