nep-reg New Economics Papers
on Regulation
Issue of 2008‒09‒13
twelve papers chosen by
Christian Calmes
University of Quebec in Ottawa

  1. Evolving Technologies and Standards Regulation By Luis Cabral; David Salant
  2. The Investment Effects of Price Caps under Imperfect Competition: A Note By Stefan Bühler; Anton Burger; Robert Ferstl
  3. Biotechnology and the Development of Food Markets: Retrospect and Prospects By GianCarlo Moschini
  4. Bank competition and financial stability : friends or foes ? By Beck, Thorsten
  5. A surplus and welfare analysis of asymmetric regulation By Cédric Clastres; Laurent David
  6. Bank regulations are changing : for better or worse ? By Barth, James R.; Caprio, Gerard, Jr.; Levine, Ross
  7. Credit risk mitigation and SMEs bank financing in Basel II : the case of the Loan Guarantee Associations By Clara Cardone Riportella; Antonio Trujillo Ponce; Maria Jose Casasola
  8. Governance matters VII : aggregate and individual governance indicators 1996-2007 By Kaufmann, Daniel; Kraay, Aart; Mastruzzi, Massimo
  9. Measuring Welfare and the Effects of Regulation in a Government-Created Market: The Case of Medicare Part D Plans By Claudio Lucarelli; Jeffrey Prince; Kosali Simon
  10. Bank competition and financial stability By Berger, Allen N.; Klapper, Leora F.; Turk-Ariss, Rima
  11. Can planners control competitive generators? By Contreras, Javier; Krawczyk, Jacek; Zuccollo, James
  12. Extending Producer Responsibility: An Evaluation Framework for Product Take-Back Policies By Michael W. Toffel; Antoinette Stein; Katharine L. Lee

  1. By: Luis Cabral; David Salant
    Date: 2008
  2. By: Stefan Bühler; Anton Burger; Robert Ferstl
    Abstract: This note analyzes a simple Cournot model where firms choose outputs and capacities facing varying demand and price-cap regulation. We find that binding price caps set above long-run marginal cost increase (rather than decrease) aggregate capacity investment.
    Keywords: capacity, investment, Cournot competition, price cap
    JEL: D24 D43 L13 L51
    Date: 2008–08
  3. By: GianCarlo Moschini (Center for Agricultural and Rural Development (CARD))
    Abstract: Biotechnology has had an important impact on the agricultural and food industries over the last twelve years by way of fast and extensive adoption of a few genetically modified (GM) crops. This has produced large efficiency gains, including higher yields and reduced costs of weed and pest control, as well as some environmental benefits. The expected development of crops with additional agronomic traits, and with output traits to improve the nutrition and health attributes of food products, holds the potential for even more pervasive impacts. Full realisation of such promises may require overcoming the constraining effects of restrictive GM product regulations.
    Keywords: biotechnology, genetically modified products, innovation, regulation, research and development.
    JEL: Q16 Q18 O33 L51
    Date: 2008–08
  4. By: Beck, Thorsten
    Abstract: Theory makes ambiguous predictions about the relationship between market structure and competitiveness of the banking system and banking sector stability. Empirical studies focusing on individual countries provide similarly ambiguous results, while cross-country studies point mostly to a positive relationship between competition and stability in the banking system. Where liberalization and unfettered competition have resulted in fragility, this has been mostly the consequence of regulatory and supervisory failures. The advantages of competition for an efficient and inclusive financial system are strong, and regulatory and supervisory policies should focus on an incentive-compatible environment for banking rather than try to fine-tune market structure or the degree of competition.
    Keywords: Banks&Banking Reform,Access to Finance,Emerging Markets,Debt Markets,Labor Policies
    Date: 2008–06–01
  5. By: Cédric Clastres (LEPII - Laboratoire d'Économie de la Production et de l'Intégration Internationale - CNRS : UMR5252 - Université Pierre Mendès-France - Grenoble II); Laurent David (Research Division - Gaz de France)
    Abstract: Some European regulators have decided to force competition in their nationalmarkets. They have decided to go beyond the second directive and apply asymmetric regulation. Gas release programs and market shares constraints are the two asymmetric decisions imposed to incumbents. When a regulator imposes a gas release program to an incumbent, this operator is compelled to release quantities of its long term contracts to its competitor. In this paper, we will focus on gas release and its impact on welfare, consumer surplus and on the level of released quantities set by regulators. The aim of a gas release program is to give access to natural gas to competitors. They become actives on the market and are in competition with the incumbent. These programs are time limited. They only help competitors in expecting the development of hubs or new investments in importation infrastructures. If competitors want to stay active after the program, they may find others supply sources to increase security of supply. The gas release can induce Raising Rival’s Costs or “Self-Sabotage” strategies. We use a Cournot model with capacity constraints to answer two questions. First, we will study the impact of these strategies on consumer surplus and welfare. We will show that there are no impact on consumer surplus but the welfare decreases. The gas release program introduces a transfer of profit between competitor and incumbent, reduces welfare because of the increase in costs of supply, but has no impact on total consumed quantities. Then, we will suppose that the regulator is setting released quantities maximising welfare. Gas release price is often based on costs plus a bid or a fixed premium. Quantities are set with a less obvious process. We will demonstrate that the regulator must set released quantities :- that would not be so high if incumbent’s supplies are small to avoid Self- Sabotage or RRC strategies ;- as a function of incumbent’s supplies if they are in intermediate values to avoid strategies seen above and to optimise quantities sold on the market ;- at a sufficient level to let the two operators playing their Cournot best reply function. Finally, we will conclude that the regulator can avoid RRC or Self-Sabotage strategies in maximising the welfare when it decides gas released quantities. Gathering from empirical studies, these quantities should not be so high in order to let a significant difference between the capacities of both competitor and incumbent to avoid collusive behaviours.
