nep-reg New Economics Papers
on Regulation
Issue of 2009‒12‒19
twenty papers chosen by
Christian Calmes
Universite du Quebec en Outaouais

  1. The growing importance of risk in financial regulation By Ojo, Marianne
  2. Capital requirements and business cycles with credit market imperfections By Agénor, P.-R.; Alper, K.; Pereira da Silva, L.
  3. Waste Not, Want Not: Economic and Legal Challenges of Regulation-Induced Changes in Waste Technology and Management By Macauley, Molly K.
  4. Prudential Regulation and Competition in Financial Markets By Rudiger Ahrend; Jens Arnold; Fabrice Murtin
  5. Controlling Banker's Bonuses: Efficient Regulation or Politics of Envy? By Matthews, Kent; Matthews, Owen
  6. Mobile network interconnection and investments By Veith, Tobias
  7. The Effects of Employmet Protection on Labor Turnover: Empirical Empirical Evidence from Taiwan By Kamhon Kan; Yen-Ling Lin
  8. Financial Stability: Overcoming the Crisis and Improving the Efficiency of the Banking Sector By Randall S. Jones; Masahiko Tsutsumi
  9. Ex-ante regulation and ex-post liability under uncertainty and irreversibility: governing the coexistence of GM crops By Beckmann, Volker; Soregaroli, Claudio; Wesseler, Justus
  10. The need of standardization and the potential role of voluntary approaches: Issues and trends in Italian GCHP market By Francesco Rizzi
  11. Firm-specific factors influencing the selection of accounting options provided by the IFRS: Empirical evidence from Spanish market By Juana Aledo; Fernando García-Martínez; Juan M. Marín Diazaraque
  12. The dependency of the banks' assets and liabilities: evidence from Germany By Memmel, Christoph; Schertler, Andrea
  13. Conflicting Goals: Energy Security vs. GHG Reductions under the EISA Cellulosic Ethanol Mandate By Fraas, Arthur; Johansson, Robert
  14. A Free Lunch in the Commons By Salant, Stephen, W.; Kotchen, Matthew J.
  15. Public Disclosure of Industrial Pollution: The PROPER Approach for Indonesia? By García López, Jorge; Sterner, Thomas; Afsah, Shakeb
  16. On the origins of land use regulations: Theory and evidence from US metro areas By Hilber, Christian A. L.; Robert-Nicoud, Frédéric
  17. Does Firm Ownership Differentiate Environmental Compliance? Evidence from Indian Chromite Mining Industry By Das, Amarendra
  18. Measuring the Gains from Trade under Monopolistic Competition By Robert C. Feenstra
  19. International Differences in Emissions Intensity and Emissions Content of Global Trade By Stratford Douglas; Shuichiro Nishioka
  20. Alternative Approaches to Cost Containment in a Cap-and-Trade System By Fell, Harrison; Morgenstern, Richard

  1. By: Ojo, Marianne
    Abstract: This paper traces the developments that have contributed to the importance of risk in regulation. Not only does it consider theories associated with risk, it also discusses explanations as to why risk has become so important within regulatory and governmental circles. Two forms of risk regulation, namely risk based regulation and meta regulation are considered. As well as considering the application of both in jurisdictions such as the UK, the paper places greater focus in discussing the importance of meta regulation in jurisdictions such as Germany, Italy and the US. The preference for meta regulation is based on the premises, not only of the advantages considered in this paper but also on the application of Basel II in several jurisdictions. Whilst meta regulation also has its disadvantages, the impact of risk based regulation on the use of external auditors plays a part in the preference for meta regulation.
    Keywords: risk; regulation; meta; Basel II; financial
    JEL: K2
    Date: 2009–12
  2. By: Agénor, P.-R.; Alper, K.; Pereira da Silva, L.
    Abstract: The business cycle effects of bank capital regulatory regimes are examined in a New Keynesian model with credit market imperfections and a cost channel of monetary policy. Key features of the model are that bank capital increases incentives for banks to monitor borrowers, thereby reducing the probability of default, and excess capital generates benefits in terms of reduced regulatory scrutiny. Basel I and Basel II-type regulatory regimes are defined, and the model is calibrated for a middle-income country. Simulations of supply and demand shocks show that, depending on the elasticity that relates the repayment probability to the capital-loan ratio, a Basel II-type regime may be less procyclical than a Basel I-type regime.
