nep-reg New Economics Papers
on Regulation
Issue of 2007‒03‒24
twelve papers chosen by
Christian Calmes
University of Quebec in Ottawa

  1. Privatization and regulation of toll motorways in europe. By Daniel Albalate; Germa Bel; Xavier Fageda
  2. Corporate governance of banks: the current state of the debate. By Polo, Andrea
  3. Killing the Goose That May Have Laid the Golden Egg? By Dieter Schmidtchen; Christoph Bier
  4. Sanctions, Now or Later? The Optimal use of Warnings in Law Enforcement By roberto galbiati
  5. Testing Optimal Punishment Mechanisms under Price Regulation: the Case of the Retail Market for Gasoline By Robert Gagné; Simon van Norden; Bruno Versaevel
  6. Corruption, Exogenous Changes in Incentives and Deterrence By Guiseppe Di Vita
  8. Mobile call termination in the UK By Armstrong, Mark; Wright, Julian
  9. Shareholder Protection in the USA and Germany - On the Fallacy of LLSV By Udo C. Braendle
  10. Less Rationality, More Efficiency: a Laboratory Experiment on "Lemons" Markets. By Roland Kirstein; Annette Kirstein
  11. Regulating Concessions of Toll Motorways, An Empirical Study on Fixed vs. Variable Term Contracts. By Daniel Albalate; Germa Bel

  1. By: Daniel Albalate (Faculty of Economics, University of Barcelona); Germa Bel (Faculty of Economics, University of Barcelona); Xavier Fageda (Faculty of Economics, University of Barcelona)
    Abstract: The private sector plays an increasing and relevant role in highway funding and management. For that reason, the regulation designed and enforced by public authorities becomes even more important for the social welfare results generated by this process. In this study, we analyze the current trends in highway funding and management paying special attention on the recent process of privatization and its motivations. Since public ownership and regulation are substitutes for government intervention, we check the hypothesis that highways privatization induces more strict regulation. Indeed, we observe that as the private sector increases its size, toll regulation becomes more detailed.
    Keywords: transport infrastructures, roads, privatization, regulation and tolls
    JEL: L43 L92 L33
    Date: 2007–03
  2. By: Polo, Andrea
    Abstract: Since banks are among the most important sources not only of finance but also of external governance for firms, the corporate governance of banks is a crucial factor for growth and development. Despite its importance, this topic has been explored only by a few studies. While some authors support, with different arguments in the course of time, the specificity of banks, other authors, among whom Ross Levine and his co-authors from the World Bank, question heavily the present banking regulatory framework. The debate on the corporate governance of banks has a direct bearing on the current discussions on the future of banking regulatory design: should the regulatory intervention be the most important corporate control mechanism in banking or should regulators focus on introducing incentives for appropriate market behaviour?
    Keywords: Financial economics; Corporate Governance; Banking; Regulation and Supervision; Market Discipline; Securities Law
    JEL: K22 G28 G21 G34 G18
    Date: 2007–03–19
  3. By: Dieter Schmidtchen (Universität des Saarlandes); Christoph Bier (Uni-Saarland - Center for the Study of Law and Economics)
    Abstract: The purpose of the paper is (1) to analyze the potential and the incentives for a vertically integrated input monopolist to engage in price-discrimination when there is downstream entry, and (2) to examine the question, whether a cost-based regulation of access charges for electricity grids enhances competition in the downstream-market. The paper shows that the incumbent will never block entry if the entrant is more efficient than the incumbent. The reason is that the input-monopolist can make more profit through input sales than it could generate by producing the downstream product itself. If the entrant does not have a cost advantage either the incumbent or the entrant gets a monopoly position. Providing for a level playing field by means of a cost-based regulation of access charges always creates competition in the downstream-market. The paper also derives the welfare effects of both the liberalization of the downstream-market and the cost-based regulation.
    Keywords: discrimination, regulation, vertical integration, electricity, access charges, sabotage,
    JEL: L L L
  4. By: roberto galbiati
    Abstract: Despite strict penalties may be available in order to prosecute violators, regulators frequently just issue a warning of some kind, and if violators move into compliance they do net release any penalty. Example of this practice may be found in several countries and for several different situations, the most common regard traffic law, environmental regulation and financial crimes. This paper defines the optimal sanctioning strategy for an enforcer that minimizes the social cost of violations and can determine the auditing probability and whether to sanction violators immediately or issue a warning and sanctioning only repeat offenders. We show that it may be desirable to procrastinate the sanctions by issuing a warning to the violators and sanction only those who result to be guilty at a second audit. Furthermore, we show that when the potential wrongdoers are uncertain about the auditing parameters the optimal probability of auditing is higher than in the case there is not such an uncertainty. The optimality of issuing a warning is related to the optimal monitoring probability.
