nep-reg New Economics Papers
on Regulation
Issue of 2008‒09‒29
sixteen papers chosen by
Christian Calmes
Universite du Quebec en Outaouais

  1. Drug price setting and regulation in France By Nathalie Grandfils
  2. Regulation of Private Health Insurance Premiums: Can Performance Assessment Play a Greater Role? By Roger Carrington; Tim Coelli; D. S. Prasada Rao
  3. Corporate Fraud, Governance and Auditing By Giovanni Immordino; Marco Pagano
  4. Banking with Contingent Contracts, Macroeconomic Risks, and Banking Crises By Hans Gersbach
  5. General trends in competition policy and investment regulation in mandatory defined contribution markets in Latin America By Dayoub, Mariam; Lasagabaster, Esperanza
  6. Multiple safety net regulators and agency problems in the EU: Is Prompt Corrective Action partly the solution? By David G. Mayes; María J. Nieto; Larry Wall
  7. The sub-prime crisis, the credit squeeze and Northern Rock: The lessons to be learnt By Maximilian J. B. Hall
  8. Law, Corporate Governance and Financial System: Econometric Analysis of French Case By Régis Blazy; Afef Boughanmi; Bruno Deffains; Jean-Daniel Guigou
  9. Lobbying, Corruption and Other Banes By Campos, Nauro F.; Giovannoni, Francesco
  10. The Impact of Higher Standards in Patent Protection for Pharmaceutical Industries under the TRIPS Agreement: A Creation-date: 2008 By Li, Xuan
  11. Corruption, privatisation and the distribution of income in Latin America By Antonio Rodriguez Andres; Carlyn Ramlogan-Dobson
  12. The Impact of Trust on Reforms By Heinemann, Friedrich; Tanz, Benjamin
  13. Efficacy of the Clean Development Mechanism By Geethanjali Selvaretnam; Kannika Thampanishvong
  14. Inheritance Law and Investment in Family Firms By Andrew Ellul; Marco Pagano; Fausto PAnunzi
  15. Japan: The banks are back! Or are they? By Maximilian J. B. Hall
  16. Bank mergers and lending relationships. By Judit Montoriol-Garriga

  1. By: Nathalie Grandfils (IRDES institut for research and information in health economics)
    Abstract: In France, drug prices have historically been regulated but approaches to setting and regulating prices have been evolving in recent years. In 2003, the prices of new outpatient drugs, which had hitherto been entirely regulated, were semi-liberalised, with drug companies setting prices in line with those in neighbouring countries; and in parallel with this in 2004, the prices of expensive drugs and/or drugs qualifying for reassignment must now also be set in line with European prices. In addition to this, price/volume regulation has recently been introduced. This document describes the price setting rules applicable to each drug category and discusses different measures for regulating drug price, particu-larly the conventional policies implemented under successive framework agreements. The regulatory path for medicines and the different actors involved are presented in an Appendix.
    Keywords: Drugs, Regulation, Public Health
    JEL: I18 L65
    Date: 2008–09
  2. By: Roger Carrington; Tim Coelli; D. S. Prasada Rao (CEPA - School of Economics, The University of Queensland)
    Date: 2008
  3. By: Giovanni Immordino (Università di Salerno and CSEF); Marco Pagano (Università di Napoli Federico II, CSEF, EIEF and CEPR)
    Abstract: We analyze corporate fraud in a model where managers have superior information but, due to private benefits from empire building, are biased against liquidation. This may induce them to misreport information and even bribe auditors when liquidation would be value-increasing. To restrain fraud, shareholders optimally choose auditing quality and the performance sensitivity of managerial pay, taking into account external corporate governance and auditing regulation. For given managerial pay, it is optimal to rely on auditing when external governance is in an intermediate range. When both auditing and managerial incentive pay are used, worse external governance must be balanced by heavier reliance on both of these incentive mechanisms. In designing managerial pay, equity can improve managerial incentives while options worsen them.
    Keywords: accounting fraud, auditing, managerial compensation, corporate governance, regulation
    JEL: G28 K22 M42
    Date: 2008–09–01
  4. By: Hans Gersbach (CER-ETH - Center of Economic Research at ETH Zurich, Switzerland)
    Abstract: We examine banking competition when deposit or loan contracts contingent on macroeconomic shocks become feasible. We show that the risk allocation is efficient, provided that banks are not bailed out. In this case, banks may shift part of the risk to depositors. The private sector insures the banking sector and banking crises are avoided. In contrast, when banks are bailed out, depositors receive non-contingent contracts with high interest rates, while entrepreneurs obtain loan contracts that demand high repayment in good times and low repayment in bad times. As a result, the present generation overinvests, and banks create large macroeconomic risks for future generations, even if the underlying risk is small or zero.