    Keywords: Banks&Banking Reform,Debt Markets,Access to Finance,Economic Theory&Research,Emerging Markets
    Date: 2009–12–01
  3. By: Macauley, Molly K. (Resources for the Future)
    Abstract: Beginning in the early 1990s, stricter government regulation to protect public health and the environment led to radical changes in waste technology and management in the United States. More stringent regulation induced wholly new technologies, including the lining of landfills, the control of their gas emissions, and changes in the economic scale and geographic location of operation. Economic integration of waste management transformed “the local dump” into a nationwide and modernized industry. These changes led to unprecedented intervention by local government in attempts to control price, quantity, and location-specific attributes of the $40 billion waste market. Regulatory-induced changes in markets have long been a topic of academic and policy interest, but unique in this case was the emergence of legal challenges—-under the dormant commerce clause—-concerning public governance and the private sector. This paper reviews the regulation-induced changes in the market, its subnational governmental interventions, and protection of interstate commerce when new technology restructures a local service into a national business.
    Keywords: municipal solid waste, economics, Supreme Court, technological change, regulation, interstate commerce
    JEL: Q2 K3 L5
    Date: 2009–06–05
  4. By: Rudiger Ahrend; Jens Arnold; Fabrice Murtin
    Abstract: This paper examines how a range of stability-oriented regulatory policies for banking and insurance are related to selected stability and competition outcomes in these sectors. Based on survey information on financial market regulation, policy indicators for eight areas of prudential banking regulation are constructed, in addition to indicators for the insurance sector. Despite incomplete information on some areas that turned out to be important in the context of the recent financial crisis, the indicators correlate well with different measures of financial stability, both during the recent crisis and beyond. Furthermore, the results do not support the view that there is a general trade-off between stability-oriented regulatory policies and competition in banking and insurance.<P>Régulation prudentielle et concurrence sur les marchés financiers<BR>Cette étude examine le lien entre les politiques de régulation prudentielle des industries de la banque et de l’assurance et les résultats observés dans ces secteurs en termes de stabilité et de concurrence. Sur la base d’enquêtes portant sur la régulation des marchés financiers, des indicateurs sont construits pour évaluer les politiques touchant à huit segments différents de la régulation bancaire prudentielle, ainsi qu‘au secteur de l’assurance. En dépit de lacunes dans le renseignement de certains segments de la régulation, lacunes préjudiciables dans le contexte récent de crise financière, ces indicateurs présentent une corrélation satisfaisante avec diverses mesures de stabilité financière, à la fois dans ce contexte de crise et au-delà. En outre, les résultats ne confirment pas l’hypothèse qu’il y aurait en général un arbitrage entre la régulation prudentielle et la concurrence dans les secteurs de la banque et de l’assurance.
    Keywords: banking, competition, insurance, prudential regulation, stability, assurance, banque, concurrence, régulation prudentielle, stabilité
    JEL: E44 G14 G21 G22 G28 L11
    Date: 2009–12–01
  5. By: Matthews, Kent (Cardiff Business School); Matthews, Owen
    Abstract: The positive relationship between bank CEO compensation and risk taking is a well established empirical fact. The global banking crisis has resulted in a chorus of demands to control banker's bonuses and thereby curtail their risk taking activities in the hope that the world can avoid a repeat in the future. However, the positive relationship is not a causative one. In this paper we argue that the cushioning of banks downside risks provide the incentive for banks to take excessive risk and design compensation packages to deliver high returns. Macro-prudential regulation will have a better chance of curbing excess risk taking than controlling banker's compensation.
