nep-reg New Economics Papers
on Regulation
Issue of 2008‒06‒21
twenty papers chosen by
Christian Calmes
University of Quebec in Ottawa

  1. Preventing Innovative Cooperations: The Legal Exemptions Unintended Side Effect By Christian Growitsch; Nicole Nulsch; Margarethe Rammerstorfer
  2. Regulation of Farming Activities: An Evolutionary Approach By Constadina Passa; Anastasios Xepapadeas
  3. Pattern Formation, Spatial Externalities and Regulation in Coupled Economic-Ecological Systems By BROCK, William; XEPAPADEAS, Anastasios
  4. The Procyclical Effects of Basel II By Repullo, Rafael; Suarez, Javier
  5. Congestion Pricing, Slot Sales and Slot Trading in Aviation By Erik T. Verhoef
  6. Keeping Both Eyes Wide Open: The Life of a Competition Authority Among Sectoral Regulators By Hoernig, Steffen; Nilssen, Tore; Pita Barros, Pedro Luis
  7. What are borders made of? An analysis of barriers to European banking integration By Massimiliano Affinito; Matteo Piazza
  8. Economic Theory and Electrical public Utilities Organization in the first part of the twentieth century: French and US Experiences By Frédéric Marty
  9. Private CSR Activities in Oligopolistic Markets: Is there any room for Regulation? By Evangelos Mitrokostas; Emmanuel Petrakis
  10. Tariff-Mediated Network Externalities: Is Regulatory Intervention Any Good? By Hoernig, Steffen
  11. Sustaining Collusion in Growing Markets By Vasconcelos, Helder
  12. Corporate Governance Reforms in the EU: Do They Matter and How? By Petya Koeva Brooks; Iryna V. Ivaschenko
  13. The Tax Base for CCCTB: The Role of Principles By Judith Freedman; Graeme Macdonald
  14. The Law and Economics Debate about Secured Lending: Lessons for European LawMaking? By John Armour
  15. The Interaction amongst Trade, Investment and Competition Policies By Csilla Bartók; Sébastien Miroudot
  16. The role of health and safety representatives in Sweden – The implementation of EEC Directive 89/391 By Trägårdh, Björn
  17. Efficient frameworks for sovereign borrowing By Irwin, Gregor; Thwaites, Gregory
  18. Green Corridors: Linking Interregional Transmission Expansion and Renewable Energy Policies By Vajjhala, Shalini; Paul, Anthony; Sweeney, Richard; Palmer, Karen
  19. Do IMF Programs Improve Economic Governance? By Jiro Honda
  20. The perception of corruption By Natalia Melgar; Máximo Rossi; Tom W. Smith

  1. By: Christian Growitsch; Nicole Nulsch; Margarethe Rammerstorfer
    Abstract: In 2004, European competition law had been faced with considerable changes due to the introduction of the new Council Regulation No. 1/2003. One of the major renewals was the replacement of the centralized notification system for inter-company cooperations in favor of a so-called legal exemption system. We analyze the implications of this reform on the agreements firms implement. In contrast to previous research we focus on the reform’s impact on especially welfare enhancing, namely innovative agreements. We show that the law’s intention to reduce the incentive to establish illegal cartels will be reached. However, by the same mechanism, also highly innovative cooperations might be prevented. To avoid this unintended effect, we conclude that only fines but not the monitoring activities should be increased in order to deter illegal but not innovative agreements.
    Keywords: Competition policy, competition law enforcement, legal exemption system
    JEL: K42 L40
    Date: 2008–06
  2. By: Constadina Passa (Department of Economics, University of Crete, Greece); Anastasios Xepapadeas (Department of Economics, University of Crete, Greece)
    Abstract: Farming activity is modeled under an intervention policy regime, combining the environmental requirements of the Council Nitrates Directive (91/676/EEC) and the compensatory provisions of the second pillar of the Common Agricul- tural Policy. The optimizing behavioural rule along with the evolutionary rule is employed in order to model the individual farmer's decision making, regard- ing compliance or not with regulatory provisions. The impact of these di¤erent behavioral rules on the selection of monitoring effort and thus on the compli- ance incentives of a population of farmers is examined. Analysis indicated that if monitoring effort is chosen arbitrarily or optimally based on the accustomed full rationality assumption then the population adopts a monomorphic behav- ior in the long-run, involving either full or noncompliance with the Directive's provisions. A polymorphic behavior involving partial compliance of the pop- ulation also arises if the dynamic model of optimal monitoring is constrained by replicator dynamics which represent the imitation rules. It is evident, thus, that the number and the type of the equilibrium steady-states is affected by the assumption regarding the behavioral rule adopted by regulated agents. Fi- nally, the dynamics of the population of compliant farmers is also assessed under accumulation of monitoring capital indicating identical properties.
