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on Regulation |
| By: | Harold Houba (VU University Amsterdam); Evgenia Motchenkova (VU University Amsterdam); Quan Wen (Vanderbilt University) |
| Abstract: | We analyze maximal cartel prices in infinitely-repeated oligopoly models under leniency where fines are linked to illegal gains, as often outlined in existing antitrust regulation, and detection probabilities depend on the degree of collusion. We introduce cartel culture that describes how likely cartels persist after each conviction. Our analysis disentangles the effects of traditional antitrust regulation, leniency, and cartel strategies. Without rewards to the strictly-first reporter, leniency cannot reduce maximal cartel prices below those under traditional regulation. Moreover, in order to avoid adverse effects fine reductions should be moderate in case of multiple reporters. Our results extend the current literature and partially support existing leniency programs. |
| Keywords: | Cartel; Antitrust; Competition Policy; Leniency Program; Self-reporting; Repeated Game |
| JEL: | L41 K C72 |
| Date: | 2009–09–25 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:uvatin:20090081&r=reg |
| By: | William Francis (Financial Services Authority); Matthew Osborne (Financial Services Authority) |
| Abstract: | The existence of a “bank capital channel”, where shocks to a bank’s capital affect the level and composition of its assets, implies that changes in bank capital regulation have implications for macroeconomic outcomes, since profit-maximising banks may respond by altering credit supply or making other changes to their asset mix. The existence of such a channel requires (i) that banks do not have excess capital with which to insulate credit supply from regulatory changes, (ii) raising capital is costly for banks, and (iii) firms and consumers in the economy are to some extent dependent on banks for credit. This study investigates evidence on the existence of a bank capital channel in the UK lending market. We estimate a long-run internal target risk-weighted capital ratio for each bank in the UK which is found to be a function of the capital requirements set for individual banks by the FSA and the Bank of England as the previous supervisor (Although within the FSA’s regulatory capital framework the FSA’s view of the capital that an individual bank should hold is given to the firm through individual capital guidance, for reasons of simplicity/consistency this paper refers throughout to “capital requirements”). We further find that in the period 1996-2007, banks with surpluses (deficits) of capital relative to this target tend to have higher (lower) growth in credit and other on- and off-balance sheet asset measures, and lower (higher) growth in regulatory capital and tier 1 capital. These findings have important implications for the assessment of changes to the design and calibration of capital requirements, since while tighter standards may produce significant benefits such as greater financial stability and a lower probability of crisis events, our results suggest that they may also have costs in terms of reduced loan supply. We find that a single percentage point increase in 2002 would have reduced lending by 1.2% and total risk weighted assets by 2.4% after four years. We also simulate the impact of a countercyclical capital requirement imposing three one-point rises in capital requirements in 1997, 2001 and 2003. By the end of 2007, these might have reduced the stock of lending by 5.2% and total risk-weighted assets by 10.2%. |
| Keywords: | bank, capital, financial regulation, prudential policy, credit, lending |
| Date: | 2009–09 |
| URL: | http://d.repec.org/n?u=RePEc:fsa:occpap:36&r=reg |
| By: | Justina A.V. Fischer (OECD, ELS/SPD, Paris and Universitaet Hohenheim, Stuttgart); Frank Somogyi (KOF Swiss Economic Institute, ETH Zurich, Switzerland) |
| Abstract: | Unionists and politicians frequently claim that globalization lowers employment protection of workers. This paper tests this hypothesis in a panel of 28 OECD countries from 1985 to 2003, differentiating between three dimensions of globalization and two labor market segments. While overall globalization is shown to loosen protection of the regularly employed, it increases regulation in the segment of limited-term contracts. We find the economic one to drive deregulation for the regularly employed, but the social one to be responsible for the better protection of workers in atypical employment. We offer political economy arguments as explanations for these differential effects. |
| Keywords: | Globalization, international trade, integration, employment protection, labor standards, unions, cross-country analysis, panel data analysis |
| JEL: | C33 F15 F16 J81 J83 O57 |
| Date: | 2009–09 |
| URL: | http://d.repec.org/n?u=RePEc:kof:wpskof:09-238&r=reg |
