nep-reg New Economics Papers
on Regulation
Issue of 2007‒11‒24
fifteen papers chosen by
Christian Calmes
University of Quebec in Ottawa

  1. Product market regulation in Bulgaria : a comparison with OECD Countries By Ilieva, Stella; De Rosa, Donato; Fay, Marianne
  2. Profit Sharing and Investment by Regulated Utilities: a Welfare Analysis By Michele Moretto; Paolo M. Panteghini; Carlo Scarpa
  3. Assessing the governance of electricity regulatory agencies in the Latin American and the Caribbean region : a benchmarking analysis By Azumendi, Sebastian Lopez; Diop, Makhtar; Guasch, Jose Luis; Andres, Luis
  4. Liberalization and private sector involvement in the water industry: a review of the economic literature By Antonio, Massarutto
  5. Conflict of laws as constitutional form: Reflections on the International Trade Law and the Biotech Panel Report By Christian Joerges
  6. Education, Market Rigidities and Growth By Philippe Aghion; Philippe Askenazy; Renaud Bourlès; Gilbert Cette; Nicolas Dromel
  7. The incidence of graft on developing-country firms By E. Valladares, Elio; Ernesto Lopez-Cordova, J.; Gonzalez, Alvaro
  8. Investment Climate and Employment Growth: The Impact of Access to Finance, Corruption and Regulations Across Firms By Reyes Aterido; Mary Hallward-Driemeier; Carmen Pagés
  9. The Contamination Problem in Utility Regulation By Fernando T. Camacho; Flavio M. Menenzes
  10. Restrictions on the number of physicians and Intergenerational Inequalities : Experience, Time and Vintage effects in GPs’ earnings* By Brigitte Dormont; Anne-Laure Samson
  11. Bankruptcy: Is It Enough to Forgive or Must we Also Forget? By Piero Gottardi; Ronel Elul
  12. Labor Market Policies and Outcomes: Cross Country Evidence for the EU-27 By Riccardo Rovelli; Randolph Bruno
  13. The Impact of Sanctions and Inspections on Firms’ Environmental Compliance Decisions By Rousseau Sandra
  14. Asymmetric Collusion and Merger Policy By Mattias Ganslandt; Lars Persson; Helder Vasconcelos
  15. Employment Protection, Firm Selection, and Growth By Markus Poschke

  1. By: Ilieva, Stella; De Rosa, Donato; Fay, Marianne
    Abstract: Less restrictive product market policies are crucial in promoting convergence to higher levels of GDP per capita. This paper benchmarks product market policies in Bulgaria to those of OECD countries by estimating OECD indicators of Product Market Regulation (PMR). The PMR indicators allow a comprehensive mapping of policies affecting competition in product markets. Comparison with OECD countries reveals that Bulgaria has made substantial progress towards less restrictive product market policies but also emphasizes a number of areas where further reform is needed. These include adoption of a regulatory process based on incentive-based rather than command-and-control approach, reduction of state interference in the decision of state-owned enterprises, further streamlining of business licensing procedures, and improvement in the communication of rules and procedures to affected parties.
    Keywords: Transport Economics Policy & Planning,Public Sector Regulation,E-Business,Emerging Markets,Markets and Market Access
    Date: 2007–11–01
  2. By: Michele Moretto (Università di Padova); Paolo M. Panteghini (Università di Brescia); Carlo Scarpa (Università di Brescia)
    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. Only a 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 there are bigger investment opportunities.
    Keywords: regulation, investment, profit sharing, real options, RPI-x
    JEL: L51 D81 D92 G31
    Date: 2007–11
  3. By: Azumendi, Sebastian Lopez; Diop, Makhtar; Guasch, Jose Luis; Andres, Luis
    Abstract: This paper focuses on an evaluation and benchmarking of the governance of regulatory agencies in the electricity sector in Latin American Countries (LAC). Using a unique database, we develop an index of regulatory governance and rank all the agencies in the LAC countries. The index is an aggregate number of the evaluation of four key governance characteristics: autonomy, transparency, accountability, and regulatory tools, including not only formal aspects of regulation but also indicators related to actual implementation. Based on 18 different indexes, we analyze the positions of agencies with regard to different aspects of their regulatory governance, considering not only performance in each variable but also scores in the different components of each category. This evaluation allows for the identification of particular country shortcomings regarding governance, and indicates needed improvements. Although the region shows an overall good governance design of their regulatory agencies, the implementation of the independent regulator model still faces several challenges. This is particularly evident in political autonomy and in the informal aspects of governance, where the region shows the largest number of countries with the lowest scores. Trinidad and Tobago and Brazil show the best results and Ecuador, Honduras, and Chile the poorest performances. The rest of the countries vary according to the different indexes. We give each governance variable equal weights and positively test the robustness of our approach using Principal Component Analysis.