    Keywords: Nitrates Directive, agri-environmental programs, monitoring effford, monitoring capital, rationality, optimal behavioral rule, replicator dynamics, imitation
    JEL: Q20 L51 B52
    Date: 2008–06–10
  3. By: BROCK, William; XEPAPADEAS, Anastasios
    Abstract: We develop a novel theoretical framework for studying ecosystems in which interacting state variables which are affected by management decisions diffuse in space. We identify (i) mechanisms creating spatial patterns when economic agents maximize profit at each site by ignoring the impact of their actions on other sites and (ii) a diffusion induced externality. Pattern formation mechanisms and externalities create a divergence in the spatiotemporal structures emerging under private or social objectives We develop optimal regulation which internalize the spatiotemporal externalities. Our theory is applied to the management and regulation of a semi-arid system. Supporting numerical simulations are also presented.
    Keywords: Economic-Ecological Systems; Pattern Formation; Reaction-Diffusion; Diffusion Instability; Spatial Externalities; Regulation
    JEL: C61 Q20 H23
    Date: 2008–06–11
  4. By: Repullo, Rafael; Suarez, Javier
    Abstract: We analyze the cyclical effects of moving from risk-insensitive (Basel I) to risk-sensitive (Basel II) capital requirements in the context of a dynamic equilibrium model of relationship lending in which banks are unable to access the equity markets every period. Banks anticipate that shocks to their earnings as well as the cyclical position of the economy can impair their capacity to lend in the future and, as a precaution, hold capital buffers. We find that the new regulation changes the behavior of these buffers from countercyclical to procyclical. Yet, the higher buffers maintained in expansions are insufficient to prevent a significant contraction in the supply of credit at the arrival of a recession. We show that cyclical adjustments in the confidence level behind Basel II can reduce its procyclical effects without compromising banks' long-run solvency.
    Keywords: banking regulation; Basel II; business cycles; capital requirements; credit crunch; loan defaults; relationship banking
    JEL: E43 G21 G28
    Date: 2008–06
  5. By: Erik T. Verhoef (VU University Amsterdam)
    Abstract: This paper studies the regulation of an airline duopoly on a congested airport. Regulation should then address two market failures: uninternalized congestion, and overpricing due to market power. We find that first-best charges are differentiated over airlines if asymmetric, and completely drive out the least efficient airline from the market. This is not generally the case for an undifferentiated charge, which is found to be a weighted average of first-best charge rules for the two airlines, and is less-than-optimally efficient because of its inability to differentiate between them. Tradeable slots may yield the first-best outcome if the congestion externality is relatively important and the market power distortion relatively unimportant, but may be less efficient than non-intervention when the reverse is true.
    Keywords: Airport congestion; congestion pricing; slot trading; tradeable permits; second-best
    JEL: R41 R48 D62
    Date: 2008–03–25
  6. By: Hoernig, Steffen; Nilssen, Tore; Pita Barros, Pedro Luis
    Abstract: Competition authorities must pay attention to many industries simultaneously. Sectoral regulators concentrate on their own industry. Often both types of authority may intervene in specific industries and there is an overlap of jurisdictions. We show how a competition authority’s resource allocation is affected by its relationships with sectoral regulators and their biases. If agencies collaborate (compete), the competition authority spends more effort on the industry with the more (less) consumer-biased sectoral regulator. The competition authority spends budget increases on the industry whose regulator reacts less to more effort. The socially optimal budget corrects for distortions due to regulatory bias, but only downwards.
    Keywords: Competition authority; Regulatory bias; Sectoral regulators
    JEL: H11 L40 L51
    Date: 2008–06
  7. By: Massimiliano Affinito (Banca d'Italia); Matteo Piazza (Banca d'Italia)
    Abstract: Linguistic and cultural differences, different legal and supervisory frameworks, relationship lending have been repeatedly mentioned as barriers to European retail banking integration. We investigate whether these barriers have affected integration within national boundaries, using an index of localism of regional banking systems as a measure of market integration. If local banks are established and flourish because asymmetric information makes entry difficult for non-incumbents (DellÂ’Ariccia, 2001) or regulatory and governance rules prevent entry from outside (Berger et al., 1995), we should find a significant relationship between indicators of these barriers and measures of the localism of banking systems. Our results show that this is indeed the case for asymmetric information, while findings are more blurred for supervisory practices.
