nep-reg New Economics Papers
on Regulation
Issue of 2009‒04‒05
six papers chosen by
Christian Calmes
Universite du Quebec en Outaouais

  1. Infrastructure Investment in Network industries: The Role of Incentive Regulation and Regulatory Independence By Balázs Égert
  2. Incentives to Innovate and Social Harm: Laissez-Faire, Authorization or Penalties? By Giovanni Immordino; Marco Pagano; Michele Polo
  3. Product market regulation and market work: a benchmark analysis By Lei Fang; Richard Rogerson
  4. Banking-on-the-Average Rules By Hans Gersbach; Volker Hahn
  5. Is the French mobile phone cartel really a cartel? By Mesnard, Louis de
  6. Average power contracts can mitigate carbon leakage By OGGIONI, Giorgia; SMEERS, Yves

  1. By: Balázs Égert
    Abstract: This paper finds that coherent regulatory policies can boost investment in network industries of OECD economies. Rate-of-return regulation is generally thought to result in overinvestment, while incentive regulation is believed to entail underinvestment. Yet, previous empirical work has generally found that the introduction of incentive regulation has not systematically changed investment in network industries. According to the theoretical literature, regulatory uncertainty exposes both types of regimes to the danger of underinvestment. However, regulatory uncertainty is arguably higher under rate-of-return regulation because investment decisions (what can be included in the rate base) are usually evaluated in a discretionary manner, while firms operating under incentive regulation are less affected by this behaviour. In addition, incentive regulation encourages investment in cost-reducing technologies. Using Bayesian model averaging techniques, this paper shows that incentive regulation implemented jointly with an independent sector regulator (indicating lower regulatory uncertainty) has a strong positive impact on investment in network industries. In addition, lower barriers to entry are also found to encourage sectoral investment. These results support the importance of implementing policies in a coherent framework.<P>L’investissement dans les industries de réseaux : Le rôle de la régulation incitative et de l’indépendance du régulateur sectoriel<BR>Ce document montre que des politiques de régulation cohérentes peuvent encourager l’investissement dans les industries de réseaux. Il est généralement admis que la régulation par le taux de rendement a tendance à causer un surinvestissement, tandis qu’une régulation incitative pourrait produire une situation de sous-investissement. Pourtant, la littérature empirique montre que l’introduction de régimes recourant à l’incitation n’a pas, de manière générale, impacté l’investissement dans les industries de réseaux. D’après la littérature théorique, l’incertitude réglementaire accroît le risque d’un sous-investissement dans les deux types de régime. L’incertitude réglementaire est cependant plus élevée dans un régime par le taux de rendement en raison des décisions discrétionnaires d’investissement (éventuellement inclus dans la base du taux de rendement), alors que les entreprises dans un régime incitatif sont moins affectées par ce genre de décisions. De plus, la régulation incitative favorise l’investissement dans les technologies visant à réduire les coûts. Par des techniques d’estimation bayesienne, ce papier montre qu’une régulation incitative mise en place en même temps qu’un régulateur sectoriel indépendant influence positivement l’investissement dans les industries de réseaux. De plus, la réduction des barrières à l’entrée encourage, elle aussi, l’investissement. Ces résultats soulignent l’importance de la mise en oeuvre cohérente des politiques sectorielles.
    Keywords: investment, investissement, network industries, régulation, cost-plus regulation, industries de réseaux, incentive regulation, régulation incitative, price cap, indépendance réglementaire, regulatory independence, rate-of-return regulation, régulation par le taux de rendement
    JEL: L51 L97 L98
    Date: 2009–03–27
  2. By: Giovanni Immordino (Università di Salerno and CSEF); Marco Pagano (Università di Napoli Federico II, CSEF, EIEF and CEPR); Michele Polo (Università Bocconi di Milano, IGIER and CSEF)
    Abstract: We analyze optimal policy design when firms' research activity may lead to socially harmful innovations. Public intervention, affecting the expected profitability of innovation, may both thwart the incentives to undertake research (average deterrence) and guide the use to which innovation is put (marginal deterrence). We show that public intervention should become increasingly stringent as the probability of social harm increases, switching first from laissez-faire to a penalty regime, then to a lenient authorization regime, and finally to a strict one. In contrast, absent innovative activity, regulation should rely only on authorizations, and laissez-faire is never optimal. Therefore, in innovative industries regulation should be softer.
    Keywords: innovation, liability for harm, safety regulation, authorization
    JEL: D73 K21 K42 L51
    Date: 2009–03–25
  3. By: Lei Fang; Richard Rogerson
