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on Regulation |
| By: | Varsanyi, Zoltan |
| Abstract: | In this chapter I argue that as a response to the introduction of capital requirements in the form of risk weights investors might potentially choose riskier portfolios than before the regulation – this is, presumably, not what the regulation intends to achieve. That is, while regulation most likely diverts investors from their optimum decision it does not guarantee that the new optimum has a lower risk. The effect of the regulation depends on several things, most importantly the correlation between individual investments, investor preferences and the relative size of risk weights. |
| Keywords: | portfolio selection; regulation; Basel II; risk |
| JEL: | G11 G18 |
| Date: | 2009–02–23 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:13594&r=reg |
| By: | Joshua Schwartzstein; Andrei Shleifer |
| Abstract: | We ask whether regulation can usefully supplement litigation in a model of optimal social control of harmful externalities. In our model, firms choose activity levels in addition to precautions. In contrast to the usual analysis, we assume that social returns to activity are higher than private returns before taking harmful externalities into account. We also assume that both courts and regulators make errors in assessing whether it is efficient for a given firm to take precautions. We show that regulation can, in some circumstances, improve resource allocation. Regulatory preemption of litigation may be efficient when social returns to activity exceed the expected harm that could result from a firm taking too few precautions. The optimal structure of law enforcement is influenced by the divergence between private and social returns to activity as well as the competence of regulators and courts. |
| JEL: | D62 K13 K40 L51 |
| Date: | 2009–02 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14752&r=reg |
| By: | Immordino, Giovanni; Pagano, Marco |
| Abstract: | Stricter laws require more incisive and costlier enforcement. Since enforcement activity depends both on available tax revenue and the honesty of officials, the optimal legal standard of a benevolent government is increasing in per-capita income and decreasing in officials' corruption. In contrast to the "tollbooth view" of regulation, the standard chosen by a self-interested government is a non-monotonic function of officials' corruption, and can be either lower or higher than that chosen by a benevolent regulator. International evidence on environmental regulation show that standards correlate positively with per-capita income, and negatively with corruption, consistently with the model's predictions for benevolent governments |
| Keywords: | corruption; enforcement; legal standards; tollbooth view |
| JEL: | D73 K42 L51 |
| Date: | 2008–12 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:7071&r=reg |
| By: | Bortolotti, Bernardo; Cambini, Carlo; Rondi, Laura; Spiegel, Yossi |
| Abstract: | We construct a comprehensive panel data of 92 publicly traded European utilities over the period 1994-2005 in order to study the relationship between capital structure, regulated prices, and firm value, and examine if and how this interaction is affected by ownership structure and regulatory independence. We show that regulated firms in our sample tend to have a higher leverage if they are privately-controlled and if they are regulated by an independent regulatory agency. Moreover, we find that the leverage of these firms has a positive and significant effect on their regulated prices, but not vice versa, and it also has a positive and significant effect on their market values. Our results are consistent with the theory that privately-controlled firms use leverage strategically to shield themselves against regulatory opportunism. |
| Keywords: | capital structure; leverage; private and state ownership; Regulated utilities; regulatory agencies; regulatory independence |
| JEL: | G31 G32 L33 |
| Date: | 2008–12 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:7100&r=reg |
| By: | Djankov, Simeon |
| Abstract: | Simplifying entry regulation has been a popular reform since the publication of Djankov et al (2002). The inclusion of business entry indicators in the World Bank’s Doing Business project has led to an acceleration in reform: in 2003-2008, 193 reforms took place in 116 countries. A large academic literature has followed: 195 academic articles have used the data compiled in Djankov et al and subsequently by the World Bank. This paper identifies three theories on why some countries impose burdensome entry requirements. It also surveys the literature on the effects of making business entry easier. |
| Keywords: | business entry; productivity; regulatory reform |
| JEL: | O13 |
| Date: | 2008–12 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:7080&r=reg |
| By: | Acharya, Viral V |
| Abstract: | Systemic risk is modeled as the endogenously chosen correlation of returns on assets held by banks. The limited liability of banks and the presence of a negative externality of one bank’s failure on the health of other banks give rise to a systemic risk-shifting incentive where all banks undertake correlated investments, thereby increasing economy-wide aggregate risk. Regulatory mechanisms such as bank closure policy and capital adequacy requirements that are commonly based only on a bank’s own risk fail to mitigate aggregate risk-shifting incentives, and can, in fact, accentuate systemic risk. Prudential regulation is shown to operate at a collective level, regulating each bank as a function of both its joint (correlated) risk with other banks as well as its individual (bank-specific) risk. |
