nep-reg New Economics Papers
on Regulation
Issue of 2009‒03‒14
eighteen papers chosen by
Christian Calmes
Universite du Quebec en Outaouais

  1. Environmental Regulation and Investment: Evidence from European Industries By Andrea M. Leiter; Arno Parolini; Hannes Winner
  2. Milk Marketing Order Winners and Losers By Hayley H. Chouinard; David E. Davis; Jeffrey LaFrance; Jeffrey M. Perloff
  3. Market Structure, Capital Regulation and Bank Risk Taking By Patrick Behr; Reinhard H. Schmidt; Ru Xie
  4. Public, private and nonprofit regulation for environmental quality By Lucie Bottega; Jenny De Freitas
  5. Toc ’n’ Roll: Bargaining, Service Quality and Specificity in the UK Railway Network By Gianni De Fraja; Emanuela Michetti; Piercarlo Zanchettin
  6. Regulations and productivity growth in banking By Delis, Manthos D; Molyneux, Philip; Pasiouras, Fotios
  7. On the Paradox of Prudential Regulations in the Globalized Economy: International Reserves and the Crisis a Reassessment By Joshua Aizenman
  8. Regulation and UK Retailing Productivity: Evidence from Micro Data By Haskel, Jonathan; Sadun, Raffaella
  9. Yardstick and Ex-post Regulation by Norm Model: Empirical Equivalence, Pricing Effect, and Performance in Sweeden By Jamasb, T.; Söderberg, M.
  10. Now or Never: Environmental Protection under Hyperbolic Discounting By Winkler, Ralph
  11. Corruption: Measuring the Unmeasurable By Zaman, Asas; Rahim, Faizur
  12. The WTO and Environmental Provisions: Three Categories of Trade and Environment Linkage By Setareh Khalilian
  13. The Evolution of the Corporation: Organization, Finance, Knowledge and Corporate Social Responsibility By Peer Zumbansen
  14. "Assessing the Consequences of a Horizontal Merger and its Remedies in a Dynamic Environment" By Isao Ishida; Toshiaki Watanabe
  15. The Welfare Implications of Oil Privatisation: A Cost-Benefit Analysis of Norway’s Statoil By Wolf, C.; Pollitt, M.G.
  16. How to find plausible, severe, and useful stress scenarios By Thomas Breuer; Martin Jandacka; Klaus Rheinberger; Martin Summer
  17. The Housing Crisis and Bankruptcy Reform: The Prepackaged Chapter 13 Approach By Posner, Eric A; Zingales, Luigi
  18. Marking to Market for Financial Institutions: A Common Sense Resolution By Franklin Allen; Elena Carletti; Finn Poschmann

  1. By: Andrea M. Leiter; Arno Parolini; Hannes Winner
    Abstract: This paper contributes to the empirical literature on the relationship between environmental regulation and firm behavior. In particular, we ask whether and how strongly investment decisions of firms respond to stringency in environmental regulation. Environmental stringency is measured as (i) an industry's total current expenditure on environmental protection, and (ii) a country's revenue from environmental taxes. Focusing on European industry level data between 1995 and 2005, we estimate the differential impact of environmental stringency on four types of investment: gross investment in tangible goods, in new buildings, in machinery, and in `productive' investment (investment in tangible goods minus investment in abatement technologies). Both environmental variables enter positively, and their quadratic terms exhibit significantly negative parameter estimates. This, in turn, indicates a positive but diminishing impact of environmental regulation on investment.
    Keywords: Investment, environmental regulation, pollution abatement costs
    JEL: D92 H23 Q52
    Date: 2009–03
  2. By: Hayley H. Chouinard; David E. Davis; Jeffrey LaFrance; Jeffrey M. Perloff (School of Economic Sciences, Washington State University)
    Abstract: Determining the impacts on consumers of government policies affecting the demand for food products requires a theoretically consistent micro-level demand model. We estimate a system of demands for weekly city-level dairy product purchases by nonlinear three stage least squares to account for joint determination between quantities and prices. We analyze the distributional effects of federal milk marketing orders, and find results that vary substantially across demographic groups. Families with young children suffer, while wealthier childless couples benefit. We also find that households with lower incomes bear a greater regulatory burden due to marketing orders than those with higher income levels.
    Keywords: Milk, marketing orders, dairy industry regulation
    JEL: Q1 D12 E21
    Date: 2008–12
  3. By: Patrick Behr; Reinhard H. Schmidt; Ru Xie
    Abstract: This paper discusses the effect of capital regulation on the risk taking behaviour of commercial banks. We first theoretically show that capital regulation works differently in different market structures of banking sectors. In lowly concentrated markets, capital regulation is effective in mitigating risk taking behavior because banks' franchise values are low and banks have incentives to pursue risky strategies in order to increase their franchise values. If franchise values are high, on the other hand, the effect of capital regulation on bank risk taking is ambiguous as banks lack those incentives. We then test the model predictions on a cross-country sample including 421 commercial banks from 61 countries. We find that capital regulation is effective in mitigating risk taking only in markets with a low degree of concentration. The results remain robust after accounting for financial sector development, legal system efficiency, and for other country and bank-specific characteristics.
