nep-reg New Economics Papers
on Regulation
Issue of 2009‒07‒11
nineteen papers chosen by
Christian Calmes
Universite du Quebec en Outaouais

  1. How does entry regulation influence entry into self-employment and occupational mobility? By Susanne Prantl; Alexandra Spitz-Oener
  2. Services Provision and Temporary Mobility: Freedoms and Regulation in the EU By Bertola, Giuseppe; Mola, Lorenza
  3. Regulating Networks in the New Economy By Jean-Michel Glachant
  5. Private Insurance Against Systemic Crises? By Gersbach, Hans
  6. The role of external auditors in corporate governance: agency problems and the management of risk By Ojo, Marianne
  7. Emerging Contours of Financial Regulation: Challenges and Dynamics By Rakesh Mohan
  8. Bad Bank(s) and Recapitalization of the Banking Sector By Schäfer, Dorothea; Zimmermann, Klaus F.
  9. Long-term Energy Supply Contracts in European Competition Policy: Fuzzy not Crazy By Jean-Michel Glachant; Adrien de Hauteclocque
  10. When No Law is Better than a Good Law By Bhattacharya, Uptal; Daouk, Hazem
  11. Governance matters VIII : aggregate and individual governance indicators 1996-2008 By Kaufmann, Daniel; Kraay, Aart; Mastruzzi, Massimo
  12. Legal Innovation in European Contract Law: Within and Beyond the (Draft) Common Frame of Reference By Florian Möslein
  13. TFP Growth in Old and New Europe By Michael C. Burda; Battista Severgnini
  14. Collective Moral Hazard, Maturity Mismatch and Systemic Bailouts By Emmanuel Farhi; Jean Tirole
  15. Market liberalization in the European Natural Gas Market The importance of capacity constraints and efficiency differences By Steven Brakman; Charles van Marrewijk; Arjen van Witteloostuijn
  16. Back to the basics in banking ? A micro-analysis of banking system stability By Olivier De Jonghe
  17. Should Financial Flows Be Regulated? Yes By Gerald Epstein
  18. Delegation of Power and Agency Losses in EU Trade Politics By Eugénia da Conceição-Heldt
  19. Antidumping Protection hurts Exporters:Firm-level evidence from France By Jozef Konings; Hylke Vandenbussche

  1. By: Susanne Prantl; Alexandra Spitz-Oener
    Abstract: We analyze how an entry regulation that imposes a mandatory educational standard affects entry into self-employment and occupational mobility. We exploit the German reunification as a natural experiment and identify regulatory effects by comparing differences between regulated occupations and unregulated occupations in East Germany to the corresponding differences in West Germany after reunification. Consistent with our expectations, we find that entry regulation reduces entry into selfemployment and occupational mobility after reunification more in regulated occupations in East Germany than in West Germany. Our findings are relevant for transition or emerging economies as well as for mature market economies requiring large structural changes after unforeseen economic shocks.
    Keywords: Entry Regulation, Self-Employment, Occupational Mobility
    JEL: J24 J62 K20 L11 L51 M13
    Date: 2009–06
  2. By: Bertola, Giuseppe; Mola, Lorenza
    Abstract: International posting of workers and mobility of self-employed service suppliers lie between outright migration and trade in goods: their regulation, for both distributional and market-correcting purposes, is not as difficult to harmonize as that of labour markets, but personal mobility is more visible and socially intrusive than product market interactions. This paper analyzes economic and legal tensions between national regulatory frameworks and international competition in these areas, in both the intra-EU and global contexts, highlighting how interactions between the external and internal roles of the European Commission may foster efficient integration of markets and policies in this and other fields.
    Keywords: Economic integration; European Union; GATS; Harmonization; Labour regulation; Posted workers.; Services regulation; Trade in services
    JEL: F22 J61
    Date: 2009–06
  3. By: Jean-Michel Glachant
    Abstract: The regulation of network industries has undergone profound transformation in the past twenty years. The regulated industry is no longer the same, being exposed to new competitive dynamics having revolutionized their industrial framework, technology and interactions with users. There also have been fundamental changes in what regulation is feasible. In an information society a model devised in the 19th century to set prices for monopoly infrastructures such as bridges, roads and railways no longer captures the essential: the interactive dynamics created by technologies, uses, and markets.
    Keywords: energy policy; regulation
    Date: 2009–02–15
  4. By: Germà Bel; Xavier Fageda
    Abstract: This paper examines factors determining prices that airports charge to airlines. Using data for 100 large airports in Europe, we find that they charge higher prices when they move more passengers. Additionally, competition from other transport modes and other nearby airports imposes some discipline on the pricing behavior of airports. Low-cost carriers and airlines with a high market share seem to have a stronger countervailing power. Finally, we find that private airports not regulated charge higher prices than public or regulated airports. From our analysis, we can infer that market power of each airport is dependent upon its specific characteristics.