    Keywords: Banker's bonus; risk taking; Too-big-to-Fail; macro-prudential regulation
    JEL: G21 G28
    Date: 2009–12
  6. By: Veith, Tobias
    Abstract: Abstract In markets with competing interconnected networks like mobile telecommunication markets investments affect the investor’s and also any competitors’ profits. In a theoretical model it is shown that cost-reducing investments reduce the investor’s termination rates and increase competitors’ termination rates under the callingparty- network-pays regime. Moreover, investments increase off-net traffic from the investor’s network but also from competitors’ networks. Regulation changes the effect on competitors’ termination rates but all other effects remain the same or are strengthened. Empirical results support the theoretical findings concerning the investor’s termination rates and the findings on off-net traffic. Competitors’ termination rates decrease. The negative termination rate effect even outweighs the quantity effect in the competitors’ profit functions. Testing for a common regulation-investment effect provides evidence that the negative investment externality is not due to regulation. --
    Keywords: regulation,mobile telecommunications,investments,interconnection
    JEL: L51 L52 L86 L96 O31 O33
    Date: 2009
  7. By: Kamhon Kan (Institute of Economics, Academia Sinica, Taipei, Taiwan); Yen-Ling Lin (Department of Economics, Tamkang University)
    Abstract: This paper investigates the effects of employment protection legislation on the rates of hiring, separation, worker flows, job reallocation, and churning flows for the case of Taiwan. Our empirical identification takes advantage of a reform created by Taiwan’s enactment of Labor Standards Law, which has substantially increased the costs of firing, and the implementation of the law’s enforcement measures. Moreover, our identification also exploits the fact that the stringency of the law’s provisions and the intensity of the law’s enforcement vary with establishment size. Based on monthly data at the establishment level for the period 1983–1995, we find that Taiwan’s Labor Standards Law and its enforcement measures have dampened labor turnover for mediumsized and large establishments, while that of small establishments was not affected.
    Keywords: Employment protection, Hiring, Separation, Worker flows, Job reallocation, Churning flows, Labor Standards Law
    JEL: J65 J63 J88
    Date: 2009–05
  8. By: Randall S. Jones; Masahiko Tsutsumi
    Abstract: The crisis that originated in mid-2007 in the United States and deepened in September 2008 is the largest peace-time disruption of financial markets since the Great Depression. It was triggered by a number of factors, namely the large amount of lending to subprime borrowers, the expansion of securitisation resulting in a disconnect between loan originators and final investors, the questionable assessments of credit rating agencies and the unprecedented resort to off-balance sheet vehicles. These developments took place during a traditional credit boom and reinforced the skyrocketing of asset prices, erosion of lending standards and under-pricing of risk. The crisis had serious repercussions worldwide, particularly in Europe, given the global nature of financial markets. This paper begins by considering why the Japanese banking system was initially relatively resilient to the deterioration in the global financial system, although there were some secondary effects that are discussed in the following section. The third section outlines the emergency response of the Japanese authorities to the financial crisis, including quantitative measures by the central bank and other institutions and regulatory changes by the Financial Services Agency (FSA). At the same time, the authorities have taken steps to improve the regulatory framework. The fourth section goes beyond the crisis to consider policies to boost chronically low profitability in the banking sector. Measures to promote efficiency in the financial sector by upgrading capital markets and improving the range and quality of financial products are discussed in the following section.<P>Stabilité financière : surmonter la crise et améliorer l'efficience du secteur bancaire au Japon<BR>Les banques japonaises ont été en grande partie épargnées par les effets directs de la crise financière mondiale, grâce à leur exposition limitée aux actifs toxiques étrangers, au cadre réglementaire en place au Japon et au rôle modeste de la titrisation. Néanmoins, la forte contraction de la production et la chute des cours des actions ont indéniablement eu des répercussions préjudiciables sur le secteur bancaire. Les autorités ont réagi en prenant des mesures pour stabiliser le marché financier, injecter des capitaux dans les établissements de dépôts et préserver le crédit aux petites entreprises. Ces mesures d'urgence devraient être démantelées progressivement afin de limiter les effets de distorsion qui en découlent, une fois que la reprise sera ancrée. Il est essentiel de moderniser le cadre réglementaire en améliorant la transparence des produits titrisés, le fonctionnement des agences de notation financières et les règles relatives aux fonds propres. Il importe également de remédier à des problèmes chroniques, dont la faible rentabilité des établissements financiers, en particulier des banques régionales, et de renforcer l'efficience du secteur financier. Cela passe par diverses mesures, notamment par la privatisation des établissements financiers publics, l'amélioration de l'efficacité des services bancaires, et le renforcement de la diversité et de la qualité des produits financiers.