    Keywords: Banks, market structure, risk shifting, franchise value, capital regulation
    JEL: G21 G28
    Date: 2008–06
  4. By: Lucie Bottega (LAMETA, Université de Montpellier 1); Jenny De Freitas (Universitat de les Illes Balears)
    Abstract: This paper studies the welfare implications of different institutions certifying environmental quality supplied by a monopoly. The monopolist can voluntarily certify the quality of the product through an eco-label provided either by an NGO or a for-proft private certifier (PC). The NGO and the PC may use advertisement to promote the label. We compare the NGO and PC regimes with the regime where the regulator imposes a minimum quality standard. The presence of a private certifier in the market decreases the scope for public intervention. The availability of green advertisement reinforces the above result.
    Keywords: Environmental quality, certification, green advertisement, NGO, self-regulation.
    JEL: D62 L15 L31 L51 Q50
    Date: 2009
  5. By: Gianni De Fraja; Emanuela Michetti; Piercarlo Zanchettin
    Abstract: The paper studies the regulatory design in an 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 in fact be preferable from a welfare viewpoint.
    Keywords: Network regulation; Railways; Incomplete contracts; Relation specific investment
    JEL: D2 L1 L5 L92
    Date: 2009–02
  6. By: Delis, Manthos D; Molyneux, Philip; Pasiouras, Fotios
    Abstract: This paper examines the relationship between the regulatory and supervision framework and the productivity of banks in 22 countries over the period 1999-2006. We follow a semi-parametric two-step approach that combines Malmquist index estimates with bootstrap regressions. The results indicate that regulations and incentives that promote private monitoring have a positive impact on productivity. Restrictions on banks’ activities relating to their involvement in securities, insurance, real estate and ownership of non-financial firms also have a positive impact. However, regulations relating to the first and second pillars of Basel II, namely capital requirements and official supervisory power do not appear to have a statistically significant impact on productivity.
    Keywords: Banks; Basel II; Productivity; Regulations
    JEL: C14 G21
    Date: 2009–02–07
  7. By: Joshua Aizenman
    Abstract: This paper discusses two pertinent issues dealing with the global liquidity crisis -- global prudential regulation reform, and reassessment of using international reserves in the crisis. We point out the paradox of prudential regulations -- while the identity of economic actors that benefited directly from crises avoidance is unknown, the cost and the burden of regulations are transparent. Hence, crises that had been avoided are imperceptible and are underrepresented in the public discourse, and the demand for prudential regulations declines during prolonged good times, thereby increasing the ultimate cost of eventual crises. While the seeds of the present crisis were mostly home grown, international flows of capital magnified its costs. Global financial integration produces the by-product of "regulatory arbitrage" -- capital tends to flow to under regulated countries, frequently resulting in excessive risk taking, in anticipation of future bailout. A coordinated globalized prudential regulation, by increasing the cost of prudential deregulation, may mitigate the temptation to under-regulate during prolonged good-times, thus adding a side benefit. We also analyze the different approaches to the use of reserves during the crisis and what this means for the global financial system. The deleveraging triggered by the crisis implies that countries that hoarded reserves have been reaping the benefits. The crisis illustrates the importance of the self insurance provided by reserves, as well as the usefulness of policies that channel a share of the windfall gains associated with improvements in the terms-of-trade to reserves and sovereign wealth funds. The reluctance of many developing countries to draw down on their reserve holdings raises the possibility that they may now suffer less from the "fear of floating" than from a "fear of losing international reserves", which may signal deterioration in the credit worthiness of a country.
    JEL: F15 F36
    Date: 2009–03
  8. By: Haskel, Jonathan (Imperial College London); Sadun, Raffaella (London School of Economics)
    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, retail, regulation
    JEL: D24 L81
    Date: 2009–02
  9. By: Jamasb, T.; Söderberg, M.
    Abstract: Following the liberalisation of network industries there has been a number of innovations in incentive regulation. This paper examines the effects of the application of norm models within an ex-post incentive regulation of electricity distribution networks in Sweden. We first examine the empirical equivalence of norm models to real utilities. Next, we estimate the effect of regulation on pricing behaviour and performance of utilities in average costs, quality of service, and network energy losses. The norm models seem to reflect the main network features, demand characteristics, and capital stocks of real utilities. However, the price of labour affects relative performance. Also, quality of service has not affected the relative performance of utilities, indicating that incentives may be weak. Moreover, on the whole, utilities respond to norm models and incentives and reduce their average prices. However, investor-owned utilities that perform better than their norm models behave strategically and increase their prices. We also find that investor-owned utilities reduce (inflate) their average cost if they perform worse (better) than the benchmark. Public utilities have not adjusted their costs significantly in response to the incentives. Furthermore, we do not find evidence of improvement in quality of service and reduction in network energy losses although less efficient investor-owned networks seem to have improved on both fronts. Finally, efficient investor-owned utilities seem to have reduced their quality of service in terms of outage length.