| Keywords: | Bank regulation; Capital adequacy; Crisis; Risk-shifting; Systemic risk |
| JEL: | D62 E58 G21 G28 G38 |
| Date: | 2009–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:7164&r=reg |
| By: | Franklin Allen; Elena Carletti; Robert Marquez |
| Abstract: | It is commonly believed that equity finance for banks is more costly than deposits. This suggests that banks should economize on the use of equity and regulatory constraints on capital should be binding. Empirical evidence suggests that in fact this is not the case. Banks in many countries hold capital well in excess of regulatory minimums and do not change their holdings in response to regulatory changes. We present a simple model of bank moral hazard that is consistent with this observation. In perfectly competitive markets, banks can find it optimal to use costly capital rather than the interest rate on the loan to guarantee monitoring because it allows higher borrower surplus. |
| Keywords: | credit market competition, monitoring, loan rates, capital, bank monitoring |
| JEL: | G21 G31 D4 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:eui:euiwps:eco2009/08&r=reg |
| By: | David Bartolini (Universit… Politecnica delle Marche, Department of Economics, MoFiR); Alberto Zazzaro (Universit… Politecnica delle Marche, Department of Economics, MoFiR) |
| Abstract: | A well-established result of the theory of antitrust policy is that it might be optimal to tolerate some degree of collusion among firms if the authority in charge is constrained by limited resources and imperfect information. However, few doubts are cast on the common opinion by which stricter enforcement of antitrust laws definitely makes market structure more competitive and prices lower. In this paper we challenge this presumption of effectiveness and show that the introduction of a positive (expected) antitrust fine may drive firms from partial cartels to a monopolistic cartel. Moreover, introducing uncertainty on market demand, we show that the socially optimal competition policy can call for a finite or even zero antitrust penalty even if there are no enforcement costs. We first show our results in a Cournot industry with five symmetric firms and a specilc rule of cartel formation. Then we extend the analysis to the case of N symmetric firms and a generic rule of coalition formation. Finally, we consider;the case of asymmetric firms and show that our results still hold for an industry;populated by one Stackelberg leader and two followers. |
| Keywords: | Antitrust policy, Coalition formation, Collusive cartels |
| JEL: | C70 L40 L41 |
| Date: | 2009–02 |
| URL: | http://d.repec.org/n?u=RePEc:anc:wmofir:19&r=reg |
| By: | Immordino, Giovanni; Pagano, Marco |
| Abstract: | We analyze corporate fraud in a model in which managers have superior information but are biased against liquidation, because of their private benefits from empire building. This may induce them to misreport information and even bribe auditors when liquidation would be value-increasing. To curb fraud, shareholders optimally choose auditing quality and the performance sensitivity of managerial pay, taking external corporate governance and auditing regulation into account. For given managerial pay, it is optimal to rely on auditing when external governance is in an intermediate range. When both auditing and incentive pay are used, worse external governance must be balanced by heavier reliance on both of those incentive mechanisms. In designing managerial pay, equity can improve managerial incentives while stock options worsen them. |
| Keywords: | accounting fraud; auditing; corporate governance; managerial compensation; regulation |
| JEL: | G28 K22 M42 |
| Date: | 2008–12 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:7104&r=reg |
| By: | Lóránth, Gyöngyi; Morrison, Alan |
| Abstract: | We examine the interdependency between loan officer compensation contracts and commercial bank internal reporting systems (IRSs). The optimal incentive contract for bank loan officers may require the bank headquarters to commit not to act on certain types of information. The headquarters can achieve this by running a basic reporting system that restricts information flow within the bank. We show that origination fees for loan officers emerge naturally as part of the optimal contract in our set-up. We examine the likely effect of the new Basel Accord upon IRS choice, loan officer compensation, and bank investment strategies. We argue that the new Accord reduces the value of commitment, and hence that it may reduce the number of marginal projects financed by banks. |
| Keywords: | capital regulation; compensation; internal reporting system |
| JEL: | G20 G21 G30 |
| Date: | 2009–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:7179&r=reg |
| By: | Zingales, Luigi |
| Abstract: | The U.S. system of security law was designed more than 70 years ago to regain investors’ trust after a major financial crisis. Today we face a similar problem. But while in the 1930s the prevailing perception was that investors had been defrauded by offerings of dubious quality securities, in the new millennium, investors’ perception is that they have been defrauded by managers who are not accountable to anyone. For this reason, I propose a series of reforms that center around corporate governance, while shifting the focus from the protection of unsophisticated investors in the purchasing of new securities issues to the investment in mutual funds, pension funds, and other forms of asset management. |