    Keywords: Energy market ; Gas release ; Regulation ; Optimal released quantities ; Efficiency ; Welfare
    Date: 2008
  6. By: Barth, James R.; Caprio, Gerard, Jr.; Levine, Ross
    Abstract: This paper presents new and official survey information on bank regulations in 142 countries and makes comparisons with two earlier surveys. The data do not suggest that countries have primarily reformed their bank regulations for the better over the last decade. Following Basel guidelines many countries strengthened capital regulations and official supervisory agencies, but existing evidence suggests that these reforms will not improve bank stability or efficiency. While some countries have empowered private monitoring of banks, consistent with the third pillar of Basel II, there are many exceptions and reversals along this dimension.
    Keywords: Banks&Banking Reform,Access to Finance,,Debt Markets,Emerging Markets
    Date: 2008–06–01
  7. By: Clara Cardone Riportella; Antonio Trujillo Ponce; Maria Jose Casasola
    Abstract: The objective of this paper is to analyse the impact of the techniques foreseen in the Basel Agreement II (BII) for mitigating the risk of default on bank loans to small and medium enterprises (SMEs). In particular, we will conduct an analysis of the effect of the guarantees that the Loan Guarantee Association (LGA) offer to the SMEs on the assignment of capital requirements of the financial entities under BII. At the same time, the study will examine the effect of this guarantee on the credit risk premium that the financial entities should charge their clients, and whether this foreseeable decrease in the interest rates applicable to the SMEs is compensated by the cost of the guarantee. The results show that, considering that the cost of the LGA guarantee in Spain is around 0.68%, it will be advantageous for an SME with the annual sales of less than or equal to €5 million to request this guarantee whenever the probability of default (PD) of the LGA is <1.1%, if the approach utilised by the financial entity is the Internal Ratings-Based (IRB) and the SME is considered as corporate; however, if the SME is included in a regulatory retail portfolio, then the limit for the PD of the LGA decreases to 0.71%. On the other hand, when the approach utilised is the Standardised one, then will be profitable for an SME treated as retail to request this guarantee whenever the PD of the LGA is <3.35% (3.95% for corporate exposures).
    Keywords: Credit risk mitigation, Bank financing of SMEs, Basel II, Loan Guarantee Association
    JEL: G21 G28 G32
    Date: 2008–09
  8. By: Kaufmann, Daniel; Kraay, Aart; Mastruzzi, Massimo
    Abstract: This paper reports on the latest update of the Worldwide Governance Indicators (WGI) research project, covering 212 countries and territories and measuring six dimensions of governance between 1996 and 2007: Voice and Accountability, Political Stability and Absence of Violence/Terrorism, Government Effectiveness, Regulatory Quality, Rule of Law, and Control of Corruption. The latest aggregate indicators are based on hundreds of specific and disaggregated individual variables measuring various dimensions of governance, taken from 35 data sources provided by 32 different organizations. The data reflect the views on governance of public sector, private sector and NGO experts, as well as thousands of citizen and firm survey respondents worldwide. The authors also explicitly report the margins of error accompanying each country estimate. These reflect the inherent difficulties in measuring governance using any kind of data. The authors also briefly describe the evolution of the WGI since its inception, and show that the margins of error on the aggregate governance indicators have declined over the years, even though they still remain non-trivial. The authors find that even after taking margins of error into account, the WGI permit meaningful cross-country comparisons as well as monitoring progress over time. In less than a decade, a substantial number of countries exhibit statistically significant improvements in at least one dimension of governance, while other countries exhibit deterioration in some dimensions. These aggregate indicators, spanning more than a decade, together with the disaggregated individual indicators, are available at
    Keywords: Governance Indicators,National Governance,Public Sector Corruption&Anticorruption Measures,Economic Policy, Institutions and Governance,Banks&Banking Reform
    Date: 2008–06–01
  9. By: Claudio Lucarelli; Jeffrey Prince; Kosali Simon
    Abstract: Medicare's prescription drug benefit (Part D) has been its largest expansion of benefits since 1965. Since the implementation of Part D, many regulatory proposals have been advanced to improve this government-created market. Among the most debated are proposals to limit the number of options, in response to concerns that there are "too many" plans. In this paper we study the welfare impacts of limiting the number of Part D plans. To do this, we first provide evidence that consumers view Medicare Part D plans as differentiated products. In doing so, we determine how much Medicare beneficiaries value the plans' various features -- an important measurement not only for our analysis, but also because these features are heavily dictated by policy. Second, using our demand- and supply-side estimates, we conduct several policy experiments to understand the implications of reducing the number of plans. Specifically, we assess the effects on equilibrium premia and welfare from removing plans that cover "the gap," reducing the maximum number of plans each firm can offer per region, and, for validation purposes, the impact of a recent major merger. Our counterfactuals regarding removal of plans provide an important assessment of the losses to consumers (and producers) resulting from government limitations on choice. These costs must be weighed against the widely discussed expected gains from limiting options (due to expected reductions in consumer search costs) when considering new restrictions on the number of plans that can be offered. We find that the search costs should be at least two thirds of the average monthly premium in order to justify a regulation that allows only two plans per firm, and that this number would be substantially lower if the limitation in the number of plans is coupled with a decrease in product differentiation (e.g., by removing plans that cover "the gap").