    Keywords: Privatization; regulation, pricing; air transportation; airports
    Date: 2009–06–09
  5. By: Gersbach, Hans
    Abstract: Insurance contracts contingent on macroeconomic shocks or on average bank capital could be a way of insuring against systemic crises. With insurance, banks are recapitalized when negative events would otherwise cause a write down of capital or even bank insolvency. In a simple model we illustrate the working of these contracts and how insurance could be achieved. We identify the main pitfalls of this approach: the insurance capacity of an economy may be too limited, insurance must be mandatory, insurance does not curb excessive risk taking (unobservable or observable), the insurers may go bankrupt in crises, and managerial restrictions on a rising bank equity capital limit insurance. Finally we discuss some complementary regulatory measures to foster the effectiveness of crisis insurance. In particular, we suggest mandatory purchase of insurance contracts against systemic crises by managers of large banks.
    Keywords: automatic recapitalization; banking crises; banking regulation; financial intermediation; insurance contracts
    JEL: D41 E4 G2
    Date: 2009–06
  6. By: Ojo, Marianne
    Abstract: This paper not only recommends means whereby principal-agent problems could be addressed, but also considers various ways in which the external auditor and audit committees contribute as corporate governance tools. The impact of bank regulations on risk taking and the need for a consideration of ownership structures are amongst other issues which are considered. In acknowledging the issues raised by ownership structures, it considers theories such as the banking theory and corporate governance theory. It also considers other alternatives whereby risk taking could be controlled. In recommending the external auditor’s expertise to address principal agent problems, it draws attention to the audit committee’s roles, both as a vital and complementary corporate governance tool, and also considers recurring problems which still persist with some financial reporting standards. It also highlights the importance of measures which need to be in place if the external auditor’s contribution to corporate governance is to be maximised.
    Keywords: agency; theory; external; auditor; banking; regulation; risk
    JEL: K2 D21 G3 G0 A10 M4
    Date: 2009–07–06
  7. By: Rakesh Mohan
    Abstract: The paper attempts to analyse the emerging contours of regulation of financial institutions with an emphasis on the emerging challenges and dynamics. [Paper prepared for Financial Stability Review of Bank of France].
    Keywords: financial, stability, institutions, challenges, dynamics, Evolution of Crisis, macroeconomic, monetary policy, US, liquidity, inflation, commodity prices, India, goods, services, imports, china, government securities, mortgage entities, interest rates, advanced economies,
    Date: 2009
  8. By: Schäfer, Dorothea; Zimmermann, Klaus F.
    Abstract: With banking sectors worldwide still suffering from the effects of the financial crisis, public discussion of plans to place toxic assets in one or more bad banks has gained steam in recent weeks. The following paper presents a plan how governments can efficiently relieve ailing banks from toxic assets by transferring these assets into a publicly sponsored work-out unit, a so-called bad bank. The key element of the plan is the valuation of troubled assets at their current market value - assets with no market would thus be valued at zero. The current shareholders will cover the losses arising from the depreciation reserve in the amount of the difference of the toxic assets’ current book value and their market value. Under the plan, the government would bear responsibility for the management and future resale of toxic assets at its own cost and recapitalize the good bank by taking an equity stake in it. In extreme cases, this would mean a takeover of the bank by the government. The risk to taxpayers from this investment would be acceptable, however, once the banks are freed from toxic assets. A clear emphasis that the government stake is temporary would also be necessary. The government would cover the bad bank’s losses, while profits would be distributed to the distressed bank’s current shareholders. The plan is viable independent of whether the government decides to have one centralized bad bank or to establish a separate bad bank for each systemically relevant banking institute. Under the terms of the plan, bad banks and nationalization are not alternatives but rather two sides of the same coin. This plan effectively addresses three key challenges. It provides for the transparent removal of toxic assets and gives the banks a fresh start. At the same time, it offers the chance to keep the cost to taxpayers low. In addition, the risk of moral hazard is curtailed. The comparison of the proposed design with the bad bank plan of the German government reveals some shortcomings of the latter plan that may threaten the achievement of these key issues.
    Keywords: Bad Bank; Financial crisis; Financial Regulation; Toxic Assets
    JEL: G20 G24 G28
    Date: 2009–06
  9. By: Jean-Michel Glachant; Adrien de Hauteclocque
    Abstract: Long-term supply contracts often have ambiguous effects on the competitive structure, investment and consumer welfare in the long term. In a context of market building, these effects are likely to be worsened and thus even harder to assess. Since liberalization and especially since the release of the Energy Sector Enquiry in early 2007, the portfolio of long-term supply contracts of the former incumbents have become a priority for review by the European Commission and the national competition authorities. It is widely believed that European Competition authorities take a dogmatic view on these contracts and systemically emphasize the risk of foreclosure over their positive effects on investment and operation. This paper depicts the methodology that has emerged in the recent line of cases and argues that this interpretation is largely misguided. It shows that a multiple-step approach is used to reduce regulation costs and balance anti-competitive effects with potential efficiency gains. However, if an economic approach is now clearly implemented, competition policy is constrained by the procedural aspect of the legal process and the remedies imposed remain open for discussion.