| By: | Tianxi, Wang |
| Abstract: | This paper presents a model on the leverage of financial intermediaries, where debt are held by risk averse agents and equity by the risk neutral. The paper shows that in an unregulated competitive market, financial intermediaries choose to be leveraged over the social best level. This is because the leverage of one intermediary imposes a negative externality upon others by reducing their profit margins. The paper thus founds capital adequacy regulation upon the market failure and suggests that this regulation should bind not only commercial banks, but all financial intermediaries, including private equities and hedge funds. |
| Keywords: | Risk Difference in Risk Preference Leverage Regulation Externality |
| JEL: | D62 D52 G00 |
| Date: | 2009–06 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:18212&r=reg |
| By: | Sauwakon Ratanawijitrasin |
| Abstract: | The focus of this paper is to examine the ways in which regulatory framework affect the pharmaeutical innovations in developing countries using member countries of the Association of South-east Asian Nations (ASEAN) as case study. The paper employs a wide angle view of drug regulation in the region whose members possess varying levels of research and development capacities, supplemented by a zoomed view using data from Thailand where more detailed data are available to author. Data collection relied mainly on review of documents from various sources. Interviews and personal communication were carried out for added information and deeper understanding. |
| Keywords: | data collection, pahrmaceutical innovations, developing countries, thailand, interviews, personal communications, risk management, drug regulation, research, ASEAN, south east, asia, nations, |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:ess:wpaper:id:2248&r=reg |
| By: | Reint Gropp (European Business School, Wiesbaden and Centre for European Economic Research (ZEW) Mannheim, Germany.); Florian Heider (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.) |
| Abstract: | The paper shows that mispriced deposit insurance and capital regulation were of second order importance in determining the capital structure of large U.S. and European banks during 1991 to 2004. Instead, standard cross-sectional determinants of non-financial firms’ leverage carry over to banks, except for banks whose capital ratio is close to the regulatory minimum. Consistent with a reduced role of deposit insurance, we document a shift in banks’ liability structure away from deposits towards non-deposit liabilities. We find that unobserved timeinvariant bank fixed effects are ultimately the most important determinant of banks’ capital structures and that banks’ leverage converges to bank specific, time invariant targets. JEL Classification: G32, G21. |
| Keywords: | bank capital, capital regulation, capital structure, leverage. |
| Date: | 2009–09 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20091096&r=reg |
| By: | Longo, R; Miraldo, M; Street, A |
| Abstract: | We analyse incentives for collusive behaviour when heterogeneous providers are faced with regulated prices under two forms of yardstick competition, namely discriminatory and uniform schemes. Providers are heterogeneous in the degree to which their interests correspond to those of the regulator, with close correspondence labelled altruism. Deviation of interests may arise as a result of de-nationalisation or when private providers enter predominantly public markets. We assess how provider strategies and incentives to collude relate to provider characteristics and across different market structures. We differentiate between "pure" markets with either only self-interested providers or with only altruistic providers and "pluralistic" markets with a mix of provider type. We find that the incentive for collusion under a discriminatory scheme increases in the degree to which markets are self-interested whereas under a uniform scheme the likelihood increases in the degree of provider homogeneity. Providers' choice of cost also depends on the yardstick scheme and market structure. In general, costs are higher under the uniform scheme, reflecting its weaker incentives. In a pluralistic market under the discriminatory scheme each provider's choice of cost is decreasing in the degree of the other provider's altruism, so a self-interested provider will operate at a lower cost than an altruistic provider. Under the uniform scheme providers always choose to operate at the same cost. The prospect of defection serves to moderate the chosen level of operating cost. |
| Date: | 2009–03 |
| URL: | http://d.repec.org/n?u=RePEc:imp:wpaper:1454&r=reg |
| By: | Francisco Covas; Shigeru Fujita |
