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on Regulation |
| By: | Delis, Manthos D; Staikouras, Panagiotis |
| Abstract: | This paper investigates the role of banking supervision, measured in terms of enforcement outputs (i.e., on-site audits and sanctions) in containing bank risk-taking. Our results on the direct banking supervision–risk-taking correlation show an inverted U-shaped relationship between on-site audits and bank risk, while the nexus between enforcement actions and risk appears linear and negative. With respect to the combined effect of efficient supervision and banking regulation (in the form of capital and transparency requirements) we find that effective supervision and disclosure prerequisites are important and complementary mechanisms in reducing bank fragility, by contrast to capital requirements which are proven rather futile in controlling bank risk, even when supplemented with a higher volume of on-site audits and enforcement actions. |
| Keywords: | Bank risk; Regulation; Supervision; Enforcement; Sanctions; Audits |
| JEL: | G38 G32 G21 |
| Date: | 2009–08–17 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:16836&r=reg |
| By: | Susanne Prantl (Institute for Fiscal Studies and WZB, Berlin); Alexandra Spitz-Oener |
| Abstract: | <p><p>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 with the corresponding differences in West Germany after reunification. Consistent with our expectations, we find that entry regulation reduces entry into self-employment 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.</p></p> |
| Keywords: | Entry Regulation, Self-Employment, Occupational Mobility |
| JEL: | J24 J62 K20 L11 L51 M13 |
| Date: | 2009–07 |
| URL: | http://d.repec.org/n?u=RePEc:ifs:ifsewp:09/14&r=reg |
| By: | Roland Strausz |
| Abstract: | I investigate the argument that, in a two–party system with different regulatory objectives, political uncertainty generates regulatory risk. I show that this risk has a fluctuation effect that hurts both parties and an output–expansion effect that benefits one party. Consequently, at least one party dislikes regulatory risk. Moreover, both political parties gain from eliminating regulatory risk when political divergence is small or the winning probability of the regulatory–risk–averse party is not too large. Because of a commitment problem, direct political bargaining is insufficient to eliminate regulatory risk. Politically independent regulatory agencies solve this commitment problem. |
| Keywords: | regulation, regulatory risk, political economy, independent regulatory agency |
| JEL: | D82 |
| Date: | 2009–08 |
| URL: | http://d.repec.org/n?u=RePEc:hum:wpaper:sfb649dp2009-040&r=reg |
| By: | Frederick Schauer; Richard Zeckhauser |
| Abstract: | For several decades now a debate has raged about policy-making by litigation. Spurred by the way in which tobacco, environmental, and other litigation has functioned as an alternative form of regulation, the debate asks whether policy-making or regulation by litigation is more or less socially desirable than more traditional policy-making by ex ante rule-making by legislatures or administrative agencies. In this paper we step into this debate, but not to come down on one side or another, all things considered. Rather, we seek to show that any form of regulation that is dominated by high-salience particular cases is highly likely, to make necessarily general policy on the basis of unwarranted assumptions about the typicality of one or a few high-salience cases or events. Two cornerstone concepts of behavioral decision – the availability heuristic and related problems of representativeness – explain this bias. This problem is virtually inevitable in regulation by litigation, yet it is commonly found as well in ex ante rule-making, because such rule-making increasingly takes place in the wake of, and dominated by, particularly notorious and often unrepresentative outlier events. In weighing the net advantages of regulation by ex ante rule-making against those of regulation by litigation, society must recognize that any regulatory form is less effective insofar as it is unable to transcend the distorting effect of high-salience unrepresentative examples. |
| JEL: | D61 K00 K2 K4 |
| Date: | 2009–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:15279&r=reg |
| By: | Stephen P. Holland |
| Abstract: | This paper investigates whether an emissions tax (equivalent to an emissions cap) maximizes social welfare (defined as the sum of consumer and producer surplus) in the presence of incomplete regulation (leakage) or market power by analyzing an intensity standard regulating emissions per unit of output. With no other market failures, an intensity standard indeed yields lower welfare, although combining it with a consumption tax eliminates this discrepancy. For incomplete regulation, I show that under certain conditions an intensity standard can yield higher welfare than any emissions tax (including the optimal emissions tax). This result persists even with the addition of a consumption tax, which ameliorates output distortions and can sometimes help the intensity standard attain the first best (when an emissions tax/consumption tax combination cannot). Comparing intensity standards to output-based updating shows that the latter yields higher welfare because of its additional flexibility. Finally, I show that with market power an intensity standard can yield higher welfare than the optimal emissions tax. The intuition of these results is relatively straightforward. The weakness of an intensity standard is that it relies more on substitution effects than output effects to reduce emissions. With incomplete regulation or market power, this disadvantage may be helpful since leakage may offset gains from reducing output and since market power already inefficiently reduces output. |
