nep-reg New Economics Papers
on Regulation
Issue of 2007‒12‒15
nine papers chosen by
Christian Calmes
University of Quebec in Ottawa

  1. The Impact of New Capital Requirements on the Portfolio Decisions of Finnish Pension Institutions By Sjöholm, Hans-Kristian
  2. Evaluating the evidence on electricity reform: Lessons for the South East Europe (SEE) market By Pollitt, M.
  3. Testing the "Waterbed" Effect in Mobile Telephony By Christos Genakos; Tommaso Valletti
  4. A short analysis on the stricter European regulations on tropical hardwood imports and their side effects By Jean-Marc Roda; Eric Aretz; Hin Fui Lim
  5. Innovation and Market Concentration in Europe's Mobile Phone Industries. Evidence from the Transition from 2G to 3G By Klaus S. Friesenbichler
  6. Globalisation and the European Union: which countries are best placed to cope? By Dave Rae; Marte Sollie
  7. Competition in TV-Distribution - A framework and applications to Sweden By Bergman, Mats; Stennek, Johan
  8. Market structure, productivity and scale in European business services By Kox, Henk L.M.; Leeuwen, George van; Wiel, Henry van der
  9. The Optimal Design of Trade Policy Flexibility in the WTO By Simon Schropp, Kornel Mahlstein

  1. By: Sjöholm, Hans-Kristian (Swedish School of Economics and Business Administration)
    Abstract: This paper examines the potential impact of new capital requirements on asset allocations of Finnish pension institutions. We describe the new requirements and consider portfolio construction to minimize regulatory capital, given the investor’s preferred level of expected return. Results identify portfolio transactions that enhance expected return without increasing capital needs. Regulation calls for portfolio diversification and prudence in management, but this paper shows that market participants can exploit inconsistencies in regulation. Possible future consequences include capital outflows from the pension system and an unintended decrease in pre-funding of old-age pensions.
    Keywords: finnish pension system; solvency; portfolio; optimization; regulatory; arbitrage
    Date: 2007–11–07
  2. By: Pollitt, M.
    Abstract: This paper discusses the evidence on electricity reform and relates it to the current situation of the South East Europe (SEE) electricity market. We begin by discussing the main elements of the European Union (EU) electricity reform model. Then we go on to discuss emerging good practice in the regulation of national electricity markets in the EU. This is important because it reflects the key role placed on independent regulation of the electricity sector in the EU reform model. Next, we evaluate the empirical evidence on the success of the EU reform model in particular before and the success of electricity reforms more generally. This leads on to a discussion of the particular context of SEE electricity reform and what specific issues this raises. We conclude with a discussion of the importance of more general institutional context of SEE electricity reform. The paper suggests that it will be a substantial, but worthwhile, challenge to create a workable supra-national electricity market in the region.
    Keywords: Electricity reform, South East Europe, European single electricity market.
    JEL: L94 P31
    Date: 2007–09
  3. By: Christos Genakos; Tommaso Valletti
    Abstract: This paper examines the impact of regulatory intervention to cut termination rates of callsfrom fixed lines to mobile phones. Under quite general conditions of competition, theorysuggests that lower termination charges will result in higher prices for mobile subscribers, aphenomenon known as the "waterbed" effect. The waterbed effect has long beenhypothesized as a feature of many two-sided markets and especially the mobile networkindustry. Using a uniquely constructed panel of mobile operators' prices and profit marginsacross more than twenty countries over six years, we document empirically the existence andmagnitude of this effect. Our results suggest that the waterbed effect is strong, but not full.We also provide evidence that both competition and market saturation, but most importantlytheir interaction, affect the overall impact of the waterbed effect on prices.