    JEL: H42 H51 I11 I18 L13 L51 L88
    Date: 2008–09
  10. By: Berger, Allen N.; Klapper, Leora F.; Turk-Ariss, Rima
    Abstract: Under the traditional"competition-fragility"view, more bank competition erodes market power, decreases profit margins, and results in reduced franchise value that encourages bank risk taking. Under the alternative"competition-stability"view, more market power in the loan market may result in greater bank risk as the higher interest rates charged to loan customers make it more difficult to repay loans and exacerbate moral hazard and adverse selection problems. But even if market power in the loan market results in riskier loan portfolios, the overall risks of banks need not increase if banks protect their franchise values by increasing their equity capital or engaging in other risk-mitigating techniques. The authors test these theories by regressing measures of loan risk, bank risk, and bank equity capital on several measures of market power, as well as indicators of the business environment, using data for 8,235 banks in 23 developed nations. The results suggest that - consistent with the traditional"competition-fragility"view - banks with a greater degree of market power also have less overall risk exposure. The data also provide some support for one element of the"competition-stability"view - that market power increases loan portfolio risk. The authors show that this risk may be offset in part by higher equity capital ratios.
    Keywords: Banks&Banking Reform,Debt Markets,Access to Finance,,Markets and Market Access
    Date: 2008–08–01
  11. By: Contreras, Javier; Krawczyk, Jacek; Zuccollo, James
    Abstract: Consider an electricity market populated by competitive agents using thermal generating units. Generation often emits pollution which a planner may wish to constrain through regulation. Furthermore, generators’ ability to transmit energy may be naturally restricted by the grid’s facilities. The existence of both pollution standards and transmission constraints can impose several restrictions upon the joint strategy space of the agents. We propose a dynamic, game-theoretic model capable of analysing coupled constraints equilibria (also known as generalised Nash equilibria). Our equilibria arise as solutions to the planner’s problem of avoiding both network congestion and excessive pollution. The planner can use the coupled constraints’ Lagrange multipliers to compute the charges the players would pay if the constraints were violated. Once the players allow for the charges in their objective functions they will feel compelled to obey the constraints in equilibrium. However, a coupled constraints equilibrium needs to exist and be unique for this modification of the players’ objective functions ..[there was a “to” here, incorrect?].. induce the required behaviour. We extend the three-node dc model with transmission line constraints described in [10] and [2] to utilise a two-period load duration curve, and impose multi-period pollution constraints. We discuss the economic and environmental implications of the game’s solutions as we vary the planner’s preferences.
    JEL: C63 C72
    Date: 2008–08–30
  12. By: Michael W. Toffel (Harvard Business School, Technology and Operations Management Unit); Antoinette Stein (State of California Department of General Services Procurement Division); Katharine L. Lee (Harvard Business School)
    Abstract: Manufacturers are increasingly being required to adhere to product take-back regulations that require them to manage their products at the end of life. Such regulations seek to internalize products' entire life cycle costs into market prices, with the ultimate objective of reducing their environmental burden. This article provides a framework to evaluate the potential for take-back regulations to actually lead to reduced environmental impacts and to stimulate product design changes. It describes trade-offs associated with several major policy decisions, including whether to hold firms physically or financially responsible for the recovery of their products, when to impose recycling fees, whether to include disposal and hazardous substance bans, and whether to mandate product design features to foster reuse and recycling of components and materials. The framework also addresses policy elements that can significantly affect the cost efficiency and occupational safety hazards of end-of-life product recovery operations. The evaluation framework is illustrated with examples drawn from take-back regulations promulgated in Europe, Japan, and the United States governing waste electrical and electronic equipment (WEEE).
    Date: 2008–09

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.
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