    Keywords: energy policy; competition policy
    Date: 2009–02–15
  10. By: Bhattacharya, Uptal; Daouk, Hazem
    Abstract: This paper argues, both theoretically and empirically, that sometimes no securities law may be better than a good securities law that is not enforced. The first part of the paper formalizes the sufficient conditions under which this happens for any law. The second part of the paper shows that a specific securities law - the law prohibiting insider trading - may satisfy these conditions. The third part of the paper takes this prediction to the data. We find that the cost of equity actually rises when some countries enact an insider trading law, but do not enforce it.
    Keywords: insider trading, cost of capital, emerging markets, securities law, enforcement, International Development, G15, G18, K22, K42,
    Date: 2009–06–16
  11. By: Kaufmann, Daniel; Kraay, Aart; Mastruzzi, Massimo
    Abstract: This paper reports on the 2009 update of the Worldwide Governance Indicators (WGI) research project, covering 212 countries and territories and measuring six dimensions of governance between 1996 and 2008: Voice and Accountability, Political Stability and Absence of Violence/Terrorism, Government Effectiveness, Regulatory Quality, Rule of Law, and Control of Corruption. These aggregate indicators are based on hundreds of specific and disaggregated individual variables measuring various dimensions of governance, taken from 35 data sources provided by 33 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. They find that even after taking margins of error into account, the WGI permit meaningful cross-country comparisons as well as monitoring progress over time. The aggregate indicators, together with the disaggregated underlying indicators, are available at
    Keywords: Governance Indicators,National Governance,Public Sector Corruption&Anticorruption Measures,Economic Policy, Institutions and Governance,Banks&Banking Reform
    Date: 2009–06–01
  12. By: Florian Möslein
    Abstract: The Europeanization of contract law has continuously developed over the past 25 years. It is now at a defining stage, with the Draft Common Frame of Reference (DCFR) recently being published. This article is not primarily concerned with the substance of this instrument, but with the process of legal innovation it might trigger. The hypothesis is that the adoption of such a rulebook will have a significant impact on the future development of European contract law. Yet the nature and likely effects of such impact are difficult to predict, given that functions, elements and purposes of the new instrument still need to be identified and defined. In any event, the DCFR will modify the pattern of future legal change in European contract law. The crucial question is: Will it provide a dynamic framework for legal innovation?
    Keywords: European law; Europeanization; acquis communautaire; comparative law
    Date: 2009–02–15
  13. By: Michael C. Burda; Battista Severgnini
    Abstract: Using Solow-Tornqvist residuals as well as two alternative measurements, we present estimates of total factor productivity (TFP) growth in a sample of 30 European economies for the period 1994-2005. In most of Western Europe, we find a deceleration of TFP growth since 2000. However, the economies of New Europe exhibit a higher level of TFP growth overall and have slowed less than those of Old Europe. In the new market economies of Central and Eastern Europe, we nd both high TFP growth as well as acceleration in the second half of the sample. Regression evidence from Western Europe suggests that product market regulation may adversely aect TFP growth and may thus impair convergence.
    Keywords: Total factor productivity growth, Solow residual, product and labor market regulation
    JEL: D24 O47 P27
    Date: 2009–06
  14. By: Emmanuel Farhi; Jean Tirole
    Abstract: The paper elicits a mechanism by which private leverage choices exhibit strategic complementarities through the reaction of monetary policy. When everyone engages in maturity transformation, authorities have little choice but facilitating refinancing. In turn, refusing to adopt a risky balance sheet lowers the return on equity. The key ingredient is that monetary policy is non-targeted. The ex post benefits from a monetary bailout accrue in proportion to the number amount of leverage, while the distortion costs are to a large extent fixed. This insight has important consequences. First, banks choose to correlate their risk exposures. Second, private borrowers may deliberately choose to increase their interest-rate sensitivity following bad news about future needs for liquidity. Third, optimal monetary policy is time inconsistent. Fourth, there is a role for macro-prudential supervision. We characterize the optimal regulation, which takes the form of a minimum liquidity requirement coupled with monitoring of the quality of liquid assets. We establish the robustness of our insights when the set of bailout instruments is endogenous and characterize the structure of optimal bailouts.