    Keywords: telecommunications, regulation, "Waterbed" effect, two-sided markets
    JEL: D21 L51 L96
    Date: 2007–10
  4. By: Jean-Marc Roda (Bois tropicaux - Production et valorisation des bois tropicaux - CIRAD : UPR40); Eric Aretz (Alterra - Centre for Ecosystem studies, - Wageningen University and Research Centre); Hin Fui Lim (FRIM - Forest Research Institute of Malaysia - FRIM)
    Abstract: This paper analyses the side effects of the stricter regulation on tropical hardwood or timber imports. It considers the place of Europe within the global timber market, where Europe accounts only for a very limited share. It also explains the high selectivity of European markets, with its consequences. While tropical wooden furniture and other secondary processed products are not considered as timber here, their question is also discussed. The number of empirical studies specifically dealing with the side effects of EU regulations is limited, but the results are converging, showing that these regulations have a general adverse effect, contrary to the initial aim of promoting the sustainability of tropical timbers. These side effects are essentially to divert the trade towards countries with lower standards, and to add a burden on most of the producing countries which have already a set of comparative disadvantages for the production of legal or sustainable timber. The effects are positive on a limited number of companies which markets are very dependent of Europe. The question is then analysed from a broader perspective, replacing the effects of the EU regulations as an incidental factor compared to the increasing consumption of tropical timber by the three developing giants: Brazil, India and China.
    Keywords: timber trade; trade regulation; environmental regulation, Europe; tropical timber; tropical hardwwod; side effect; adverse effect
    Date: 2007–03–01
  5. By: Klaus S. Friesenbichler (WIFO)
    Abstract: Aiming at both low prices and innovation, policy makers and economists have long argued about the optimal intensity of competition. While the current discussion in telecommunication regulation points out that competition can be detrimental to innovation due to the low appropriability of rents established economic approaches advocate competition to be conducive to innovation. This reflects the dispute in economics between Schumpeterian and neoclassical theories. Aghion et al. (2005) offered reconciliation by modelling an inverted U relationship, which in this paper I test for European mobile phone providers. Innovation is measured by a service launch indicator and R&D investments, and competition is approximated by market concentration. As markets are clearly defined, problems of market definition which usually blur concentration indices are avoided. I find robust and statistically significant support for the tested quadratic relationship for both innovation indicators. The innovation optimising Herfindahl-Hirschman laid around 5,500 between 2001 and 2003, but may however vary over time. This finding points at a conflict in the realisation of the regulatory objectives of low prices and innovation at the same time.
    Keywords: Innovation, R&D, market concentration, inverted U, mobile telecommunication research and Development
    Date: 2007–11–20
  6. By: Dave Rae; Marte Sollie
    Abstract: Globalisation can be a threat or an opportunity, depending on a country’s trade mix and its economic and regulatory structure. This paper assesses which EU countries are most exposed to globalisation using, among other indicators, measures of revealed comparative advantage. It then looks at which countries are best placed to cope. This depends on labour and product market flexibility, the average skill level of the workforce, the innovation framework, the quality of the education system and the level and type of support, such as job-search assistance, that is given to those who are harmed by globalisation. This paper relates to the 2007 Economic Survey of the European Union( <P>Mondialisation et Union européenne : quels sont les pays les mieux placés pour y faire face ? <BR>La mondialisation peut être une menace ou une opportunité, selon la composition des échanges des pays, leur structure économique et leur réglementation. Cet article évalue les pays de l’UE qui sont les plus exposés à la mondialisation en utilisant, parmi d’autres indicateurs, des mesures des avantages comparatifs révélés. Il examine ensuite quels sont les pays les mieux placés pour faire face à ce défi. Ceci dépend de la flexibilité des marchés du travail et des produits, du niveau de qualification moyenne de la main-d’oeuvre, du cadre concernant l’innovation, de la qualité du système éducatif et des niveaux et types de soutien, comme les aides à la recherche d’un emploi, qui sont mises à la disposition de ceux qui ont subi des préjudices à cause de la mondialisation.