    Keywords: Bank of Japan, bank, Basel II, capital adequacy regulation, capital injections, capital markets, credit rating agencies, financial sector, FSA, global financial crisis, Japan, Japanese economy, regional banks, reverse mortgages, securitisation, agences de notation financières, Bâle II, Banque du Japon, banque, banques régionales, crise financière mondiale, économie japonaise, FSA, injections de capitaux, Japon, marchés de capitaux, prêts viagers hypothécaires, règles relatives aux fonds propres, secteur financier, titrisation
    JEL: Q28 Q54 Q56 Q58
    Date: 2009–12–04
  9. By: Beckmann, Volker; Soregaroli, Claudio; Wesseler, Justus
    Abstract: Ex-ante regulations and ex-post liabilities for using a new technology will induce additional costs for adopters. The standard model is advanced by including irreversibility and uncertainty and taking into account transaction costs of negotiating possible cost reductions. The case analysed is the coexistence policy for GM crops in the European Union. Results show, the design of the rules and regulations can provide strong incentives for regional agglomeration of GM and non-GM farmers. --
    Keywords: Ex-ante regulation,ex-post liability,irreversibility,uncertainty,Agglomeration
    JEL: D81 L23 Q12 Q24 R3
    Date: 2009
  10. By: Francesco Rizzi (Sant’Anna School of Advanced Studies - MAIN Lab, Pisa, Italy)
    Abstract: Despite the lack of specific incentives, Ground Coupled Heat Pumps (GCHP) installations are booming in Italy both in private and public sectors of the market. Such rapid growth entails an increasing concern for environmental and technical performances since no comprehensive regulation and reliable standards exist yet. By means of an investigation of sectoral opinion leaders and SWOT-based technique for building scenarios, this paper discusses potential schemes for balancing mandatory and voluntary requirements. The analysis suggests that standardization and voluntary schemes are perceived as effective tools to encourage the greening of Italian GCHP-SMEs in short-run while laying the foundations for evolving sustainable policies in the longer run. A potential scheme that has been simulated by reflecting the supply-side orientations of the market and that involves of process and product standards is discussed.
    Date: 2009–08–01
  11. By: Juana Aledo (Universidad Complutense de Madrid); Fernando García-Martínez (Universidad Complutense de Madrid); Juan M. Marín Diazaraque (Universidad Carlos III de Madrid)
    Abstract: It is generally accepted that International Financial Reporting Standards (IFRS) promote a "true and fair" presentation of financial statements. The improvement of the quality of financial reporting helps investors, bankers and regulators make better decisions. Spanish GAAP, on the other hand, are based on a "prudent" approach for asset and liability recognition and valuation, with the goal of protecting stakeholders. Adjustments introduced as a consequence of IFRS adoption may result in (i) the recognition (or derecognition) of assets and liabilities for the first time (i.e. derivative financial assets and liabilities) and (ii) the application of accounting criteria that differs from those recognised under local GAAP (i.e. cost vs. revaluation model). The main objective of this study is to examine the financial statements of the firms listed on the Spanish Continuous Stock Market that have been using IFRS since 2005 to determine the accounting policy options they apply under IFRS and, most importantly, to provide evidence of the factors driving these choices. Since there are significant differences in reporting quality between countries as a consequence of different accounting regimes and institutional frameworks, mandatory IFRS adoption provides an opportunity to assess the economic consequences of these differences. The main finding of this paper is that companies apply the most conservative criteria to reduce the number of discrepancies between the two standards, particularly in regards to presentation and measurement practices. Nevertheless, the evitación from Spanish GAAP has a significant impact on reported equity and net income. Firms in Consumer services, Consumer goods, Oil and Gas, and Basic Materials, Manufacturing and Construction industries experience the largest adjustments. Additionally, we find that firm-specific factors such as industry, size, auditor’s opinion and capital structure influence the choice of accounting policy used to prepare financial statements. The findings reported in this paper provide a basis for debate about the quality of financial disclosure and reporting regulation and their impact across countries.