| JEL: | H23 Q40 Q50 |
| Date: | 2009–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:15262&r=reg |
| By: | Michael McAleer (Econometric Institute, Erasmus School of Economics Erasmus University Rotterdam and Tinbergen Institute and Center for International Research on the Japanese Economy (CIRJE), Faculty of Economics, University of Tokyo); Juan-Angel Jimenez-Martin (Department of Quantitative Economics, Complutense University of Madrid); Teodosio Perez-Amaral (Department of Quantitative Economics, Complutense University of Madrid) |
| Abstract: | Under the Basel II Accord, banks and other Authorized Deposit-taking Institutions (ADIs) have to communicate their daily risk estimates to the monetary authorities at the beginning of the trading day, using a variety of Value-at-Risk (VaR) models to measure risk. Sometimes the risk estimates communicated using these models are too high, thereby leading to large capital requirements and high capital costs. At other times, the risk estimates are too low, leading to excessive violations, so that realised losses are above the estimated risk. In this paper we analyze the profit maximizing problem of an ADI subject to capital requirements under the Basel II Accord as ADI's have to choose an optimal VaR reporting strategy that minimizes daily capital charges. Accordingly, we suggest a dynamic communication and forecasting strategy that responds to violations in a discrete and instantaneous manner, while adapting more slowly in periods of no violations. We apply the proposed strategy to Standard&Poor's 500 Index and show there can be substantial savings in daily capital charges, while restricting the number of violations to within the Basel II penalty limits. |
| Date: | 2009–08 |
| URL: | http://d.repec.org/n?u=RePEc:tky:fseres:2009cf644&r=reg |
| By: | Wendy Dobson (University of Toronto) |
| Abstract: | This paper compares US and Asian views of the international economic architecture including Asia’s evolving regional institutions. Lessons from the global financial crisis are used to assess reforms of the financial institutions better to prevent and manage future crises. While G20 leaders have increased the resources of the International Monetary Fund much work remains to restore its legitimacy and independence and to define clearly the Financial Stability Board’s mandate to strengthen financial oversight and regulation. The paper critiques proposals for a global super-regulator and concludes that while the global architecture is important, the tests of its success will be fewer government actions to self-insure and the willingness to heed warnings of future problems and take timely corrective actions. |
| Keywords: | global financial crisis; international economic architecture; IMF reform; WTO; Asian regionalism; regulatory reform |
| JEL: | F02 F13 F33 F59 |
| Date: | 2009–08 |
| URL: | http://d.repec.org/n?u=RePEc:ttp:iibwps:19&r=reg |
| By: | Jerome Adda (Institute for Fiscal Studies and European University Institute); Samuel Berlinski (Institute for Fiscal Studies and University College, London); V. Bhaskar; Steve Machin (Institute for Fiscal Studies and University College London) |
| Abstract: | <p><p><p><p>This paper analyzes the effects of a ban on smoking in public places upon firms and consumers. It presents a theoretical model and tests its predictions using unique data from before and after the introduction of smoking bans in the UK. Cigarette smoke is a public bad, and smokers and non-smokers differ in their valuation of smoke-free amenities. Consumer heterogeneity implies that the market equilibrium may result in too much uniformity, whereas social optimality requires a mix of smoking and non-smoking pubs (which can be operationalized via licensing). If the market equilibrium has almost all pubs permitting smoking (as is the case in the data) then a blanket ban reduces pub sales, profits, and consumer welfare. We collect survey data from public houses and find that the Scottish smoking ban (introduced in March 2006) reduced pub sales and harmed medium run profitability. An event study analysis of the stock market performance of pub-holding companies corroborates the negative effects of the smoking ban on firm performance.</p></p></p></p> |
| Keywords: | Regulation; smoking ban; market provision of quality; sales; prices; profitability; stock market performance. |
| JEL: | I18 H23 L51 L81 |
| Date: | 2009–07 |
| URL: | http://d.repec.org/n?u=RePEc:ifs:ifsewp:09/13&r=reg |
| By: | Michael McAleer (Econometric Institute, Erasmus School of Economics Erasmus University Rotterdam and Tinbergen Institute and Center for International Research on the Japanese Economy (CIRJE), Faculty of Economics, University of Tokyo); Juan-Angel Jimenez-Martin (Department of Quantitative Economics, Complutense University of Madrid); Teodosio Perez-Amaral (Department of Quantitative Economics, Complutense University of Madrid) |