    Keywords: globalisation, réglementation, trade, regulation, commerce, mondialisation, labour market flexibility
    JEL: E60 F10 F43
    Date: 2007–12–06
  7. By: Bergman, Mats (Uppsala University); Stennek, Johan (Department of Economics, School of Business, Economics and Law, Göteborg University)
    Abstract: The purpose of this report is to investigate how well competition in the TV-industry works, primarily focusing on distribution. For this purpose we suggest a framework of analysis and, at the same time, we apply this framework to the Swedish market. Even if our focus will be distribution services, we will need to paint a broader picture, including contents providers, channels, pay-TV operators, advertisers, viewers and other market participants. While our assessment is primarily based on economic analysis of the market, we also aim to integrate the economic analysis with the traditional methodology of competition law. We will therefore go into some details of how the relevant markets should be defined. The report concludes with an in-depth investigation of three current issues in the Swedish market.<p>
    Keywords: television; distribution; cable; satellite; IPTV; terrestrial; telecommunications; competition; oligopoly; competition policy; regulation
    JEL: L00 L40
    Date: 2007–12–11
  8. By: Kox, Henk L.M.; Leeuwen, George van; Wiel, Henry van der
    Abstract: Using data from 11 EU countries, the paper investigates the impact of scale economies on labour productivity in European business services. Moreover, it analyses whether the incidence of scale sub-optimality is related to characteristics of the market or to national regulation characteristics. The econometric analysis is based on a production function model in combination with a distance-to-the-frontier model. We find evidence for the existence of increasing returns to scale in business services firms. A result is that throughout the EU, business-services firms with less than 20 employed persons have a significantly lower level of labour productivity than the rest of the business-services industry. Two factors explain the scale inefficiencies. The first is the level of policy-caused firm-entry costs; higher start-up costs for new firms go along with more scale inefficiency. Secondly, business-services markets tend to be segmented by firm size: firms tend to compete predominantly with firms in their own size segment of the markets. Scale-related inefficiencies are to some extent compensated by more competition within a firm's own size segment. If a firm operates in a more “crowded” segment this has a significant and positive impact on its labour productivity. We derive some policy implications from our findings.
    Keywords: EU; business services; scale efficiency; labour productivity; regulation; entry costs
    JEL: L5 L11 D2 L8
    Date: 2007–11
  9. By: Simon Schropp, Kornel Mahlstein (IUHEI, The Graduate Institute of International Studies, Geneva)
    Abstract: This paper is a contribution to the literature on rational design of trade agreements. The World Trade Organization (WTO) is an incomplete contract among sovereign states. Incomplete contracts contain gaps. Ex post, contractual gaps may leave gains from trade unrealized; they may create “regret” in signatories once unanticipated contingencies or sudden protectionist backlashes have occurred. Trade policy flexibility mechanisms, such as the “safeguards clause” under Art. XIX GATT, are geared towards seizing ex post regret by allowing parties affected by a protectionist shock to partially and temporarily withdraw from previously made trade liberalization concessions – given that they compensate the victim(s) of such backtracking behavior. This paper examines the somewhat understudied issue of optimal trade policy flexibility design in the WTO: In particular, we analyze whether ex post escape should be organized by means of a unilateral opt-out clause (a “liability rule” of escape), or a bilateral renegotiation provision (a “property rule” of escape). Modeling the WTO as a fully non-contingent tariff liberalization contract with contingencies (or “states of nature”) asymmetrically revealed, we find that a liability rule backed by expectation remedies payable to the affected victim Pareto-dominates both a renegotiation clause, as well as any other remedy arrangement connected to a liability rule. Only the remedial design of liability-cum-expectation damages yields the desirable incentives to liberalize ex ante, and to default ex post and therewith is able to replicate the outcomes of the hypothetical contracting ideal of the complete contingent contract.
    Keywords: Incomplete contracts, remedies, enforcement, WTO, trade renegotiations, WTO Dispute Settlement,
    JEL: F02 F13 F51 F53 K00 K33 K42
    Date: 2007–12

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