| Keywords: | coorporate goverance; security regulation |
| JEL: | G18 G38 K22 |
| Date: | 2009–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:7110&r=reg |
| By: | De Fraja, Gianni; Michetti, Emanuela; Zanchettin, Piercarlo |
| Abstract: | The paper studies the regulatory design in a industry where the regulated downstream provider of services to final consumers purchases the necessary inputs from an upstream supplier. The model is closely inspired by the UK regulatory mechanism for the railway network. Its philosophy is one of vertical separation between ownership and operation of the rolling stock: the Train Operating Company (TOC) leases from a ROlling Stock COmpany (ROSCO) the trains it uses in its franchise. This, we show, increases the flexibility and competitiveness of the network. On the other hand, it also reduces the specificity of the rolling stock, thus increasing the cost of running the service, and the TOC's incentive to exert quality enhancing effort, thus reducing the utility of the final users. Our simple model shows that the UK regime of separation may indeed be preferable from the point of view of welfare. |
| Keywords: | Incomplete contracts; Network regulation; Railways; Relation specific investment |
| JEL: | D2 L1 L5 L92 |
| Date: | 2008–12 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:7088&r=reg |
| By: | Ellul, Andrew; Pagano, Marco; Panunzi, Fausto |
| 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: | Family firms; Inheritance law; Investor protection |
| JEL: | G32 |
| Date: | 2008–09 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6977&r=reg |
| By: | Jeremy Lawson; Sebastian Barnes; Marte Sollie |
| Abstract: | Financial innovation and integration have spurred financial development and enhanced consumer choice. Financial integration has also been associated with the emergence of large, complex, cross-border financial institutions (LCFIs). This has changed risk profiles and made cross-border contagion more likely. An important challenge for the EU is to manage systemic risks and cross-border contagion to ensure financial stability in an integrated financial market. The financial market turmoil has also highlighted some gaps in the regulatory and supervisory framework. Although the European authorities should be commended for the progress they have made in updating and improving frameworks and responding to the financial turmoil, more can be done. In particular, further steps are needed to remove the mismatch between integrating European financial markets on the one hand, and largely national supervision on the other. Attention should also be given to the question of which measures are adequate to dampen the procyclicality of the financial system. New regulations should not impose unnecessary costs on consumers, businesses and financial institutions, nor create obstacles to further market integration.<P>Stabilité des marchés de capitaux dans l'Union européenne : Améliorer la réglementation et le contrôle<BR>L’innovation et l’intégration financières ont favorisé le développement de la sphère financière et élargi les choix offerts aux consommateurs. L’intégration financière a aussi été de pair avec la formation de grandes institutions financières transnationales (GIFT) complexes. Ce phénomène a modifié les profils de risque et accru les risques de contagion transnationale. Pour l’UE, l’un des grands problèmes consiste à maîtriser le risque systémique et la contagion transnationale afin d’assurer la stabilité financière sur un marché des capitaux intégré. La tourmente financière a aussi mis en relief un certain nombre de failles du dispositif de réglementation et de contrôle. Bien que les autorités européennes méritent d’être félicitées pour leurs progrès dans le sens de la modernisation et de l’amélioration de leurs dispositifs et pour leur réaction à la tourmente financière, on peut faire davantage. En particulier, de nouvelles mesures sont nécessaires afin de remédier au décalage entre l’intégration des marchés européens de capitaux d’une part et des régimes de contrôle à caractère largement national de l’autre. Il convient en outre de se demander quelles mesures faut-il mettre en oeuvre pour atténuer le penchant procyclique du système financier. Les nouveaux règlements ne doivent pas faire peser des coûts inutiles sur les consommateurs, les entreprises et les institutions financières, ni entraver la poursuite de l’intégration des marchés. |
| Keywords: | European Union, Union européenne, surveillance prudentielle, financial regulation, réglementation financière, financial crisis, crise financière, financial supervision |
| JEL: | G1 G21 G28 |
| Date: | 2009–02–20 |
| URL: | http://d.repec.org/n?u=RePEc:oec:ecoaaa:670-en&r=reg |
| By: | Bertrand Gruss; Silvia Sgherri |