    Keywords: banking integration, barriers, asymmetric information
    JEL: G21 G28
    Date: 2008–04
  8. By: Frédéric Marty (GREDEG - Groupe de Recherche en Droit, Economie et Gestion - CNRS : UMR6227 - Université de Nice Sophia-Antipolis, OFCE - Observatoire français des conjonctures économiques - FNSP)
    Abstract: The purpose of the paper is to highlight the role of economists in the institutional building of the electric systems in the first part of the twentieth century. It aims at showing how the organization of electricity sector and its regulation were largely the fruits of the economists’ works not only at a theoretical point of view, but also trough their individual commitment in the public regulation building. <br />Economists participate to the electricity sector re-organization by their academic researches and by their intervention in the new legislative framework building or directly in the firms’ management. Both US experience of private regulated firms and French experience of a public-owned monopoly testimony of such commitment.<br />Through these two examples, the communication will aim at putting into relief the dynamics between scholar debates and electricity sector reforms and the links between economic history and history of economic thought. Finally, the purpose will be to highlight to what extent these two historical experiences and the related economics debates can help us in the current European reform.
    Keywords: electricity, regulation, economic theory
    Date: 2008–06–09
  9. By: Evangelos Mitrokostas (Department of Economics, University of Crete); Emmanuel Petrakis (Department of Economics, University of Crete, Greece)
    Abstract: The present paper examines the conditions under which the regulator can complement the provision of Corporate Social Responsibility (CSR) activities by private firms in an oligopolistic market. Our main finding is that if there is no credible information disclosure about SR characteristics of the firms' products to consumers, no firm will have incentives to undertake CSR effort in equilibrium. However, if the necessary information about the CSR aspects of each firm's product, otherwise unobservable, is made available to consumers through certification provided either by a profit-maximizing certifier or by the regulator, then both firms will have incentives to engage in CSR activities. Hence in equilibrium, consumers' surplus, firms profits and total welfare increase comparing to the benchmark case without CSR activities.
    Keywords: Corporate Social Responsibility, Oligopoly, Vertical Differentiation, Certification.
    JEL: M14 L13 L5
    Date: 2008–06–17
  10. By: Hoernig, Steffen
    Abstract: Mobile phone networks' practice of charging higher prices for off-net than for on-net calls has been pinpointed as the source of two competition problems: underprovision of calls and permanent disadvantages for small networks. We consider these allegations and four different remedies: limiting on/off-net differentials or off-net margins, lower termination fees, and asymmetric termination fees. In all cases a trade-off has to be made between efficiency and networks' profits on the one hand, and consumer surplus on the other. Indeed, the total welfare effects of regulating on/off-net differentials are ambiguous and depend on demand characteristics.
    Keywords: Network competition; on/off-net differentials; retail price controls; termination fees
    JEL: L13 L51 L96
    Date: 2008–06
  11. By: Vasconcelos, Helder
    Abstract: The impact of demand growth on the collusion possibilities is investigated in a Cournot supergame where market growth may trigger future entry and the collusive agreement is enforced by the most profitable 'grim trigger strategies' available. It is shown that even in situations where perfect collusion can be sustained after entry, coping with a potential entrant in a market which is growing over time may completely undermine any pre-entry collusive plans of the incumbent firms. This is because, before entry, a deviation and the following punishment phase may become more attractive thanks to their additional effect in terms of delaying entry.
    Keywords: Collusion; Demand Growth; Entry
    JEL: D43 L13 L41
    Date: 2008–06
  12. By: Petya Koeva Brooks; Iryna V. Ivaschenko
    Abstract: This paper proposes a new approach to quantifying the effects of corporate governance reforms, by focusing on the dynamics of the voting premiums, a measure of the private benefits of control in a corporation. The results indicate that the reforms have been successful in reducing the voting premiums EU-wide. Moreover, more intense and broad reform efforts (such as introducing national reforms beyond and above the EU-wide initiatives) bring higher and longer lasting benefits. Our findings also suggest that the market for corporate control in Europe has become more integrated, as illustrated by the lower dispersion in voting premiums across countries and over time.
