nep-reg New Economics Papers
on Regulation
Issue of 2010‒01‒23
eighteen papers chosen by
Christian Calmes
Universite du Quebec en Outaouais

  1. Lessons from the global financial crisis for regulators and supervisors By Willem Buiter
  2. The Crisis: Policy Lessons and Policy Challenges By Agnes Benassy-Quere; Benoit Coeure; Pierre Jacquet; Jean Pisani-Ferry
  3. Oil and Gas in the Canadian Federation By Plourde, André
  4. The Valuation Effect of Listing Requirements: An Analysis of Venture Capital-Backed IPOs By Cécile Carpentier; Douglas Cumming; Jean-Marc Suret
  5. "Observations on the Problem of 'Too Big to Fail/Save/Resolve'" By Jan Kregel
  6. Consolidation in banking and financial stability in Europe: empirical evidence By Uhde, André; Heimeshoff, Ulrich
  7. Regulation of Systemic Liquidity Risk By Cao, Jin; Illing, Gerhard
  8. Environmental Regulation and Investment: Evidence from European Country-Industry Data By Leiter, Andrea M.; Parolini, Arno; Winner, Hannes
  9. Extending the scope of prudential supervision: Regulatory developments during and beyond the “effective” periods of the Post BCCI and the Capital Requirements directives. By Ojo, Marianne
  10. Think Globally, Act Locally? Stock vs Flow Regulation of a Fossil Fuel By Amigues, Jean-Pierre; Chakravorty, Ujjayant; Moreaux, Michel
  11. Product differentiation and welfare in a mixed duopoly with regulated prices: the case of a public and a private hospital By Herr, Annika
  12. Decreasing Copyright Enforcement Costs: The Scope of a Gradual Response By Olivier Bomsel; Heritiana Ranaivoson
  13. Assessing Barriers to Trade in the Distribution and Telecom Sectors in Emerging Countries By Lionel Fontagne; Cristina Mitaritonna
  14. Trade Impact of European Measures on GMOs Condemned by the WTO Panel By Anne-Celia Disdier; Lionel Fontagne
  15. Switching Consumers and Product Liability: On the Optimality of Incomplete Strict Liability By Florian Baumann; Tim Friehe; Kristoffel Grechenig
  16. Institutional Support of the Firm: A Theory of Business Registries By Benito Arruñada
  17. Linkages between Environmental Policy and Competitiveness By OECD
  18. Law and stock markets: evidence from an emerging market By Korkeamäki, Timo; Rainio, Elina; Takalo, Tuomas

  1. By: Willem Buiter
    Abstract: This lecture is a tour d’horizon of the financial crisis aimed at extracting lessons for future financial regulation. It combines normative recommendations based on conventional welfare economics with positive assessments of the kind of measures likely to be adopted based on political economy considerations.
    Date: 2009–07
  2. By: Agnes Benassy-Quere; Benoit Coeure; Pierre Jacquet; Jean Pisani-Ferry
    Abstract: We review the competing explanations of the 2007-2008 global crisis, recall how governments around the world had to depart from established policy stances, and reflect on the legacy of the crisis both in terms of future challenges and changes in policy doctrine. The G-20 has addressed important regulatory and macro-financial dimensions of the crisis, but it has left difficult questions unanswered. We review some of these incoming challenges such as moral hazard in the post-bail-out world, the trade-off between financial stability and the cost of capital, the feasibility for central banks to manage their new financial stability mandate, and the effectiveness of peer review to address global imbalances.
    Keywords: Global financial crisis; economic policy; financial regulation; black swan
    JEL: E50 E6 F02 F36 G18 G28
    Date: 2009–11
  3. By: Plourde, André (University of Alberta, Department of Economics)
    Abstract: This paper provides an overview of key governance issues of relevance to the upstream oil and gas industry in Canada. The focus is on implications of Canada’s constitutional organization as a federation of ten provinces and three territories. Regulatory structures and provisions are described, as are revenue-sharing arrangements. Challenges for the environmental regulation of activities relating to oil and gas exploration, development, and production are highlighted. Implications of the evolving understanding of the rights of Canada’s aboriginal peoples are discussed. Special attention is paid to issues of importance to the federation as a whole and to the potential for the emergence of inter-governmental tensions and conflicts.