    Keywords: Regulation, incentive, electricity, Sweden
    JEL: L33 L52 L94
    Date: 2009–02
  10. By: Winkler, Ralph
    Abstract: The author analyzes the optimal investment in environmental protection in a model of an infinite series of non-overlapping hyperbolically discounting agents. He shows that without a commitment mechanism society is eventually stuck in a situation where all agents prefer further investment in the long run, yet neither present nor future agents will actually ever invest. Such an outcome is not only unsatisfactory for each generation but may also be inefficient in a Pareto sense. The author’s results are consistent with real world observations, and thus provide a new explanation for weak environmental policy performance.
    Keywords: Environmental policy, environmental protection, hyperbolic discounting, Markov perfect equilibria, tme-inconsistency
    JEL: D90 Q50 Q58
    Date: 2009
  11. By: Zaman, Asas; Rahim, Faizur
    Abstract: While the strategy of measuring and quantifying has been extremely successful, and valuable in the progress of science, it does not follow that it is universally useful. We argue that attempts to measure corruption can be counterproductive in several different ways. Qualitative and action oriented approaches may prove more valuable. A political economy explanation of why extremely distorted and biased measures of corruption continue to be used is also offered.
    Keywords: Corruption; measurement; quantitative imperative; corruption perception index
    JEL: B40 A14
    Date: 2008–12
  12. By: Setareh Khalilian
    Abstract: The current WTO jurisdiction on linkages of trade and environment is not free of contradictions and has provided for heated debate due to some inconsistencies in past WTO rulings. The article argues that the WTO jurisdiction is not only unclear but also lacks economic reasoning. It aims to structure WTO provisions and WTO case rulings so that their application to three separate dimensions of environmental damage is set out clearly: domestic, cross-border and global pollution. The paper concludes is that only cases of cross-border and global pollution can legitimize trade measures against environmental pollution, albeit only direct trade interventions are really effective in these cases
    Keywords: WTO, environment, trade sanctions
    JEL: F13 F18 K33 B52
    Date: 2009–02
  13. By: Peer Zumbansen
    Abstract: This paper, which selectively focuses on the contested concept of Corporate Social Responsibility [CSR], forms part of a larger research project on the evolution of corporate governance. This research posits the evolution of corporate governance along three historical paradigms: first, the economic/industrial organization paradigm, second, the financial paradigm, and third, the knowledge paradigm. With regard to CSR, the paper explores the promises and shortcomings of the concept against the background of an evolutionary theory of corporate governance. The identification of three historical-conceptual paradigms allows us to trace the development of the relation between a general discourse on corporate governance regulation [CGR] on the one hand and a more specialized, often polemic debate over corporate (social, environmental, human rights) responsibilities on the other. On the basis of the review of the three paradigms of CSR over the course of more than one hundred years, the paper concludes that there is no convincing justification to separate the general Corporate Governance from the more specific CSR discourse when assessing the nature of the corporation. Instead, it is argued that a more adequate understanding of what defines a corporation is gained when capturing its embedded nature in a continuously changing domestic, global and functional environment. Besides being both a legal fiction and an economic actor, the business corporation is assuming a host of other roles in a functionally differentiated global society. The paper suggests that the generation and dissemination of knowledge, both internally and externally, has become the defining feature of the firm. The corporation as a knowledge actor succeeds the prior stages of assessing it as a private, political or financial actor, without however erasing these dimensions of the firm. In that, the history of the corporation - as concept and reality - shares important features with that of the state - as concept and as fact.
    Keywords: corporate social responsibility, corporate governance, financialisation, economic sociology, knowledge society, uncertainty, risk, management
    JEL: G38 K22
    Date: 2008–12
  14. By: Isao Ishida (Faculty of Economics and Graduate School of Public Policy, University of Tokyo); Toshiaki Watanabe (Institute of Economic Research, Hitotsubashi University)
    Abstract: This paper estimates a dynamic oligopoly model to assess the economic consequences of a horizontal merger that took place in 1970 to create the second largest global producer of steel. The paper solves a Markov perfect Nash equilibrium for the model and simulates the welfare effects of the horizontal merger. Estimates reveal that the merger enhanced the production efficiency of the merging party by a magnitude of 4.1 %, while the exercise of market power was restrained primarily by the presence of fringe competitors. Our simulation result also indicates that structural remedies endorsed by the competition authority failed to promote competition. model.