    Keywords: International Financial Reporting Standards, Mandatory Disclosure Level, Fair-value Accounting
    JEL: M41
    Date: 2009–12
  12. By: Memmel, Christoph; Schertler, Andrea
    Abstract: Developments in risk-transfer instruments and risk management techniques in the last two decades have fundamentally changed how banks manage their assets and liabilities. In this document we show that, for all three sectors of German universal banks (private commercial banks, savings banks, and cooperative banks), asset-liability dependency declined over the period 1994-2007, the decline was strongest for those banks that use more than sector-average amounts of derivatives. Only in the case of private commercial banks, we do find that lower regulatory capital has coincided with higher asset-liability dependencies. Over our sample period, the difference has diminished since poorly-capitalized private commercial banks have reduced their asset-liability dependencies more intensively than their well-capitalized counterparts. Moreover, we find that profitability matters for the asset-liability dependency but not in the same way for all three sectors. Asset-liability dependency is lower for private commercial banks with higher provision income, savings banks with lower ROE volatilities and cooperative banks with higher ROEs. --
    Keywords: Asset-liability dependency,maturity,correlation analysis
    JEL: G21 G32
    Date: 2009
  13. By: Fraas, Arthur (Resources for the Future); Johansson, Robert
    Abstract: Increasing energy security and lowering greenhouse gas (GHG) emissions have been prominent goals in recent energy and environmental policies. While these goals are often complementary, there may also be cases where they conflict. A case in point is the Energy Independence and Security Act of 2007 (EISA). The goals of EISA are to increase the United States' energy independence and security as well as to increase the production of clean renewable fuels. Title II of EISA establishes mandates for increasing the use of low carbon fuels to replace gasoline. While the Title II mandates will meet the energy security goal of EISA, the mandate for the use of at least 16 billion gallons of cellulosic ethanol by 2022 may conflict with efforts to reduce substantially the nation's GHG emissions over the next 20 years. The nation's production capacity for biomass is likely to be limited and the use of biomass to replace coal in generating electricity yields 2 to 3 times the GHG reduction associated with using cellulosic ethanol to displace gasoline. Thus, there is a trade-off between the energy security gains of the biofuels mandate under EISA and the more effective (in terms of GHG emission reductions) use of biomass in the electric utility sector. One means of evaluating this trade-off is to examine the factors that affect the costeffectiveness of diverting biomass from electricity production to cellulosic ethanol production. This paper identifies some of the key factors that affect the cost-effectiveness of the energy security and climate change goals of EISA. The cost-effectiveness of EISA will depend on (1) constraints on biomass production, that is, the extent to which the EISA mandate may crowd out the use of biomass to generate electricity; (2) the world oil price (and the cost of production of cellulosic ethanol); and (3) the social cost of carbon.
    Keywords: energy security, cost-effective policy, cellulosic ethanol
    JEL: Q42 Q48 Q52
    Date: 2009–08–24
  14. By: Salant, Stephen, W. (Resources for the Future); Kotchen, Matthew J.
    Abstract: We derive conditions under which cost-increasing measures -- consistent with either regulatory constraints or fully expropriated taxes -- can increase the profits of all agents active within a common-pool resource. This somewhat counterintuitive result is possible regardless of whether price is exogenously fixed or endogenously determined. Consumers are made no worse off and, in the case of an endogenous price, can be made strictly better off. The results simply require that total revenue be decreasing and convex in aggregate effort, which is an entirely reasonable condition, as we demonstrate in the context of a renewable natural resource. We also show that our results are robust to heterogeneity of agents and, under certain conditions, to costless entry and exit. Finally, we generalize the analysis to show its relation to earlier work on the effects of raising costs in a model of Cournot oligopoly.
    Date: 2009–08–05
  15. By: García López, Jorge (Department of Economics, School of Business, Economics and Law, Göteborg University); Sterner, Thomas (Resources for the Future, Washington, D.C.); Afsah, Shakeb (consultant in Washington, D.C.)