    Date: 2008–04–17
  13. By: Judith Freedman (University of Oxford); Graeme Macdonald (University of Kent)
    Abstract: The European Commission is working on a proposal for a Common Consolidated Corporate Tax Base (CCCTB). A draft Directive is expected to be published during the course of 2008. The proposal aims to tackle some fundamental problems encountered as a result of lack of corporate tax harmonisation, especially in the areas of cross border losses and transfer pricing. There are several difficulties that must be tackled to make the proposal workable, not least the question of formulary apportionment of the consolidated profits of the corporate group as between Member States. This paper does not attempt to discuss the entire range of issues to which the CCCTB gives rise, important though they are, but focuses on the question of the tax base itself. The CCCTB project presents an opportunity to rethink the tax base. For the purposes of this paper it is assumed that there will be no radical re-appraisal of the way in which we tax corporations for the time being, but that the tax base will continue to be based on a concept of ‘profit’. This paper supports the use of International Financial Reporting Standards (IFRS) as a starting point in ascertaining profit. It acknowledges that some deviations will be necessary from IFRS for tax purposes and suggests that these deviations should be explicit and based on autonomous tax principles. Partial convergence gives rise to issues about the relationship between accounting and tax principles. Conceptual clarity is needed to manage the questions that will arise and appropriate institutional mechanisms need to be developed to deal with the task of interpretation and regulation of the evolving relationship between accounting developments and tax law. If the CCCTB is to be successful it must provide a comprehensive and autonomous set of rules. In fact it must be a Comprehensive Common Consolidated Corporate Tax Base (CCCCTB or C4TB) In view of the complexity of the issues arising in creating and applying the rules for a tax base, it is impossible to produce a Directive that will cover every necessary detail. Instead it needs to refer to IFRS as at the date of the Directive and to contain a set of tax principles as well as setting out institutional arrangements capable of managing the relationship. National tax law and national accounting standards are an inappropriate default for a C4TB. Thus the Directive should provide both a reference point for determining the scope of the tax base and a constitutionally valid framework for interpretation and application of the Directive and its implementing legislation in Member States.
    Keywords: CCCTB, Tax Base, Principles
    Date: 2008
  14. By: John Armour
    Abstract: This review paper is a contribution to a symposium on the 'Future of Secured Credit in Europe'. Its theme is the way in which empirical research has shed light on earlier theoretical literature. These findings tend to suggest that the legal institution of secured credit is, on the whole, socially beneficial, and that such benefits are likely to outweigh any associated social costs. Having made this general claim, the paper then turns to consider the effects of four particular dimensions across which systems of secured credit may differ, and which may therefore be of interest to European law-makers. These are: (i) the scope of permissible collateral; (ii) the efficacy of enforcement; (iii) the priority treatment of secured creditors; and (iv) the mechanisms employed to assist third parties in discovering that security has been granted. In each case, consideration is paid first to the theoretical position, and then empirical findings. It is argued that perhaps the most difficult of these issues for European law-makers concerns the appropriate design of publicity mechanisms for third parties.
    Keywords: secured credit, European corporate finance, notice filing, enforcement, insolvency priorities
    JEL: G33 K22
    Date: 2008–03
  15. By: Csilla Bartók; Sébastien Miroudot
    Abstract: The report focuses on the complementarities between trade, investment and competition policies and analyses how policy coherence can be promoted in these three important areas that shape incentives for firms and individuals to be more productive and for markets to be more competitive. It also deals with the potential inconsistencies or tensions that may arise between trade, investment and competition reforms and how to ease them. It shows that specific policy goals can be achieved while maintaining an open and procompetitive environment. Overall, the analysis highlights the role of governments in providing the right incentives to facilitate the adjustment to the internationalisation of production and the important synergies between policies that can be exploited to promote growth. It is not only the case in contestable markets but also in the context of market failures where pro-competitive policies can address specific distortions and mitigate the adverse effects of reforms. The report includes the results of a survey collecting the experience of policymakers on complementarities between trade, investment and competition policies.
    Keywords: investment, competition, trade, reforms, market failure
    JEL: F1 F2 L5
    Date: 2008–02–22
  16. By: Trägårdh, Björn (Studier av organisation och samhälle)
    Abstract: In Sweden, workers´ representatives have been involved in risk assessment at workplaces since the beginning of the 20th century. One of the main results is the development of a large net of health and safety representatives called “skyddsombud”; regional safety representatives (RSR) on many small workplaces and joint safety committees on large workplaces. One result of EU Directive 89/391 in Sweden seems to be a further development of both regulations and praxis, i.e. regulation AFS 2001:1 and the development of systematic work environment management (‘SWEM’). However, since the 1990’ies there has been some serious cutbacks. The report demonstrates a gap between a lack of praxis implementation and what is stated in EU Directive 89/391. The implementation of the Directive is normally weaker due to lack of control and workers’ representation in certain industries, as in the construction industry or in small companies with few or no organized workers and/or with foreign workers. Health and safety work still seems to be controversial. Trade unions worry about too little implementation of the Directive and want EU to step up their efforts, while employee organizations worry about too much implementation and warn for ‘gold plating’. Built on these findings, a neo-institutional analysis is made claiming to explain the results. The report ends with some policy recommendations.<p>
    Keywords: risk assessment; health and safety representatives; skyddsombud; EU Directive 89/391; implementation; neo-institutional analysis.