    Date: 2009–01
  15. By: Wolf, C.; Pollitt, M.G.
    Abstract: The oil industry is of great economic significance to many countries, and privatisations of National Oil Companies (NOCs) have often been controversial, as have been the benefits from privatisation more generally. We conduct a social cost-benefit analysis of the partial privatisation of Norway’s Statoil and estimate net present welfare improvements of at least NOK 166 billion (US$18.4 billion) in 2001 money, which amounts to 11% of Norway’s GDP in that year. Savings on investment costs are the most important source of efficiency improvements, and two thirds of the overall benefits accrue at fellow stakeholders in Statoil-led operations. The state manages to capture 66% of the total welfare gain, with the remainder going to private shareholders and no changes to consumer surplus. It is shown that benefits from partial privatisation can be substantial, particularly if ownership change is supported by additional restructuring measures, and that privatisation can be structured with state involvement at several levels, aiming to maximise the public share of benefits.
    Keywords: Privatisation, Cost-Benefit, Welfare, Oil and Gas, Norway
    JEL: D61 H43 L33 L71 Q48
    Date: 2009–03–11
  16. By: Thomas Breuer (Research Centre PPE, Fachhochschule Vorarlberg, Hochschulstr. 1, A-6850 Dornbirn, Austria.); Martin Jandacka (Research Centre PPE, Fachhochschule Vorarlberg, Hochschulstr. 1, A-6850 Dornbirn, Austria.); Klaus Rheinberger (Research Centre PPE, Fachhochschule Vorarlberg, Hochschulstr. 1, A-6850 Dornbirn, Austria.); Martin Summer (Oesterreichische Nationalbank, Economic Studies Division, P.O. Box 61, A-1010 Vienna, Austria.)
    Abstract: We give a precise operational definition to three requirements the Basel Committee on Banking Supervision specifies for stress tests: Plausibility and severity of stress scenarios as well as suggestiveness of risk reducing actions. The basic idea of our approach is to define a suitable region of plausibility in terms of the risk factor distribution and search systematically for the worst portfolio loss over this region. One key innovation compared to the existing literature is the solution of two open problems. We suggest a measure of plausibility that is not prone to the problem of dimensional dependence of maximum loss and we derive a way to consistently deal with situations where some but not all risk factors are stressed. Among the various approaches used for partial scenarios, plausibility is maximised by setting the non stressed risk factors to their conditional expected value given the value of the stressed risk factors.
    Keywords: Stress testing, maximum loss, risk management, banking regulation.
    JEL: G28 G32 G20 C15
    Date: 2009–02–05
  17. By: Posner, Eric A; Zingales, Luigi
    Abstract: The housing crisis threatens to destroy hundreds of billions of dollars of value by causing homeowners with negative equity to walk away from their houses. A house in foreclosure is worth 30 to 50 percent less than a house that a homeowner either retains or sells on the market, and a foreclosed house damages neighboring property values as well. We advocate a reform of Chapter 13 that would allow homeowners to strip down the value of their mortgages in a prepackaged bankruptcy. Such a plan would give homeowners an incentive to keep or resell their homes, thus reducing the market value loss of homes while protecting the effective value of creditors’ interests. Two further key elements of the plan are that it uses prices based on the average house price in a particular ZIP code, which reduces moral hazard; and it is automated, requiring only a rubber stamp by a bankruptcy judge or other official, thus preserving judicial resources. Other plans, including that of the Obama administration, are compared.
    Keywords: bankruptcy; chapter 13; housing
    JEL: K35
    Date: 2009–03
  18. By: Franklin Allen (University of Pennsylvania); Elena Carletti (European University Institute); Finn Poschmann (C.D. Howe Institute)
    Abstract: Debate has intensified in recent years on the advantages and disadvantages of moving towards a full mark-to-market accounting system for banks and insurance companies. The debate has been heated by moves by the International Accounting Standards Board (IASB) and the US Financial Accounting Standards Board to harmonize accounting standards across countries. Proponents contend that mark-to-market accounting has the advantage of reflecting the relevant value of financial institution balance sheets, allowing regulators, investors and other users of accounting information to better assess their risk profile. Opponents counter that mark-to-market accounting leads to excessive and artificial volatility, especially when regulatory standards such as bank capital ratios are tied to reported accounting numbers.
    Keywords: mark-to-market accounting, accounting standards, financial markets
    JEL: E44 O16
    Date: 2009–02

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