| Abstract: | This paper attempts to quantify business cycle effects of bank capital requirements. The authors use a general equilibrium model in which financing of capital goods production is subject to an agency problem. At the center of this problem is the interaction between entrepreneurs' moral hazard and liquidity provision by banks as analyzed by Holmstrom and Tirole (1998). They impose capital requirements on banks and calibrate the regulation using the Basel II risk-weight formula. Comparing business cycle properties of the model under this procyclical regulation with those under hypothetical countercyclical regulation, the authors find that output volatility is about 25 percent larger under procyclical regulation and that this volatility difference implies a 1.7 percent reduction of the household's welfare. Even with more conservative parameter choices, the volatility and welfare differences under the two regimes remain nonnegligible. |
| Keywords: | Bank capital ; Business cycles ; Bank reserves |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedpwp:09-23&r=reg |
| By: | Martijn Cremers; Roberta Romano |
| Abstract: | This paper examines the impact on shareholder voting of the mutual fund voting disclosure regulation adopted by the SEC in 2003, using a paired sample of management proposals on executive equity incentive compensation plans submitted before and after the rule change. While voting support for management has decreased over time, we find no evidence that mutual funds’ support for management declined after the rule change, as expected by advocates of disclosure. In fact, we find evidence of increased support for management by mutual funds after the change. There is some evidence that firms sponsoring such proposals both before and after the rule change differ from those sponsoring a proposal only before the change. For example, firms are more likely to sponsor a proposal both before and after the rule change if they have higher mutual fund ownership. Such endogeneity could partly explain our findings of increased support after the rule. |
| JEL: | G2 K22 |
| Date: | 2009–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:15449&r=reg |
| By: | Monique Kerleau (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I); Anne Fretel (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I); Isabelle Hirtzlin (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I) |
| Abstract: | In France, people obtain basic health insurance coverage through a public health insurance system. Although public coverage is comprehensive, substantial co-payments and deductibles are more and more required and individuals become increasingly dependant on private complementary health insurance, to be better reimbursed. In the context of strengthened constraints to control public health spending, the market for complementary cover is indeed likely to develop. This expansion has several implications for the regulation of private health insurance. Starting in the early 2000s, public policies have emphasized tools that directly motivate employers to provide group-insurance schemes. These include subsidies to employers for offering complulsory, supplementary coverage, and mandating social partners to negociate the implementation of health coverage in every compagny, whatever its size or activity. Such changes tend, to some extent, to "re-couple" health insurance with companies. This paper explores the implications of this experience for France. |
| Keywords: | Private health care insurance, complementary employer-provided health insurance. |
| Date: | 2009–09 |
| URL: | http://d.repec.org/n?u=RePEc:hal:cesptp:halshs-00423931_v1&r=reg |
| By: | Naguib Shokralla, Rania |
| Abstract: | This paper aims at investigating the difference between the Egyptian and Argentinean approach to privatisation and FDI and how their different policies, institutions and regulations affected the progress of their respective privatisation programmes and FDI participation. The analysis indicates that, in Egypt, the legal framework of privatisation did not explicitly incorporate FDI participation. FDI regulations were developed separately from privatisation regulations. As a result, a foreign investor in Egypt is faced with multiple laws and multiple regulating agencies for FDI. Unlike in Argentina, the legal framework of privatisation explicitly incorporated the participation of FDI, and FDI regulations were totally liberalised. This explains why FDI participation in Argentine privatisation during 1989 – 2000 accounted for 63% of privatisation proceeds, while, in Egypt, FDI participation accounted for only 24% of privatisation proceeds during 1993 – 2000. |
| Keywords: | Privatisation; FDI; Egypt; Argentina; regulations |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:eid:wpaper:15959&r=reg |
| By: | Pietro Veronesi; Luigi Zingales |