    Keywords: Financial intermediation, macroeconomic risks, state contingent contracts, banking regulation
    JEL: D41 E4 G2
    Date: 2008–08
  5. By: Dayoub, Mariam; Lasagabaster, Esperanza
    Abstract: Following Chile's pension reform in 1981, a wave of multi-pillar pension reforms took place in Latin America (LAC). Their implementation has revealed new policy challenges. To shed light on these issues, this paper reviews the structure and performance of mandatory DC pillars in LAC. The review highlights three important points. First, it suggests overall positive outcomes from reforms in the LAC countries that implemented multi-pillar pension systems. There is, however, scope for increasing efficiency. Second, management fees have declined but remain relatively high whereas decreases in operational costs have only been partially passed through to consumers reflecting inadequate competition. Limits on transfers and related measures have been ineffective in curtailing management fees but created new barriers to entry. In recent years, a few countries in LAC introduced or are in the process of introducing a combination of new measures that focus more directly on the two root causes of inadequate competition - the inelasticity of demand to fees and selective elimination of barriers to entry by facilitating unbundling of services. These new measures show some promise. Third, the paper's review indicates that a greater diversification of pension fund portfolios in LAC appears to be necessary. Portfolio concentration owes to the adoption of strict quantitative investment regulations, underdeveloped capital markets and volatile macroeconomic environments. A gradual relaxation of these restrictions is now in progress in several countries. Regulators have become more conscious of the costs imposed by such regulations and macroeconomic conditions have improved. Greater overseas diversification seems inevitable given the development stage of local capital markets.
    Keywords: Debt Markets,,Emerging Markets,Access to Finance,Investment and Investment Climate
    Date: 2008–09–01
  6. By: David G. Mayes (Bank of Finland); María J. Nieto (Banco de España); Larry Wall (Federal Reserve Bank of Atlanta)
    Abstract: This paper presents a stylized mechanism aimed at dealing with the cross border agency problems that arise in supervising and resolving cross border banking groups in the European Union (EU). The authors assume that PCA policies have been implemented by the national supervisors and explore the institutional changes needed in Europe if PCA is to be effective as an incentive compatible mechanism. The paper identifies these changes starting with enhancements in the availability of information on banking groups to supervisors. Next, the paper considers the collective decision making by supervisors with authority to make discretionary decisions within the PCA framework as soon as a bank of a cross border banking group falls below the minimum capital standard. Finally, the paper analyzes the coordination measures that should be implemented if PCA requires the bank to be resolved.
    Keywords: banking supervision, European Union, Prompt Corrective Action
    JEL: G28 K23 F20
    Date: 2008–09
  7. By: Maximilian J. B. Hall (Dept of Economics, Loughborough University)
    Abstract: On 14 September 2007, after failing to find a 'White Knight' to take over its business, Northern Rock bank turned to the Bank of England ('the Bank') for a liquidity lifeline. This was duly provided but failed to quell the financial panic, which manifested itself in the first fully-blown nationwide deposit run on a UK bank for 140 years. Subsequent provision of a blanket deposit guarantee duly led to the (eventual) disappearance of the depositor queues from outside the bank's branches but only served to heighten the sense of panic in policymaking circles. Following the Government's failed attempt to find an appropriate private sector buyer, the bank was then nationalised in February 2008. Inevitably, post mortems ensued, the most transparent of which was that conducted by the all-party House of Commons' Treasury Select Committee. And a variety of reform proposals are currently being deliberated at fora around the globe with a view to patching up the global financial system to prevent a recurrence of the events which precipitated the bank's illiquidity. This article briefly explains the background to these extraordinary events before setting out, in some detail, the tensions and flaws in UK arrangements which allowed the Northern Rock spectacle to occur. None of the interested parties – the Bank, the Financial Services Authority (FSA) and the Treasury – emerges with their reputation intact, and the policy areas requiring immediate attention, at both the domestic and international level, are highlighted. Some reform recommendations are also provided for good measure, particularly in the area of formal deposit protection.
    Keywords: UK banks, banking regulation and supervision, central banking, deposit protection.