    Abstract: Recent empirical work finds a negative correlation between product market regulation and aggregate employment. We examine the effect of product market regulations on hours worked in a benchmark aggregate model of time allocation as well as in a standard dynamic model of entry and exit. We find that product market regulations affect time devoted to market work in effectively the same fashion that taxes on labor income or consumption do. In particular, if product market regulations are to affect aggregate market work in this model, the key driving force is the size of income transfers associated with the regulation relative to labor income, and the key propagation mechanism is the labor supply elasticity. We show in a two-sector model that industry-level analysis is of little help in assessing the aggregate effects of product market regulation. incompl s
    Keywords: labor supply, product market regulation, entry barriers CL HG2567 A4A5
    Date: 2009
  4. By: Hans Gersbach (CER-ETH - Center of Economic Research at ETH Zurich, Switzerland); Volker Hahn (CER-ETH - Center of Economic Research at ETH Zurich, Switzerland)
    Abstract: In this paper, we argue for a regulatory framework under which a bank’s required level of equity capital depends on the equity capital of its peers. Such bankingon- the-average rules are transparent and could also be combined with the current regulatory framework. In addition, we argue that banking-on-the-average rules ensure the build-up of bank equity capitals in booms and thus avoid excessive leverage. Prudent banks can impose prudency on other banks. In a simple model of a banking system, we show that a banking-on-the-average framework can deliver the socially optimal solution because it induces banks to abstain from gambling. Moreover, it alleviates socially harmful consequences of conventional equity-capital rules, which may induce banks to excessively cut back on lending or liquidate desirable long-term investment projects in downturns.
    Keywords: banking on the average, equity-capital requirements, banking system, banking crisis
    JEL: G21 G28
    Date: 2009–03
  5. By: Mesnard, Louis de (LEG - CNRS UMR 5118 - Université de Bourgogne)
    Abstract: France Telecom (FT), SFR and Bouygues Telecom (BT) have been fined by France’s Conseil de la Concurrence (CC) for organizing a mobile phone cartel with stable market shares (one-half, one-third and one-sixth respectively) and for directly exchanging commercial information. While not contesting the legal decision, it is argued here that the economic reasoning is flawed. 1) As the CC made much of the firms’ stable market shares, we have first followed this line of reasoning by considering that the market shares are quotas under uniform costs. Even if there is a general incentive to form a monopolistic cartel, BT was too small for it to be worth its while to join it; it is not necessary to exchange information directly to coordinate market shares and prices effectively; all partial cartels are unlikely. 2) We then considered that the non-uniform market shares are explained by the costs in Cournot competition which can be deduced from the observed market shares by assuming that the costs are kept the same when switching from Cournot competition to any form of cartel. We deduced that market shares cannot be other than stable and non-uniform; any monopoly is unlikely to come about, because FT has negative incentives to form a monopolistic cartel; no partial cartels of two operators are viable because at least one member would lose out. The paper also shows that Stackelberg competition is unlikely as well as Bertrand-Edgeworth competition. In conclusion, Cournot competition is the only arrangement that guarantees no losses to all operators.
    Keywords: Cartel; Mobile phone; Mobile telephony; GSM; Conseil de la Concurrence;ARCEP ; Cournot ; Stackelberg
    JEL: L13 L41 L96 D43 K21
    Date: 2009
  6. By: OGGIONI, Giorgia (UniversitŽ catholique de Louvain (UCL). Center for Operations Research and Econometrics (CORE)); SMEERS, Yves (UniversitŽ catholique de Louvain (UCL). Center for Operations Research and Econometrics (CORE))
    Abstract: The progressive relocation of part of the Energy Intensive Industries (EIIs) out of Europe is one of the possible consequences of the combination of emission charges and higher electricity prices entailed by the EU-Emission Trading Scheme (EU-ETS). In order to mitigate this effect, EIIs have asked for special power contracts whereby they would be supplied from dedicated power capacities at average (capacity, fuel, transmission and emission allowance) costs. We model this situation on a prototype power system calibrated on four countries of Central Western Europe. In order to capture the main feature of EIIs' demand, we separate the consumer market in two segments: EIIs and the rest. EIIs buy electricity at average cost price while the rest pays marginal cost. We consider two different types of EIIs' contractual arrangements: a single region wide and zonal average cost prices. We also analyze the cases where generators only rely on existing capacities or can invest in new ones. We find that these average cost contracts can indeed partially mitigate the incentive to relocate activities but with quite diverse regional impacts depending on different national power policies. Models are formulated as a non-monotone complementarity problems with endogenous energy, transmission and allowance prices and are implemented in GAMS.
    Keywords: average cost based contracts, carbon leakage, complementarity conditions, EU-ETS.
    Date: 2008–11

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