    Date: 2008–06–09
  17. By: Irwin, Gregor (Bank of England); Thwaites, Gregory (Bank of England)
    Abstract: This paper presents a theoretical model of strategic default to assess how national and international policymakers should seek to influence the cost of default and the distribution of bargaining power in the event of a default. We find that, in the absence of restrictions on the parameter space, deadweight costs of default should be driven to zero. Moreover, if the debtor is risk-averse, there is an optimal division of bargaining power between the debtor and its creditors. Even with restrictions on the parameter space, marginally lower deadweight costs, possibly in some combination with greater creditor bargaining power, can always raise social welfare ex ante. However, once debt has been contracted, the debtor's trade-off between creditor bargaining power and deadweight costs changes fundamentally. In equilibrium, the deadweight costs of default may therefore tend to be too high, and the allocation of bargaining power inefficiently skewed towards the debtor. The challenge for policymakers is to find credible, time-consistent combinations of policies that can both reduce deadweight costs and shift bargaining power towards creditors.
    Keywords: Sovereign debt; default; restructuring.
    JEL: F34 G15
    Date: 2008–03
  18. By: Vajjhala, Shalini (Resources for the Future); Paul, Anthony; Sweeney, Richard; Palmer, Karen
    Abstract: A variety of recent policy measures have been advanced to promote interregional power transmission investment in the United States; among these are the designation of corridors on federal lands in western states and the identification of national interest electric transmission corridors across the country. Although these corridors have been put forward as critical policy interventions to modernize an aging transmission system, their effectiveness could be undermined by parallel policies, such as renewable portfolio standards (RPSs), designed to alter the landscape for new investment in generation capacity. This paper presents the results of a scenario analysis of the relationship between the interregional power grid and renewables policies to evaluate 1) the effects of state and national RPS policies on interregional power flows and 2) the impacts of transmission expansion on the locations and types of new, renewable sources for electricity capacity additions. Using the RFF Haiku Electricity Market Model, we find that the locations of transmission corridors could have a significant impact on the location, type, and marginal cost of generation in the future. Conversely, a national RPS would induce interregional power flows across the country significantly different from those that would prevail in the absence of such a policy. In particular, a national RPS would promote western renewables and shift power flows to the East. Under either a set of state-level RPS policies or a national RPS, the majority of power flowing into California will come from the Pacific Northwest, not from the Southwest, which is where corridors are most abundant. Additionally, a national RPS could motivate more than 10 GW of new biomass capacity in the Southeast, but grid expansion could shift 6 GW of this capacity to the Plains states and western wind.
    Keywords: energy corridors, transmission grid, renewable electricity, RPS
    JEL: Q42 Q48
    Date: 2008–03–01
  19. By: Jiro Honda
    Abstract: This paper examines the effects of IMF financial assistance on economic governance in developing countries, based on panel data analyses of perceived governance indicators. It uses a two-stage approach to address possible endogeneity issues. The results show that successful implementation of IMF programs is associated with improvements in the quality of economic governance. Specifically, the paper finds statistically robust results that IMF concessional programs through the Poverty Reduction and Growth Facility tend to enhance the rule of law and strengthen control of corruption. Through this exercise, however, no statistically significant effect is observed for assistances under the General Resource Account.
    Date: 2008–05–05
  20. By: Natalia Melgar (Departamento de Economía, Facultad de Ciencias Sociales, Universidad de la República); Máximo Rossi (Departamento de Economía, Facultad de Ciencias Sociales, Universidad de la República); Tom W. Smith (NORC/University of Chicago)
    Abstract: In this paper we analyze the foundations of corruption perception. Even when we employ the concept of corruption in several areas and its connotations vary widely depending on societies and people, it is possibly to find some elements in common which are connected with the misuse of public office with the purpose of making private gains. This paper focuses on this wide concept of corruption. We use data from the module on Citizenship of the 2004 International Social Survey Program (ISSP). Ordered probit models were estimated in order to study the impact of independent variables on the perception of corruption. We conclude that there are significant socio-demographic variables: gender, marital status, religiosity, education and sector of employment, among others. Additionally, we find that country of residence matters and that there are similar results among countries with common characteristics.
    Keywords: corruption, microeconomic behavior, comparative research, public opinion, ISSP
    JEL: D73 K42 O57
    Date: 2008–03

This nep-reg issue is ©2008 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.