    JEL: E53 E58 G21 G28
    Date: 2008–08
  8. By: Régis Blazy (CREFI-LSF, University of Luxembourg); Afef Boughanmi (CREFI-LSF, University of Luxembourg); Bruno Deffains (BETA-REGLES, University of Nancy II); Jean-Daniel Guigou (CREFI-LSF, University of Luxembourg)
    Abstract: The World Bank reports « Doing business » (2004, 2005 and 2006), referring to the main assumptions and findings of the « law and finance » theory, predict that the common law system provides better basis for financial development and economic growth than French origin civil law. This paper challenges the « law and finance » theory supported by La Porta, Lopez-de-Silanes, Shleifer and Vishny (LLSV). Thus, it undergoes an empirical investigation of the role of corporate governance in financial development and in shaping the financial structure of firms. We focus on French corporate governance reforms in order to examine whether these reforms are consistent with a reorganization of the French financial system during the period 1980-2004. This research aims to evaluate the proposition that there is a strong and stable relationship between legal origin, investor protection and financial system. LLSV affirm, in addition, that the causality is from law to finance. Our analysis considers the dynamic aspect of corporate governance. The key question the study addresses is how over-time changes in corporate governance rules and financial system in France affected financial development. This empirical study suggests that indicators of investor protection may be independent from legal origin. In addition, our investigation focuses on other stakeholders (employees and bondholders) and points out that the stakeholder’s point of view appears to be more relevant, than the shareholder approach, to understand the corporate governance mechanisms. Our econometric investigation is rather new as the law and finance literature has not always focused on the elaboration of corporate governance indicators suitable for the French legislation. Also, our thesis undergoes a multiple criteria analysis of corporate governance reforms, which is a method not yet used in the growing literature generated by the legal corporate governance approach. Indeed, we weight the dummy variables according to the importance of stakeholder rights included in the constructions of the indicators. This methodology shows that the causality is especially from finance to law. This paper yields results that mitigate the main LLSV’s predictions and emphasize the merits of the stakeholder approach.
    Keywords: corporate governance, investor protection, financial development
    JEL: G30 K10 K22 C12
    Date: 2008
  9. By: Campos, Nauro F. (Brunel University); Giovannoni, Francesco (University of Bristol)
    Abstract: Although the theoretical literature often uses lobbying and corruption synonymously, the empirical literature associates lobbying with the preferred mean for exerting influence in developed countries and corruption with the preferred one in developing countries. This paper challenges these views. Based on whether influence is sought with rule-makers or rule-enforcers, we develop a conceptual framework that highlights how political institutions are instrumental in defining the choice between bribing and lobbying. We test our predictions using survey data for about 6000 firms in 26 countries. Our results suggest that (a) lobbying and corruption are fundamentally different, (b) political institutions play a major role in explaining whether firms choose bribing or lobbying, (c) lobbying is more effective than corruption as an instrument for political influence, and (d) lobbying is more powerful than corruption as an explanatory factor for enterprise growth, even in poorer, often perceived as highly corrupt, less developed countries.
    Keywords: lobbying, corruption, political institutions
    JEL: E23 D72 H26 O17 P16
    Date: 2008–09
  10. By: Li, Xuan
    Abstract: A comparative study is undertaken that explores Chinese and Indian pharmaceutical industries under different patent regimes. It is found that relative to India, which had implemented process patent until 2005, China with a product patent regime since 1993 suffers from both lower drug accessibility and availability (the latter is a missing parameter in the literature). Also, China lags behind in both lower R&D investment and patents filed by Chinese nationals. Based on these findings and associated legal interpretation, we conclude that higher patent protection in China generates negative impacts on the pharmaceutical industries. Thus, governments should utilize TRIPS flexibilities and other regimes like price control to offset the anticompetitive effect in designing patent policies.
    Keywords: product patent, process patent, TRIPS, pharmaceutical industries, China, India
  11. By: Antonio Rodriguez Andres; Carlyn Ramlogan-Dobson
    Abstract: This paper presents new evidence on income inequality in Latin America over the period 1981-2000. Using a panel data methodology, we find that a reduction in corruption is associated with a rise in inequality. This counterintuitive result can be explained by privatisation. Privatisation removes industries from government influence (and corruption) and worsens income inequality as new owners strive for efficiency and profits. The paper argues that structural reform policies aimed primarily at achieving positive and increasing growth rates do not adequately address the income distribution problem.
    Keywords: Corruption, Latin America, Income inequality, Instrumental variables, Panel data, Privatisation.