    Keywords: law enforcement, monitoring probability, regulation, warnings,
    JEL: K4 D6
  5. By: Robert Gagné (HEC Montréal, CRT and CIRANO); Simon van Norden (HEC Montréal, CIRANO and CIREQ); Bruno Versaevel (EM Lyon, GATE CNRS)
    Abstract: We analyse the effects of a price floor on price wars (or deep price cuts) in the retail market for gasoline. Bertrand supergame oligopoly models predict that price wars should last longer in the presence of price floors. In 1996, the introduction of a price floor in the Quebec retail market for gasoline serves as a natural experiment with which to test this prediction. We use a Markov Switching Model with two latent states to simultaneously identify the periods of price-collusion/price-war and estimate the parameters characterizing each state. Results support the prediction that price floors reduce the intensity of price wars but increase their expected duration.
    Keywords: gasoline prices, Markov switching model, oligopoly supergame, price regulation
    JEL: C32 L13 L81
    Date: 2006–10
  6. By: Guiseppe Di Vita (University of Catania)
    Abstract: In this article we apply and extend the model elaborated by Acemoglu and Verdier in their seminal paper (2000), to examine how the economy represented in their theoretical framework responds to an exogenous change in the agent's incentive. In particular, we focus on the consequences of a famous sentence of the Italian Supreme Court in plenary session, no. 500 of 1999, in which a revolutionary interpretation of civil liability rules is introduced, allowing private agents of our economy to appear before the court to demand reimbursement for the damages suffered as a consequence of illicit behavior of the public administration. This is one of the few cases in which the judex substantially makes law in a system of civil law, and the modi modification in incentive whether or not to be corrupted comes from an authority that is not part of the game (the jurisdictional power). Basing our affirmations on the model, we can say that corruption may have declined in Italy since the year 2000, as a result of a change in the incentives for both private agents and bureaucrats.
    Keywords: Bureaucrats, Corruption, Government failure, Incentives, Market failure, Public goods,
    JEL: K13 D23 H41
  7. By: Mario Denni
    Abstract: This paper addresses the determinants of diffusion of broadband infrastructure by looking at the U.S. Federal States. It tries to identify in particular to what extent intra- and inter -platform competition contribute to accelerating the speed of diffusion. Panel data analysis results indicate that both types of competition significantly affect the rate of diffusion, although with different effect. Intra-platform competition seems to have a positive impact only initially on the rate of diffusion but then dissipates. For the longer term, inter -platform has a much more important role in driving the rate of diffusion. The study takes account of the impact of other variables measuring competition in the telecommunications sector as well.
    Keywords: Broadband; Technological diffusion; Regulation and competition
    JEL: L1 L86 L96 O3
  8. By: Armstrong, Mark; Wright, Julian
    Abstract: We discuss policy towards mobile call termination, illustrated by the 2002 Competition Commission enquiry into the UK mobile market. We present a model of the mobile market which includes both fixed-to-mobile and mobile-to-mobile call termination. In broad terms, the former service is likely to involve monopoly pricing if left unchecked, while the latter service---if the termination charge is jointly chosen by networks---may provide the mobile sector with the means by which to relax competition. Competition is often relaxed by choosing a low mobile-to-mobile termination charge. If feasible, then, unregulated networks often wish to set different termination charges depending on whether traffic originates on the fixed or mobile network. By contrast, social optimality often requires that uniform termination charges be imposed.
    Keywords: Telecommunications; Regulation; Oligopoly; Call termination
    JEL: L96 L51 L41
    Date: 2007–03–21
  9. By: Udo C. Braendle (School of Law, University of Manchester, UK)
    Abstract: "Law matters" is the message in several articles of LaPorta et al., which influence economic as well as legal literature. The results of their heavily cited Law and Finance article highlight the much better shareholder protection of Common Law compared to Civil Law countries. In this contribution I reconsider their "ntidirector rights index" for Germany and the United States, two typical representatives of their respective legal tradition. By having a close look at the legal provisions of the two countries I illustrate the weaknesses and pitfalls of the index. Bothering German Company Law, I find that Germany would score much better in this index. Moreover, I point out inconsistencies in the judgment of the USA. In conclusio the differences between Common and Civil Law in terms of shareholder protection are far less significant than LaPorta et al. propose, if at all. The blindfold citation of this article can (and does) implicate wrong politicaleconomic measures and should therefore be avoided.
    Keywords: Common Law, Civil Law, Shareholder Protection, Germany, USA, LLSV, Law and Finance, Corporate Governance,
    JEL: K22 G34 K40
  10. By: Roland Kirstein; Annette Kirstein (Universität Karlsruhe)
    Abstract: In this paper we experimentally test a theory of boundedly rational behavior in a "lemons market." We analyzed two different market designs, for which perfect rationality implies complete and partial market collapse, respectively. Our empirical observations deviate substantially from these predictions of rational choice theory: Even after 20 repetitions, the actual outcome is closer to e±ciency than expected. Our bounded rationality approach to explaining these observations starts with the insight that perfect rationality would require the players to perform an in¯nite number of iterative reasoning steps. Boundedly rational players, however, carry out only a limited number of such iterations. We have determined the iteration type of the players independently from their market behavior. A significant correlation exists between the iteration types and the observed price offers.