    Keywords: National Governance,Governance Indicators,Public Sector Corruption & Anticorruption Measures,Country Strategy & Performance,Banks & Banking Reform
    Date: 2007–11–01
  4. By: Antonio, Massarutto
    Abstract: The theoretical and empirical literature on water supply and sewerage liberalization is reviewed in this paper in order to discuss the potential for market creation and private sector involvement in this sector. The analysis is framed in the “policy roadmap” developed by regulatory economics and discusses opportunities for competition in the market, unbundling, competition for the market and yardstick competition. A review of studies comparing privately and publicly managed water utilities is finally provided.
    Keywords: Water supply and sewerage; liberalization; private sector involvement; water infrastructure; economic regulation
    JEL: H54 L51 L95 L33
    Date: 2007–09
  5. By: Christian Joerges
    Abstract: Hardly anywhere is the trend towards a perfection of transnational governance arrangements and their legalization more visible than in international trade. Governance arrangements established through and alongside WTO law are both practically important and theoretically challenging. They do not just organise international trade relations. They also affect national and regional (European) regulatory policies partly directly, partly more indirectly. How can we explain and how should we evaluate their emergence? The WTO system of 1994, which replaced the GATT of 1947, responded to the ever increasing importance of non-tariff barriers to trade. These barriers reflect regulatory concerns especially in the fields of health and safety, consumer and environmental protection. There importance for WTO member is such that they cannot simply be abandoned for the sake of free trade. This is why the responses the new international trade system institutionalised by special agreements concerning non-tariff barriers to free trade such as the Agreement on the Application of Sanitary and Phytosanitary Measures (SPS) and the Agreement on Technical Barriers to Trade (TBT) reflect a politicisation of international trade. Can we conclude that international markets have been re-regulated and that international trade law ensures their social embeddedness? The paper seeks yardsticks for an answer to these questions in the debates on transnational constitutionalism. It submits that constutionalisation can and should be based on a conflict-of approach. For its elaboration of this suggestion, the paper first contrasts the jurdification of transnational governance at the European and the international level. It then discusses the WTO panel report on the Biotech dispute. It concludes that the legalisation and judicialisation in that case have remained thin. What can be observed is a political rather than a social and legal embeddedness of markets.
    Keywords: international trade; legitimacy; multilevel governance; national autonomy; risk regulation; WTO
    Date: 2007–05–15
  6. By: Philippe Aghion (Harvard University); Philippe Askenazy (Paris School of Economics and IZA); Renaud Bourlès (Université de la Méditerranée (GREQAM)); Gilbert Cette (Banque de France (DAMEP) and Université de la Méditerranée (CEDERS)); Nicolas Dromel (CREST-INSEE and Université Cergy-Pontoise (THEMA))
    Abstract: This note investigates the effects of the education level, product market rigidities and employment protection legislation on growth. It exploits macro-panel data for OECD countries. For countries close to the technological frontier, education and rigidities are significantly related to TFP growth. The contribution of the interaction between product market regulation and labour market rigidity seems particularly substantial.
    Keywords: productivity, growth, regulations, market rigidities, education
    JEL: O47 J24 J68 L40 O57
    Date: 2007–11
  7. By: E. Valladares, Elio; Ernesto Lopez-Cordova, J.; Gonzalez, Alvaro
    Abstract: This pap er measures the extent to which firms in developing countries are the target of bribes. Using new firm-level survey data from 33 African and Latin American countries, we first show that perceptions adjust slowly to firms ' experience with corrupt officials and hence are an imperfect proxy for the true incidence of graft. We then construct an experience-based index that reflects the probability that a firm will be asked for a bribe in order to complete a specified set of business transactions. On average, African firms are three times as likely to be asked for bribes as are firms in Latin America, although there is substantial variation within each region. Last, we show that graft appears to be more prevalent in countries with excessive regulation and where democracy is weak. In particular, our results suggest that the incidence of graft in Africa would fall by approximately 85 percent if countries in the region had levels of democracy and regulation similar to those that exist in Latin America.
