nep-reg New Economics Papers
on Regulation
Issue of 2007‒08‒14
six papers chosen by
Christian Calmes
University of Quebec in Ottawa

  1. Regulation of Bank Capital and Behavior of Banks: Assessing the US and the EU-15 Region Banks in the 2000-2005 Period By Petr Teplý; Milan Matejašák
  2. Government Policy in the Formal and Informal Sectors By Prado, Jr., Jose Mauricio
  3. Are Financial Development and Corruption Control Substitutes in Promoting Growth? By Christian Ahlin; Jiaren Pang
  4. Incorporating the Price of Quality in Efficiency Analysis: the Case of Electricity Distribution Regulation in the UK By Yu, W.; Jamasb, T.; Pollitt, M.
  5. The Effect of Legal Systems and Accounting Conservatism on Corporate Governance: The U.S. versus the U.K.(A Comparative Analysis) By Narayanan, Supreena
  6. When do creditor rights work? By Safavian, Mehnaz; Sharma, Siddharth

  1. By: Petr Teplý (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic); Milan Matejašák (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic)
    Abstract: In recent years, regulators have increased their focus on the capital adequacy of banking institutions to enhance their stability, hence the stability of the whole financial system. The purpose of this paper is to assess and compare how American and European banks adjust their level of capital and portfolio risk under capital regulation, whether and how they react to constraints placed by the regulators. In order to do this, we estimate a modified version of the simultaneous equations model developed by Shrieves and Dahl. This model analyzes adjustments in capital and risk at banks when they approach the minimum regulatory capital level. The results indicate that regulatory requirements have the desired effect on bank behavior. Both American and European banks that are close to minimum requirements simultaneously increase their capital. In addition, the US banks decrease their portfolio risk taking.
    Keywords: banking regulation, Basel Capital Accord, capital adequacy, banks, simultaneous equations model
    JEL: C30 G18 G21
    Date: 2007–08
  2. By: Prado, Jr., Jose Mauricio (Institute for International Economic Studies, Stockholm University)
    Abstract: The paper quantitatively investigates, in general equilibrium, the interaction between the firms' choice to operate in the formal or the informal sector and government policy on taxation and enforcement, given a level of regulation. A static version of Ghironi and Melitz’s (2005) industry model is used to show that firms with lower productivity endogenously choose to operate in the informal sector. I use cross-country data on taxes, measures of informality, and measures of regulation (entry and compliance costs, red tape, etc) to back out how high the enforcement levels must be country by country to make the theory match the data. Welfare gains from policy reforms can be fairly large. I find also that welfare gains from reducing regulation are almost twice those computed for the policy reform. Finally, distortions associated with informality account for a factor of 1.5 of the output per capita difference between the richest and the poorest countries.
    Keywords: Informal economy; General equilibrium; Regulation
    JEL: E61 H30
    Date: 2007–08–06
  3. By: Christian Ahlin (Department of Economics, Vanderbilt University); Jiaren Pang (Washington University)
    Abstract: While financial development and corruption control have been studied extensively, their interaction has not. We develop a simple model in which low corruption and financial development both facilitate the undertaking of productive projects, but act as substitutes in doing so. The substitutability arises because corruption raises the need for liquidity and thus makes financial improvements more potent; conversely, financial underdevelopment makes increased corruption more onerous and thus raises the gains from reducing it. We test this substitutability by predicting growth, of countries and industries, using measures of financial development, lack of corruption, and a key interaction term. Both approaches point to positive effects from improving either factor, as well as to a substitutability between them. The growth gain associated with moving from the 25th to the 75th percentile in one factor is 0.63-1.68 percentage points higher if the second factor is at the 25th percentile rather than the 75th. The results show robustness to different measures of corruption and financial development and do not appear to be driven by outliers, omitted variables, or other theories of growth and convergence.
    Keywords: Financial development, growth, complementarity, corruption
    JEL: O16 O17 O40 O43
    Date: 2006–12
  4. By: Yu, W.; Jamasb, T.; Pollitt, M.
    Abstract: Efficiency analysis of electricity distribution networks is often limited to technical or cost efficiency measures. However, some important non-tradable aspects of their service such as quality of service and network energy losses are generally not part of the analysis. A regulatory concern is that technical efficiency can be achieved at the expense of these measures as well as allocative efficiency. Valuation of service quality for inclusion in regulatory models is particularly difficult. This paper presents an approach to measure and incorporate service quality and energy losses in analysis of technical and allocative efficiency of the utilities. We calculate technical and allocative efficiency of the 14 distribution networks in the UK between 1990/91 and 2003/04 using the Data Envelopment Analysis technique. We find that efficiency measures improved during the first (1990/91-1994/95) and second (1995/96-1999/00) distribution price control reviews and exhibited a slight decline during the third (2000/01-2004/05) review period. We find relatively low allocative efficiency - i.e. a mismatch in allocating resources among expenditures, service quality, and energy losses. The results suggest that the utilities may not be sufficiently incentivised to achieve socially optimal input bundles under the current incentive scheme. Key words: Data Envelopment Analysis, electricity, quality of service, willingness-to-pay
    JEL: L15 L51 L94
    Date: 2007–07
  5. By: Narayanan, Supreena
    Abstract: Corporate Governance deals with the ways in which suppliers of finance to corporations assure themselves of getting a return on their investments. This paper analyses the effects of legal systems and accounting conservatism on corporate governance. The U.K. and American corporate governance perspective, there have fundamentally been the same goals with respect to strengthening corporate governance In comparison to the U.S vs the U.K., the value of independent directors is emphasized in the recommendations of Derek Higgs regarding corporate governance, building on the earlier work of the Cadbury Commission. In the U.S. it is the responsibility of the States and the stock exchanges to determine their corporate governance requirements. In the U.K. it is the responsibility of the Security Exchange Commission to overlook adherence to corporate governance regulations whereas its is the duty of the Sarbanes Oxley act to overlook the corporate governance rules and regulations. Theory indicates that accounting conservatism is important to establish an efficient corporate governance system in both the U.S and the UK
    Keywords: Corporate Governance; Legal Systems; Accouting Conservatism
    JEL: F3
    Date: 2006–02–19
  6. By: Safavian, Mehnaz; Sharma, Siddharth
    Abstract: Creditor-friendly laws are generally associated with more credit to the private sector and deeper financial markets. But laws mean little if they are not upheld in the courts. The authors hypothesize that the effectiveness of creditor rights is strongly linked to the efficiency of contract enforcement. This hypothesis is tested using firm level data on 27 European countries in 2002 and 2005. The analysis finds that firms have more access to bank credit in countries with better creditor rights, but the association between creditor rights and bank credit is much weaker in countries with inefficient courts. Exploiting the panel dimension of the data and the fact that creditor rights change over time, the authors show that the effect of a change in creditor rights on change in bank credit increases with court enforcement. In particular, a unit increase in the creditor rights index will increase the share of bank loans in firm investment by 27 percent in a country at the 10th percentile of the enforcement time distribution (Lithuania). However, the increase will be only 7 percent in a country at the 80th percentile of this distribution (Kyrgyzstan). Legal protections of creditors and efficient courts are strong complements.
    Keywords: Debt Markets,,Banks & Banking Reform,Emerging Markets,Labor Policies
    Date: 2007–08–01

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