| Abstract: | The Basel II Accord requires that banks and other Authorized Deposit-taking Institutions (ADIs) communicate their daily risk forecasts to the appropriate monetary authorities at the beginning of each trading day, using one or more risk models to measure Value-at-Risk (VaR). The risk estimates of these models are used to determine capital requirements and associated capital costs of ADIs, depending in part on the number of previous violations, whereby realised losses exceed the estimated VaR. In this paper we define risk management in terms of choosing sensibly from a variety of risk models, discuss the selection of optimal risk models, consider combining alternative risk models, discuss the choice between a conservative and aggressive risk management strategy, and evaluate the effects of the Basel II Accord on risk management. We also examine how risk management strategies performed during the 2008-09 financial crisis, evaluate how the financial crisis affected risk management practices, forecasting VaR and daily capital charges, and discuss alternative policy recommendations, especially in light of the financial crisis. These issues are illustrated using Standard and Poor's 500 Index, with an emphasis on how risk management practices were monitored and encouraged by the Basel II Accord regulations during the financial crisis. |
| Date: | 2009–08 |
| URL: | http://d.repec.org/n?u=RePEc:tky:fseres:2009cf643&r=reg |
| By: | Michael McAleer (Econometric Institute, Erasmus School of Economics Erasmus University Rotterdam and Tinbergen Institute and Center for International Research on the Japanese Economy (CIRJE), Faculty of Economics, University of Tokyo); Juan-Angel Jimenez-Martin (Department of Quantitative Economics, Complutense University of Madrid); Teodosio Perez-Amaral (Department of Quantitative Economics, Complutense University of Madrid) |
| Abstract: | When dealing with market risk under the Basel II Accord, variation pays in the form of lower capital requirements and higher profits. Typically, GARCH type models are chosen to forecast Value-at-Risk (VaR) using a single risk model. In this paper we illustrate two useful variations to the standard mechanism for choosing forecasts, namely: (i) combining different forecast models for each period, such as a daily model that forecasts the supremum or infinum value for the VaR; (ii) alternatively, select a single model to forecast VaR, and then modify the daily forecast, depending on the recent history of violations under the Basel II Accord. We illustrate these points using the Standard and Poor's 500 Composite Index. In many cases we find significant decreases in the capital requirements, while incurring a number of violations that stays within the Basel II Accord limits. |
| Date: | 2009–08 |
| URL: | http://d.repec.org/n?u=RePEc:tky:fseres:2009cf636&r=reg |
| By: | Di Cesare, Antonio |
| Abstract: | This paper analyzes the effects of CDO issuance on the risk of default of banks. Previous literature showed that the overall riskiness of a bank can increase when it sells part of the loans in its portfolio by issuing a CDO of which it retains the equity tranche. Using Monte Carlo simulations, this paper confirms previous results but also highlights that they can change substantially if one modifies the hypothesis regarding how the proceeds of securitizations are reinvested. The assessment of the effects of securitizations on bank stability is thus mainly a matter of empirical research. Using data for Italian banks I provide evidence that the securitization activity has been a relevant factor in changing the composition of the asset side of banks' balance sheets. Results also show that these changes have probably contributed to lower the average ex-ante riskiness of Italian banks. I also compare the riskiness of loans that have been securitized with that of new loans granted by the same securitizing banks using loan-by-loan data. Results show that new loans are on average riskier than loans that have been securitized, thus pointing to an increasing amount of risk to be born by banks as a consequence of the reinvestment of the proceeds of securitizations. |
| Keywords: | Bank stability; CDOs; Value-at-Risk; bank capital structure; Monte Carlo simulations |
| JEL: | G28 G21 |
| Date: | 2009–02 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:16831&r=reg |
| By: | Fehr, Ernst (University of Zurich); Zehnder, Christian (University of Lausanne) |
| Abstract: | The evidence suggests that relational contracting and legal rules play an important role in credit markets but on the basis of the prevailing field data it is difficult to pin down their causal impact. Here we show experimentally that relational incentives are a powerful causal determinant for the existence and performance of credit markets. In fact, in the absence of legal enforcement and reputation formation opportunities the credit market breaks down almost completely while if reputation formation is possible a stable credit market emerges even in the absence of legal enforcement of debt repayment. Introducing legal enforcement of repayments causes a further significant increase in credit market trading but has only a surprisingly small impact on overall efficiency. The reason is that legal enforcement of debt repayments weakens relational incentives and exacerbates another moral hazard problem in credit markets – the choice of inefficient high-risk projects. |