    Keywords: Public Sector Corruption & Anticorruption Measures,Corruption & Anitcorruption Law,Crime and Society,E-Business,Access to Finance
    Date: 2007–11–01
  8. By: Reyes Aterido (World Bank); Mary Hallward-Driemeier (World Bank); Carmen Pagés (Inter-American Development Bank and IZA)
    Abstract: Using firm level data on 70,000 enterprises in 107 countries, this paper finds important effects of access to finance, business regulations, corruption, and to a lesser extent, infrastructure bottlenecks in explaining patterns of job creation at the firm level. The paper focuses on how the impact of the investment climate varies across sizes of firms. The differences across size categories come from two sources. First, objective conditions of the business environment do vary systematically by firm types. Micro and small firms have less access to formal finance, pay more in bribes than do larger firms, and face greater interruptions in infrastructure services. Larger firms spend significantly more time dealing with officials and red tape. Second, even controlling for these differences in objective conditions, there is evidence of significant non-linearities in their impact on employment growth. The results suggest strong composition effects: A weak business environment shifts downward the size distribution of firms. In the case of finance and business regulations this occurs by reducing the employment growth of all firms, particularly micro and small firms. On the other hand, corruption and poor access to infrastructure reduce employment growth by affecting the growth of medium size and large firms. With significant differences between firms with less than 10 employees and SMEs, these results indicate significant reforms are needed to spur micro firms to grow into the ranks of the SMEs.
    Keywords: employment growth, investment climate, corruption, regulatory framework, finance
    JEL: J23
    Date: 2007–11
  9. By: Fernando T. Camacho; Flavio M. Menenzes (School of Economics, The University of Queensland)
    Abstract: This paper formally examines the implications of a utility’s diversification into an unregulated industry. In our framework, the utility is the most efficient provider in the unregulated industry (up to a particular capacity) and, as such, there is no question about the desirability of allowing it to operate in that market. Nevertheless, the risk faced by a diversified utility is greater than the risk faced by a utility that operates only in a regulated market. This additional risk can potentially affect the diversified utility’s credit rating and, therefore, increase the cost of capital for the regulated business that will be recovered from ratepayers. We show that by allowing a regulated firm to diversify into an unregulated market, the regulator faces a trade-off: a lower cost in the unregulated market versus a higher cost in the regulated market. If the regulator only cares about welfare in the regulated market, then a ringfencing requirement is optimal subject to implementation costs not being substantial. Of course, the ring-fencing requirement effectively prevents the firm from achieving a lower cost in the unregulated market. Therefore, if the regulator cares about welfare in both regulated and unregulated markets, ring-fencing may no longer be optimal.
    Date: 2007
  10. By: Brigitte Dormont; Anne-Laure Samson
    Abstract: This paper analyses the regulation of ambulatory care and its impact on physicians’careers, using a representative panel of 6,016 French self-employed GPs over the 1983 - 2004 period. The beginning of their activity is infuenced by the regulated number of places in medical schools, named in France numerus clausus. We show that the policies aimed at manipulating the numerus clausus strongly affect physicians’ permanent level of earnings. Our estimates allow us to identify experience, time and vintage effects in physicians’ earnings. The estimated cohort (or vintage) effect appears to be very large, revealing that intergenerational inequalities due to fluctuations in the numerus clausus regulation are far from negligible. Cohorts of GPs beginning during the eighties have the lowest permanent earnings: they faced both the baby-boom numerous cohorts and the consequences of a high number of places in medical schools. Conversely, the decrease in the numerus clausus led to an increase in permanent earnings of GPs who began their practice in the mid nineties. Overall, the estimated gap in earnings between "good" and "bad" cohorts may reach 25%. We performed a more thorough analysis of the earnings distribution to examine whether individual unobserved heterogeneity could compensate for average differences between cohorts. Our results about stochastic dominance between earnings distributions by cohort show that it is not the case.
    Date: 2007–07
  11. By: Piero Gottardi (Dipartimento di Scienze Economiche, Università di Venezia); Ronel Elul (Federal Reserve Bank of Philadelphia)
    Abstract: In many countries, lenders are not permitted to use information about past defaults after a specified period of time has elapsed. We model this provision and determine conditions under which it is optimal. We develop a model in which entrepreneurs must repeatedly seek external funds to finance a sequence of risky projects under conditions of both adverse selection and moral hazard. We show that forgetting a default makes incentives worse, ex-ante, because it reduces the punishment for failure. However, following a default it is generally good to forget, because by improving an entrepreneur’s reputation, forgetting increases the incentive to exert effort to preserve this reputation. Our key result is that if agents are sufficiently patient, and low effort is not too inefficient, then the optimal law would prescribe some amount of forgetting — that is, it would not permit lenders to fully utilize past information. We also argue that forgetting must be the outcome of a regulatory intervention by the government — no lender would willingly agree to ignore information available to him.