    JEL: E44 E52 G28
    Date: 2009–07
  15. By: Steven Brakman; Charles van Marrewijk; Arjen van Witteloostuijn
    Abstract: In the European Union, energy markets are increasingly being liberalized. A case in point is the European natural gas industry. The general expectation is that more competition will lead to lower prices and higher volumes, and hence higher welfare. This paper indicates that this might not happen for at least two reasons. First, energy markets, including the market for natural gas, are characterized by imperfect competition and increasing costs to develop new energy sources. As a result, new entrants in the market are less efficient than incumbent firms. Second, energy markets, again including the market for natural gas, are associated with capacity constraints. Prices are determined in residual markets where the least efficient firms are active. This is likely to lead to price increases, rather than decreases.
    Keywords: natural gas, capacity constraints, efficiency, market liberalization
    JEL: Q4 L1 L7
    Date: 2009–07
  16. By: Olivier De Jonghe (Ghent University; National Bank of Belgium, Research Department)
    Abstract: This paper analyzes the relationship between banks’ divergent strategies toward specialization and diversification of financial activities and their ability to withstand a banking sector crash. We first generate market-based measures of banks’ systemic risk exposures using extreme value analysis. Systemic banking risk is measured as the tail beta, which equals the probability of a sharp decline in a bank’s stock price conditional on a crash in a banking index. Subsequently, the impact of (the correlation between) interest income and the components of non-interest income on this risk measure is assessed. The heterogeneity in extreme bank risk is attributed to differences in the scope of non-traditional banking activities: non-interest generating activities increase banks’ tail beta. In addition, smaller banks and better-capitalized banks are better able to withstand extremely adverse conditions. These relationships are stronger during turbulent times compared to normal economic conditions. Overall, diversifying financial activities under one umbrella institution does not improve banking system stability, which may explain why financial conglomerates trade at a discount
    Keywords: diversification, non-interest income, financial conglomerates, banking stability, extreme value analysis, tail risk
    JEL: G12 G21 G28
    Date: 2009–06
  17. By: Gerald Epstein
    Abstract: As the international financial crisis spreads, some governments are using “unconventional tools” of monetary and financial policy to protect themselves. Should policies to control international capital flows be part of the government “toolkit” in these difficult times? This essay answers: YES. It describes the economic arguments for and against using capital controls, prudential regulations and other “capital management techniques” to manage international financial flows, presents empirical evidence on their impacts, and describes the variety of policies that many countries have successfully applied to enhance macroeconomic and financial stability, create policy space, and achieve other national development goals.
    Keywords: Sub-sovereign bonds, infrastructure finance, issuers, investors, financial sector, municipal finance
    JEL: E5 F3 F4 O1 O16 O19
    Date: 2009–07
  18. By: Eugénia da Conceição-Heldt
    Abstract: This paper addresses the problem of agency losses (agency shirking and agency slippage) in the process of power delegation in EU trade policy. The central question is whether a conflictual situation exists between the interests of the member states and those of the European Commission (agency shirking), or whether the structure of delegation in itself stimulates the agent to adopt a different position from the principals (agency slippage). Drawing on the principal-agent approach, I argue that agency losses are due to the structure of delegation and that the existence of multiple principals with diverging preferences facilitates agency. I find empirical evidence that the Council-Commission relationship on trade politics has different dynamics depending on the negotiating stage. In the initial negotiating stage, when defining the negotiating mandate of the Commission, the relationship is cooperative. Conflict between the Commission and the Council only breaks out in a latter stage of negotiations, when the Commission makes concessions at the international level.
    Keywords: trade policy; agriculture policy; European Council; European Commission
    Date: 2009–03–15
  19. By: Jozef Konings; Hylke Vandenbussche
    Abstract: This paper empirically evaluates the effects of antidumping measures on the exports of protected firms. While antidumping protection raises the domestic sales of the more “traditional” non-exporting firms on the protected market with about 5%, it negatively affects the firm-level exports of similar products as the protected ones. Export sales of protected firms fall by almost 8% compared to a relevant control group of unprotected firms. The drop in firm-level exports more than doubles for firms that are global, i.e. firms with foreign affiliates. Measured at the product-level, extra-EU exports of goods protected by antidumping fall by 36% while exports to target countries fall by as much as 66% following protection. Protection also affects the extensive margin of exporters but to a lesser extent. Initial exporters face a marginally higher probability to stop exporting during protection compared to unprotected firms. Finally, we find that the productivity of exporters falls while that of non-exporters rises during antidumping protection. We offer a number of plausible explanations for our findings arising from the heterogeneous firm literature. We also discuss the importance of our findings for policy.
    Keywords: Antidumping, firm-level exports, intensive margin, extensive margin, productivity, dif-in dif
    JEL: F13 L O30 C2
    Date: 2009

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