    JEL: O15 O54
    Date: 2008–07
  12. By: Heinemann, Friedrich; Tanz, Benjamin
    Abstract: In a constantly changing economic environment a country's ability to undertake institutional reforms is crucial to maintain economic growth and to promote the welfare of its citizens. A wide range of determinants for institutional reforms have been identified. However, the impact of trust on reforms has so far never been addressed. We provide theoretical arguments why trust should influence institutional changes and test the relationship empirically. We find a significant positive relation between trust and reforms with regard to government size, the legal system, and deregulation of private businesses and the labor market. The results in other policy fields are ambiguous.
    Keywords: Trust, Economic Freedom, Policy Reforms
    JEL: E60 H11
    Date: 2008
  13. By: Geethanjali Selvaretnam; Kannika Thampanishvong
    Abstract: The Clean Development Mechanism (CDM) gives the industrialized countries (the Annex I countries) some flexibility in achieving their emission reduction targets under the Kyoto Protocol by allowing them to pay for projects that reduce greenhousegas emissions in the developing countries (the non-Annex I countries). This paper is devoted to evaluate the efficacy of the CDM. We show that, on one hand, the emissions in the non-Annex I country decline because of abatement undertaken by the Annex I country under the CDM; on the other hand, the total emissions may increase because (i) the Annex I country will increase emissions in its own country, and (ii) the non-Annex I country, under some conditions, could crowd out the benefits from the CDM projects by increasing its domestic emissions. In order for the CDM to be more effective, we recommend that only partial credits should be given to the Annex I country that undertakes abatement under the CDM. We also suggest that the authority overseeing the CDM should not allow the CDM projects to be hosted by the non-Annex I country that is more conscious about the environment.
    Keywords: Clean Development Mechanism (CDM), Kyoto Protocol, emission, abatement.
    JEL: D24 Q51 Q54
    Date: 2008–08
  14. By: Andrew Ellul (Kelley School of Business, Indiana University); Marco Pagano (Università di Napoli Federico II, CSEF, EIEF and CEPR); Fausto PAnunzi (Bocconi University, IGIER and CEPR)
    Abstract: Entrepreneurs may be constrained by the law to bequeath a minimal stake to non-controlling heirs. The size of this stake can reduce investment in family firms, by reducing the future income they can pledge to external financiers. Using a purpose-built indicator of the permissiveness of inheritance law and data for 10,245 firms from 32 countries over the 1990-2006 interval, we find that stricter inheritance law is associated with lower investment in family firms, while it leaves investment unaffected in non-family firms. Moreover, as predicted by the model, inheritance laws affects investment only in family firms that experience a succession.
    Keywords: succession, family firms, inheritance law, growth, investment
    JEL: G32
    Date: 2008–09–21
  15. By: Maximilian J. B. Hall (Dept of Economics, Loughborough University)
    Abstract: Since fiscal 2003, the 'performance' of the Japanese banking sector, in terms of profitability, asset quality, and capital adequacy, has improved markedly as the real economy has recovered, suggesting that the widespread pessimism (see, for example, Hall, 2006 and IMF, 2003) expressed earlier concerning the fragility of the sector was somewhat overdone. Yet, despite these positive developments, a number of serious challenges still face the Japanese banking industry and their supervisors. Core profitability, for example, remains very weak, in part due to wafer thin lending margins at home and sluggish corporate loan demand. Asset quality has also widely suffered because of exposure to the re-regulated consumer finance industry and the US sub-prime market. And controversy still surrounds the issues of bank "under-reserving" and regulatory tolerance of "double gearing" on the capital adequacy front. These, and other, problems must be resolved if Japanese banks are to finally re-claim the ground lost to international competitors over the last 15 years or so and secure lasting improvement in their financial health.
    Keywords: Japanese Banking; Performance – Capital Adequacy and Profitability; Supervision; Financial Stability.
    JEL: G21 G28 G32
    Date: 2008–07
  16. By: Judit Montoriol-Garriga (Federal Reserve Bank of Boston, 600 Atlantic Avenue, Boston, MA 02210, USA.)
    Abstract: This paper analyzes the effects of bank mergers on bank-firm relationships. Using matched bank-firm level data, I find that mergers disrupt lending relationships, specially to small borrowers of target banks. However, I find significant positive effects of mergers for borrowers that continue the lending relationship with the consolidated bank. On average, consolidated banks reduce loan interest rates. The most beneficial mergers from the borrower point of view are those involving two large banks and commercial banks. While the reduction in interest rates is larger when the acquirer and the target have some market overlap, the decline is much smaller when there is a significant increase in local banking market concentration. JEL Classification: G21, G34.
    Keywords: Banking consolidation, Lending relationships, Small business lending.
    Date: 2008–09

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