| Abstract: | We calculate the costs and benefits of the largest ever U.S. Government intervention in the financial sector announced the 2008 Columbus-day weekend. We estimate that this intervention increased the value of banks’ financial claims by $131 billion at a taxpayers’ cost of $25 -$47 billions with a net benefit between $84bn and $107bn. By looking at the limited cross section we infer that this net benefit arises from a reduction in the probability of bankruptcy, which we estimate would destroy 22% of the enterprise value. The big winners of the plan were the three former investment banks and Citigroup, while the loser was JP Morgan. |
| JEL: | G21 G28 |
| Date: | 2009–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:15458&r=reg |
| By: | Margaret Kyle; Anita McGahan |
| Abstract: | We examine the relationship between patent protection for pharmaceuticals and investment in development of new drugs. Patent protection has increased around the world as a consequence of the TRIPS Agreement, which specifies minimum levels of intellectual property protection for members of the World Trade Organization. It is generally argued that patents are critical for pharmaceutical research efforts, and so greater patent protection in developing and least-developed countries might result in greater effort by pharmaceutical firms to develop drugs that are especially needed in those countries. Since patents also have the potential to reduce access to treatments through higher prices, it is imperative to assess whether the benefits of increased incentives have materialized in research on diseases that particularly affect the poor. We find that patent protection is associated with increases in research and development (R&D) effort when adopted in high income countries. However, the introduction of patents in developing countries has not been followed by greater investment. Particularly for diseases that primarily affect the poorest countries, our results suggest that alternative mechanisms for inducing R&D may be more appropriate than patents. |
| JEL: | F13 I11 L65 O34 |
| Date: | 2009–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:15468&r=reg |
| By: | Bunea-Bontaş, Cristina Aurora; Lăzărică, Marinela; Petre, Mihaela Cosmina |
| Abstract: | In the last decades, we have witnessed the progressive integration of European financial system, as a result of the cumulative effect of markets' liberalization, innovation and globalisation, and of harmonization of the regulations and implementation of financial reforms by the EU Member States. In this context, increased risk of financial instability necessarily requires the development of standards and codes of best practices in order to improve financial system integrity and stability, and to insure the health of the global banking and financial markets. From this perspective, the Basel II Accord represents a true revolution, aiming the improvement of the consistency of capital regulations internationally and better operational risk management practices. As a member of the EU, Romania is currently through the stages of implementation of Basel II, starting 1st of January 2008. As a central bank, NBR main objectives are: to adapt national legislation; to coordinate the efforts of credit institutions to develop new strategies regarding solvency, capital adequacy and measurement system for each risk category; to impose the disclosure requirements for financial reports and to adapt the IT system. |
| Keywords: | Basel II Accord; capital adequacy; financial system stability; minimum capital requirements; risk management; risk-weighted assets |
| JEL: | G28 F33 G21 |
| Date: | 2009–06–30 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:18132&r=reg |
| By: | Daron Acemoglu; Philippe Aghion; Leonardo Bursztyn; David Hemous |
| Abstract: | This paper introduces endogenous and directed technical change in a growth model with environmental constraints and limited resources. A unique final good is produced by combining inputs from two sectors. One of these sectors uses "dirty" machines and thus creates environmental degradation. Research can be directed to improving the technology of machines in either sector. We characterize dynamic tax policies that achieve sustainable growth or maximize intertemporal welfare, as a function of the degree of substitutability between clean and dirty inputs, environmental and resource stocks, and cross-country technological spillovers. We show that: (i) in the case where the inputs are sufficiently substitutable, sustainable long-run growth can be achieved with temporary taxation of dirty innovation and production; (ii) optimal policy involves both "carbon taxes" and research subsidies, so that excessive use of carbon taxes is avoided; (iii) delay in intervention is costly: the sooner and the stronger is the policy response, the shorter is the slow growth transition phase; (iv) the use of an exhaustible resource in dirty input production helps the switch to clean innovation under laissez-faire when the two inputs are substitutes. Under reasonable parameter values (corresponding to those used in existing models with exogenous technology) and with sufficient substitutability between inputs, it is optimal to redirect technical change towards clean technologies immediately and optimal environmental regulation need not reduce long-run growth. We also show that in a two-country extension, even though optimal environmental policy involves global policy coordination, when the two inputs are sufficiently substitutable environmental regulation only in the North may be sufficient to avoid a global disaster. |