| Abstract: | The ongoing financial turmoil has triggered a lively debate on ways of containing systemic risk and lessening the likelihood of future boom-and-bust episodes in credit markets. Particularly, it has been argued that banking regulation might attenuate procyclicality in lending standards by affecting the behavior of banks capital buffers. This paper uses a two-country DSGE model with financial frictions to illustrate how procyclicality in borrowing limits reinforces the ”overreaction” of asset prices to shocks described by Aiyagari and Gertler (1999), and to quantify the stabilization gains from policies aimed at smoothing cyclical swings in credit conditions. Results suggest that, in financially constrained economies, the ensuing volatility reduction in equity prices, investment, and external imbalances would be sizable. In the presence of cross-border spillovers, gains would be even higher. |
| Keywords: | Credit Cycles; Collateral Constraints; DSGE Models |
| JEL: | E32 F42 F36 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:eui:euiwps:eco2009/07&r=reg |
| By: | Haskel, Jonathan; Sadun, Raffaella |
| Abstract: | We use UK micro data to explore whether planning regulation reduced UK retailing productivity growth between 1997 and 2003. We document a shift to smaller shops, particularly within supermarket chains, following a regulatory change in 1996 which increased the costs of opening large stores. This might have caused a slowdown in productivity growth if firms (a) lose scale advantages, by moving to smaller stores and (b) lose scope advantages if existing organisational knowledge appropriate to larger stores is not perfectly substitutable with the organisational capital required to run smaller stores. Our micro data shows a relation, controlling for fixed effects, between chain-level TFP for multi-store chains and various measures of the size of the stores within the chain. Our results suggest the fall in within-chain shop sizes was associated with a lowering of chain TFP by about 0.4% pa, about 40% of the post-1995 slowdown in UK retail TFP growth. The foregone productivity works out at about £80,000 per small chain supermarket store. |
| Keywords: | Productivity; Regulation.; Retail |
| JEL: | D24 L81 |
| Date: | 2009–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:7140&r=reg |
| By: | Andrea de Michelis |
| Abstract: | The global financial crisis that emerged in mid 2007 has caused considerable economic disruptions in the United States and elsewhere, and exposed major flaws in the global financial system. After examining the origins of the crisis, this paper recommends specific policy responses to resolve the immediate problems and discusses how to make the US financial system more resilient and stable in the future.<P>Surmonter la crise financière<BR>La crise financière qui a éclaté à la mi-2007 a provoqué des perturbations économiques considérables aux États-Unis et ailleurs, et révélé des failles majeures dans le système financier mondial. Après une analyse des origines de la crise, ce chapitre préconise des réponses spécifiques pour résoudre les problèmes immédiats et étudie les moyens de rendre le système financier des États-Unis plus résilient et plus stable dans l’avenir. |
| Keywords: | United States, États-Unis, surveillance prudentielle, financial regulation, financial crisis, crise financière, deleveraging, housing finance, financement du logement, financial supervision, réglementation des marchés financiers, market stability regulator, securitisation, subprime mortgage, autorité de contrôle pour la stabilité des marchés financiers, crédit hypothécaire à risques, réduction de l’effet de levier, titrisation |
| JEL: | E44 G20 G21 G28 R21 |
| Date: | 2009–02–24 |
| URL: | http://d.repec.org/n?u=RePEc:oec:ecoaaa:669-en&r=reg |
| By: | Loranth, Gyongyi; Morrison, Alan |
| Abstract: | We examine the interdependency between loan officer compensation contracts and commercial bank internal reporting systems (IRSs). The optimal incentive contract for bank loan officers may require the bank headquarters to commit not to act on certain types of information. The headquarters can achieve this by running a basic reporting system that restricts information flow within the bank. We show that origination fees for loan officers emerge naturally as part of the optimal contract in our set-up. We examine the likely effect of the new Basel Accord upon IRS choice, loan officer compensation, and bank investment strategies. We argue that the new Accord reduces the value of commitment, and hence that it may reduce the number of marginal projects financed by banks. |
| Date: | 2009–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:7155&r=reg |
| By: | Mejer, Malwina; van Pottelsberghe, Bruno |
| Abstract: | This paper analyses the consequences for the European Patent System (EPS) of the recently ratified London Agreement (LA), which aims to reduce the translation requirements for patent validation procedures in 15 out of 34 national patent offices. The simulations suggest that the cost of patenting has been reduced by 20 to 30 percent since the enforcement of the LA. With an average translation cost saving of €3,600 per patent, the total savings for the business sector amount to about €220 millions. The fee elasticity of patents being about -0.4, one may expect an increase in patent filings of eight to 12 percent. Despite the translation cost savings, the relative cost of a European patent validated in six (thirteen) counties is still at least five (seven) times higher than in the United States. |
| Keywords: | European patent system; fee elasticity; London Agreement; patent fees; translation costs |
| JEL: | O34 P14 P51 |
| Date: | 2008–11 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:7033&r=reg |