    Keywords: guessing games, beauty contests, market failure, adverse selection, lemon problem, regulatory failure, paternalistic regulation,
    JEL: D8 C7 B4
  11. By: Daniel Albalate (Faculty of Economics, University of Barcelona); Germa Bel (Faculty of Economics, University of Barcelona)
    Abstract: Recent theoretical developments on concession contracts for long term infrastructure projects under uncertain demand show the benefits of allowing for flexible term contracts rather than fixing a rigid term. This study presents a simulation to compare both alternatives by using real data from the oldest Spanish toll motorway. For this purpose, we analyze how well the flexible term would have performed instead of the fixed length actually established. Our results show a huge reduction of the term of concession that would have dramatically decreased the firm’s benefits and the user’s overpayment due to the internalization of an unexpected traffic increase.
    Keywords: Toll motorways, privatization, concessions, regulation.
    JEL: H54 L33 L43 L92
    Date: 2007–03
    Abstract: In recent years, the German capital market was shaken by scandals caused by the insiders of public corporations like Comroad, Metabox, Infomatec, EM.TV et al. The overall damages of the scandals generated in the Frankfurt Stock Exchange's Neuer Markt are approximated to be close to 200 billion until the market segment was finally closed down. The consequence of the financial scandals is, besides the causation of the tremendous damages to private investors, a substantially spoiled reputation of the capital market itself, whereas the latter adversities seem not yet to be absorbed completely. Even though the criminal procedures in the mentioned cases leaded to the conviction of the responsible insiders, the refurbishment of the scandals in German courtrooms frequently left damaged investors without a remedy for their losses, thereby revealing the jurisdiction's de lege lata limits. As far as noticed actually none of the damaged investors' civil claims did yet succeed. A first reaction to the corporate scandals by the German regulator in the fourth capital market advancement act is widely assessed to be insufficient to amend investors' legal status effectively. The aim of this analysis is to approach the first best solution to minimize the total social costs of false capital market information. It furthermore contributes to the continuing discussion in Germany about the reasons for the financial scandals. Moreover, it makes a contribution to the debate on the issue, whether the damaging events indicate an advanced intervention of the government, and - if so - in which fashion the legal rule should be developed to be an optimal remedy. The capital market scandals are set off by false capital market information that was intentionally or frivolously disseminated by Directors and Officers (D&O) of public corporations, which are in the German two-tier system Vorstand and Aufsichtsrat. Hence, the impact that false material data have on the efficiency of capital markets will be addressed in detail. Its specific effect on the share price is scrutinized by reviewing practical cases that occurred recently in Germany. This might allow a deeper understanding of the different kinds of damages that result from the approval of a frivolous disclosure policy by Board members. By changing the perspectives the hypothesis that Board members have clear incentives to provide capital markets with false information will be verified. The analysis will apply especially insights of Law & Economics - as well as from the developing branch of Law and Behavioral Science - to emphasize the issue's discussion in traditional legal scholarship. Moreover, as economic theory indicates, a reason for a government intervention is only given in cases of market failures. Thus, the analysis will determine if the inefficient allocation of investors' funds and the related Pareto suboptimality is grounded on market failures. Especially presumable obstacles with asymmetric information, negative externalities and potential free riding-behavior by competitors appear worthwhile to focus on. From an economic perspective it is to discuss whether the damages of shareholders that - due to false capital market information - purchased stocks above their actual value, should be recoupable in general. The crucial aspect about influencing the process of disclosure with an effective liability rule is that it could also hinder necessary and valuable truthful information to be available for the market participants. As the economic approach to the law discerns it as a tool to maximize social welfare, the analysis will check whether the drafted German Kapitalmarktinformationshaftungsgesetz (KapInHag) is complying with this prerequisite. It will focus on two aspects that appear crucial for the efficiency of the legal rule. First, the target of the drafted liability rule, i.e. who should be held liable for the dissemination of false information will be focused on. The traditional German liability regime that favors the primary responsibility of the corporation will be depicted and compared with the divergent proposal of the KapInHaG. The main question will be, which liability system provides the optimal setting of incentives for Board members. Second, as the central aspect of a liability rule is the standard of fault that it comprises, it will be analyzed in detail. The German lawmaker suggests in the drafted KapInHag a standard of "gross negligence". Thus, Board members will compensate damaged investors in every case the court in its ex post evaluation will conclude that the disclosure of false information was grossly negligent. The analysis will examine in detail whether the proposal of the KapInHaG is pinpointing the accurate level of deterrence, while assuring that the necessary information will be disseminated courageously and at the perfect time. Therefore it will specially utilize the Business Judgment Rule, an instrument of US corporate law that might be worthwhile to implement also in German capital market law.

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.
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