| JEL: | C65 O30 O31 O33 |
| Date: | 2009–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:15451&r=reg |
| By: | Du, Julan (BOFIT); Tao, Zhigang (BOFIT) |
| Abstract: | Market economy models differ in the degree of the power of the government vis-à-vis the market in the economy. Under the classications set forth by Glaeser and Shleifer (2002, 2003), and Djankov et al. (2003), these market models range from those emphasizing low government intervention in the market (private orderings and private litigation through courts) to those where the state is an active participant (regulatory state). This paper, using data from a survey of 3,073 private enterprises in China, constructs an index to quantify the power of the government vis-à-vis the market. Regional government power is found to vary considerably across China's regions. Notably, enterprises located in regions where government exerts more power in the market perform better, suggesting that the regulatory state model of the market economy is appropriate for China. |
| Keywords: | regulatory state; disorder costs; dictatorship costs; market economy models; China's economic reform |
| JEL: | D02 L25 P30 |
| Date: | 2009–10–21 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:bofitp:2009_017&r=reg |
| By: | David C. Wheelock; Paul Wilson |
| Abstract: | The substantial consolidation of the U.S. banking industry since the mid-1980s has brought a large increase in average (and median) bank size, which along with concerns about banks that are "too-big-to-fail," has led many analysts to wonder whether banks are "too large." This paper presents new estimates of ray-scale and expansion-path scale economies for U.S. banks based on nonparametric, local linear estimation of a model of bank costs. We employ a dimension-reduction technique to reduce estimation error, and bootstrap methods for inference. Our estimates indicate that as recently as 2006, most U.S. banks faced increasing returns to scale, suggesting that industry consolidation and increasing scale are likely to continue unless checked by government intervention. |
| Keywords: | Banks and banking ; Economies of scale ; Bank failures |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2009-054&r=reg |
| By: | Luc Laeven; Harry Huizinga |
| Abstract: | This paper shows that banks use accounting discretion to overstate the value of distressed assets. Banks' balance sheets overvalue real estate-related assets compared to the market value of these assets, especially during the U.S. mortgage crisis. Share prices of banks with large exposure to mortgage-backed securities also react favorably to recent changes in accounting rules that relax fair-value accounting, and these banks provision less for bad loans. Furthermore, distressed banks use discretion in the classification of mortgage-backed securities to inflate their books. Our results indicate that banks' balance sheets offer a distorted view of the financial health of the banks. |
| Keywords: | Accounting , Asset management , Asset prices , Bank accounting , Bank regulations , Banks , Financial crisis , Housing prices , Investment , Liquidity management , Real estate prices , |
| Date: | 2009–09–28 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:09/207&r=reg |
| By: | Satyajit Chatterjee; Burcu Eyigungor |
| Abstract: | The authors construct a quantitative equilibrium model of the housing market in which an unanticipated increase in the supply of housing triggers default mortgages via its effect on house prices. The decline in house prices creates an incentive to increase the consumption of housing space, but leverage makes it costly for homeowners to sell their homes and buy bigger ones (they must absorb large capital losses). Instead, leveraged households find it advantageous to default and rent housing space. Since renters demand less housing space than homeowners, foreclosures are a negative force affecting house prices. The authors explore the possible effects of the government's foreclosure prevention policy in their model. They find that the policy can temporarily reduce foreclosures and shore up house prices. |
| Keywords: | Housing ; Default (Finance) ; Foreclosure |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedpwp:09-22&r=reg |