    Keywords: Bankruptcy, Information, Incentives, Fresh Start
    JEL: D86 G33 K35
    Date: 2007
  12. By: Riccardo Rovelli (University of Bologna, DARRT and IZA); Randolph Bruno (University of Bologna, DARRT and IZA)
    Abstract: We conduct a comparative analysis of Labor Market Policies and outcomes for the EU member states, for the period 2000-2005. We document the main differences in Labor Market Policies across EU members, including new member states after 2004. We focus on indicators of policy generosity (expenditures relative to GDP) and relate these and other policy indicators to indicators of labor market outcomes and performance. Our results show that, on a cross-country basis, higher rates of employment are in general associated with: (i) higher expenditures on labor market policies, especially on active policies; (ii) a lower degree of rigidity in labor market institutions and in product market regulation.
    Keywords: labor market policies, labor market outcomes, European social models
    JEL: J08 J38 J68
    Date: 2007–11
  13. By: Rousseau Sandra (K.U.Leuven-Center for Economic Studies)
    Abstract: Firms’ compliance decisions are expected to be strongly influenced by the expected fine for non-compliance with environmental regulations. In this paper we measure the effect of the probability of inspection and the size of the fine – jointly and separately – on the compliance decisions made by textile firms in Flanders. The results confirm the deterrence effect of increasing inspections, but they do not support a similar finding for monetary sanctions. The low levels of the sanctions that courts levy and the rapidly increasing marginal abatement costs imply that firms’ compliance decisions are not positively affected by the imposed penalties. However, we do find that it might be welfare enhancing to occasionally scan a selection of firms or sectors more deeply since the number of detected violations raises significantly as a consequence.
    Keywords: Monitoring and enforcement; environmental regulations; textile sector
    Date: 2007–09
  14. By: Mattias Ganslandt (Research Institute of Industrial Economics (IFN)); Lars Persson (Research Institute of Industrial Economics (IFN) and CEPR); Helder Vasconcelos (Universidade Católica Portuguesa and CEPR)
    Abstract: In their merger control, EU and the US have considered symmetric size distribution (cost structure) of firms to be a factor potentially leading to collusion. We show that forbidding mergers leading to symmetric market structures can induce mergers leading to asymmetric market structures with higher risk of collusion, when firms face indivisible costs of collusion. In particular, we show that if the rule determining the collusive outcome has the property that the large (efficient) firm benefits sufficiently more from collusion when industry asymmetries increase, collusion can become more likely when firms are moderately asymmetric.
    Keywords: Collusion; Cost Asymmetries; Merger Policy
    JEL: D43 L41
    Date: 2007–10
  15. By: Markus Poschke (McGill University, EUI and IZA)
    Abstract: This paper analyzes the effect of firing costs on aggregate productivity growth. For this purpose, a model of endogenous growth through selection and imitation is developed. It is consistent with recent evidence on firm dynamics and on the importance of reallocation for productivity growth. In the model, growth is driven by selection among heterogeneous incumbent firms, and is sustained as entrants imitate the best incumbents. In this framework, firing costs not only induce misallocation of labor, but also affect growth by affecting firms’ exit decisions. Importantly, charging firing costs only to continuing firms raises growth by promoting selection. Also charging them to exiting firms is akin to an exit tax, hampers selection, and reduces growth - by 0.1 percentage points in a calibrated version of the model. With job turnover very similar in the two settings, this implies that the treatment of exiting firms matters for welfare and growth. In addition, the impact on growth rates is larger in sectors where firms face larger idiosyncratic shocks, as in services. This fits evidence that recent EU-U.S. growth rate differences are largest in these sectors and implies that firing costs can play a role here. A brief empirical analysis of the impact of firing costs on the size of exiting firms supports the model’s conclusions.
    Keywords: endogenous growth theory, firm dynamics, labor market regulation, firing costs, entry and exit, firm selection
    JEL: E24 J63 J65 L11 L16 O40
    Date: 2007–11

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