| Keywords: | credit markets, relationship lending, reputation formation, legal enforcement |
| JEL: | C91 G21 G28 L14 |
| Date: | 2009–08 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp4351&r=reg |
| By: | Michael Kremer; Jessica Leino; Edward Miguel; Alix Peterson Zwane |
| Abstract: | In many societies, social norms create common property rights in natural resources, limiting incentives for private investment. This paper uses a randomized evaluation in Kenya to measure the health impacts of investments to improve source water quality through spring protection, estimate the value that households place on spring protection, and simulate the welfare impacts of alternative water property rights norms and institutions, including common property, freehold private property, and alternative “Lockean†property rights norms. We find that infrastructure investments reduce fecal contamination by 66% at naturally occurring springs, cutting child diarrhea by one quarter. While households increase their use of protected springs, travel-cost based revealed preference estimates of households’ valuations are only one-half stated preference valuations and are much smaller than levels implied by health planners’ typical valuations of child mortality, consistent with models in which the demand for health is highly income elastic. Simulations suggest that, at current income levels, private property norms would generate little additional investment while imposing large static costs due to spring owners’ local market power, but that private property norms might function better than common property at higher income levels. Alternative institutions, such as “modified Lockean†property rights, government investment or vouchers for improved water, could yield higher social welfare. |
| JEL: | C93 H75 O13 Q25 Q51 |
| Date: | 2009–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:15280&r=reg |
| By: | Granlund, David (Department of Economics, Umeå University) |
| Abstract: | The price effects of the Swedish pharmaceutical substitution reform are analyzed using data for a panel of all pharmaceutical product sold in Sweden in 1997—2007. The price reduction due to the reform was estimated to average 10% and was found to be significantly larger for brand name pharmaceuticals than for generics. The results also imply that the reform amplified the effect of generic entry has on brand-name prices by a factor of ten. Results of a demand-estimation imply that the price reductions increased total pharmaceutical consumption by 8% and consumer welfare by SEK 2.7 billion annually. |
| Keywords: | drugs; generic competition; equivalent variation; demand estimation |
| JEL: | D40 I11 L65 |
| Date: | 2009–08–13 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:umnees:0777&r=reg |
| By: | Dan Usher (Queen's University) |
| Abstract: | A common, though by no means universally-accepted doctrine among practitioners of law and economics is that redistribution is no business of the law. This efficiency-only doctrine is not that redistribution is unworthy as a social objective, but that any given benefit to the poor is attainable at a lower cost to the rich through taxation than through the choice of legal rules. The rationale for the efficiency-only doctrine is that redistributive law creates a double distortion: an initial distortion arising from redistribution pre se, through taxation or through law, and an additional distortion all its own. The efficiency-only doctrine is sometimes valid, but is far narrower than its advocates would seem to suggest, and is inapplicable to most of what is commonly thought of as redistributive law. Redistribution is best supplied by a balance of law and taxation. |
| Keywords: | Law, Income Tax, Redistribution |
| JEL: | K10 K34 H21 H26 |
| Date: | 2009–06 |
| URL: | http://d.repec.org/n?u=RePEc:qed:wpaper:1210&r=reg |
| By: | Hitoshi Tanaka (Faculty of Economics, Hokkai Gaku-en University); Tatsuro Iwaisako (Graduate School of Economics, Osaka University); Koichi Futagami (Graduate School of Economics, Osaka University) |
| Abstract: | This paper constructs a North-South quality ladder model in which foreign direct investment (FDI) is determined by the endogenous location choice of firms and examines analytically how strengthening patent protection in the South affects welfare in the South. Strengthening patent protection increases the Southfs welfare by enhancing innovation and FDI, but also allows the firms with patents to charge higher prices for their goods, which decreases welfare. However, the model shows that the former positive welfare effect overcomes the latter negative one, and introducing the strictest form of patent protection in the South, that is, harmonizing patent protection in the South with that in the North, may maximize welfare in the South as well as in the North. |
| Keywords: | foreign direct investment, innovation, intellectual property rights protection, welfare analysis |
| JEL: | F43 O33 O34 O40 |
| Date: | 2009–08 |
| URL: | http://d.repec.org/n?u=RePEc:osk:wpaper:0924&r=reg |