    Abstract: This paper evaluates the effectiveness of the Program for Pollution Control Evaluation and Rating (PROPER) in Indonesia. PROPER, the first major public disclosure program in the developing world, was launched in June 1995; though it collapsed in 1998 with the Asian financial crisis, it is currently being revived. There have been claims of success for this pioneering scheme, yet little formal analysis has been undertaken. We analyze changes in emissions concentrations (mg/L) using panel data techniques with plant-level data for participating firms and a control group. The results show that there was indeed a positive response to PROPER, especially among firms with poor environmental compliance records. The response was immediate, and firms pursued further emissions reductions in the following months. The total estimated reductions in biochemical oxygen demand (BOD) and chemical oxygen demand (COD) were approximately 32%.<p>
    Keywords: environmental policy; pollution control; public disclosure; Asia; Indonesia
    JEL: D78 D82
    Date: 2009–12–08
  16. By: Hilber, Christian A. L.; Robert-Nicoud, Frédéric
    Abstract: We model residential land use constraints as the outcome of a political economy game between owners of developed and owners of undeveloped land. Land use constraints benefit the former group (via increasing property prices) but hurt the latter (via increasing development costs). More desirable locations are more developed and, as a consequence of political economy forces, more regulated. Using an IV approach that directly follows from our model we find strong and robust support for our predictions. The data provide weak or no support for alternative hypotheses whereby regulations reflect the wishes of the majority of households or efficiency motives.
    Keywords: housing supply; land ownership; land use regulations; zoning
    JEL: H7 Q15 R52
    Date: 2009–12
  17. By: Das, Amarendra
    Abstract: This paper compares the environmental performance of public and private firms in the context of Indian chromite mining industry. It proposes a new methodology to measure firms’ environmental performance in a multidimensional framework. Comparison of unidimensional and multidimensional environmental defiance indices reveal no significant difference between the public and private firms.
    Keywords: Firm ownership; Multi Dimensional Environmental Compliance
    JEL: G38 Q53 L72
    Date: 2009–08–15
  18. By: Robert C. Feenstra
    Abstract: Three sources of gains from trade under monopolistic competition are: (i) new import varieties available to consumers; (ii) enhanced efficiency as more productive firms begin exporting and less productive firms exit; (iii) reduced markups charged by firms due to import competition. The first source of gains can be measured as new goods in a CES utility function for consumers. We argue that the second source is formally analogous to the producer gain from new goods, with a constant-elasticity transformation curve for the economy. We suggest that the third source of gain can be measured using a translog expenditure function for consumers, which in contrast to the CES case, allows for finite reservation prices for new goods and endogenous markups.
    JEL: F12
    Date: 2009–12
  19. By: Stratford Douglas (Department of Economics, West Virginia University); Shuichiro Nishioka (Department of Economics, West Virginia University)
    Abstract: Understanding international differences in the emissions intensity of trade and production is essential to understanding the effects of greenhouse gas limitation policies. We develop data on emissions from 48 industrial sectors in 32 countries and estimate the CO2 emissions intensity of production and trade. We find no evidence that developing countries specialize in emissions-intensive sectors; instead, emissions intensities differ systematically across countries because of differences in production techniques. Northern and Western European countries have the lowest emissions-intensity, while Southern and Eastern European countries and China have the highest emissions-intensity. Developed countries such as Japan and the United States whose trading partners are mostly developing countries import the most emissions.
    Keywords: Heckscher-Ohlin; Emissions Technique; CO2 Emissions; Environment
    JEL: F18 Q27 Q56
    Date: 2009
  20. By: Fell, Harrison (Resources for the Future); Morgenstern, Richard (Resources for the Future)
    Abstract: We compare several emissions reduction instruments, including quantity policies with banking and borrowing, price policies, and hybrid policies (safety valve and price collar), using a dynamic model with stochastic baseline emissions. The instruments are compared under the design goal of obtaining the same expected cumulative emissions across all options. Based on simulation analysis with the model parameterized to values relevant to proposed U.S. climate mitigation policies, we find that restrictions on banking and borrowing, including the provision of interest rates on the borrowings, can severely limit the value of the policy, depending on the regulator-chosen allowance issuance path. Although emissions taxes generally provide the lowest expected abatement costs, a cap-and-trade system combined with either a safety valve or a price collar can be designed to provide expected abatement costs near those of a tax, but with lower emissions variance than a tax. Consistently, a price collar is more cost-effective than a safety valve for a given expected cumulative emissions outcome because it encourages inexpensive abatement when abatement costs decline.
    Keywords: cost containment, safety valve, price collar, climate change
    JEL: Q55
    Date: 2009–04–13

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