    Keywords: Canadian oil and gas policy; federalism; energy revenue-sharing
    JEL: H10 L78 Q48
    Date: 2010–01–01
  4. By: Cécile Carpentier; Douglas Cumming; Jean-Marc Suret
    Abstract: This paper examines the impact of securities regulation and exchange listing standards on the valuation of venture capital-backed IPOs in Canada and the United States. We use a sample of IPOs in both countries matched by size and sector over the 1986-2007 period. The data strongly indicate Canadian IPO valuations are 48% to 66% lower than their matched American counterparts, depending on the matched sample and control variables. We carefully control for several alternative explanations that might account for this difference, including issuer and VC quality, mispricing and liquidity effects. The data highlight the costs associated with low listing standards in Canada. <P>Ce papier examine l’impact de la réglementation des valeurs mobilières et des normes minimales d’inscription en bourse sur la valorisation des premiers appels publics à l’épargne (PAPEs) effectués au Canada et aux États-Unis par des émetteurs financés par des investisseurs en capital de risque. Nous utilisons un échantillon de PAPEs dans chacun des pays sur la période 1986 à 2007. Chaque émission canadienne est pairée avec une émission américaine de taille et de secteur similaires. Nous montrons que les valorisations des émissions canadiennes sont de 48 % à 66 % plus basses que celles des émissions correspondantes américaines, en fonction de l’échantillon retenu et des variables de contrôle. Cette différence subsiste à la prise en compte de plusieurs variables de contrôle, notamment la qualité des émetteurs et des investisseurs en capital de risque, ainsi que la liquidité. Les résultats montrent que les normes réglementaires permissives appliquées aux entreprises émergentes au Canada ont un effet perceptible sur la valeur que leur attribuent les investisseurs.
    Keywords: Securities Regulation, Listing Standards, Valuation, Initial Public Offerings, réglementation des valeurs mobilières, normes minimales d’inscription en bourse, valorisation, introduction en bourse
    JEL: G24 G32 G14 G15
    Date: 2010–01–01
  5. By: Jan Kregel
    Abstract: Past experience suggests that multifunctional banking is the leading source of financial crisis, while large bank size contributes to contagion and systemic risk. This indicates that resolving large banks will not solve the problems associated with multifunctional banking--a conclusion reached after every financial crisis, and one that should apply to the present crisis as well. Senior Scholar Jan Kregel observes that it is important to recognize that past solutions may not be appropriate for present conditions. The approach to the current financial crisis has been to resolve small- and medium-size banks through the FDIC, while banks considered "too big to fail" are given direct and indirect government support. Many of these large government-supported banks have been allowed to absorb smaller banks through FDIC resolution, creating even larger banks. As these institutions repay their direct government support, the problem of "too big to fail" is simply aggravated. Thus, the current thrust of government regulatory reform--increased capital and liquidity requirements, and further legislation--is unlikely to lessen the systemic risks these institutions pose.
    Date: 2009–12
  6. By: Uhde, André; Heimeshoff, Ulrich
    Abstract: Using aggregate balance sheet data from banks across the EU-25 over the period from 1997 to 2005 this paper provides empirical evidence that national banking market concentration has a negative impact on European banks' financial soundness as measured by the Z-score technique while controlling for macroeconomic, bank-specific, regulatory, and institutional factors. Furthermore, we find that Eastern European banking markets exhibiting a lower level of competitive pressure, fewer diversification opportunities and a higher fraction of government-owned banks are more prone to financial fragility whereas capital regulations have supported financial stability across the entire European Union. --
    Keywords: Market structure,Financial stability,Banking regulation
    JEL: G21 G28 G34 L16
    Date: 2009
  7. By: Cao, Jin; Illing, Gerhard
    Abstract: The paper provides a baseline model for regulatory analysis of systemic liquidity shocks. We show that banks may have an incentive to invest excessively in illiquid long term projects. In the prevailing mixed strategy equilibrium the allocation is inferior from the investor’s point of view since some banks free-ride on the liquidity provision as a result of limited liability. The paper compares different regulatory mechanisms to cope with the externalities. It is shown that the combination of liquidity regulation ex ante and lender of last resort policy ex post is able to implement the outcome maximizing investor’s payoff. In contrast, both “narrow banking” and imposing equity requirements as buffer are inferior mechanisms for coping with systemic liquidity risk.
    Keywords: Liquidity Regulation; Systemic risk; Lender of last resort; Financial Stability
    JEL: E5 G21 G28
    Date: 2010–01
  8. By: Leiter, Andrea M. (Department of Economics and Statistics, University of Innsbruck); Parolini, Arno (Department of Economics and Statistics, University of Innsbruck); Winner, Hannes (University of Salzburg)
    Abstract: This paper contributes to the empirical literature on the relationship between environmental regulation and firm behavior. In particular, we ask whether and how strongly an industry's investment responds to stringency in environmental regulation. Environmental stringency is measured as (i) an industry's total current expenditure on environmental protection, and (ii) a country's revenue from environmental taxes. Focusing on European industry level data between 1995 and 2005, we estimate the dierential impact of environmental stringency on four types of investment: gross investment in tangible goods, in new buildings, in machinery, and in `productive' investment (investment in tangible goods minus investment in abatement technologies). Both environmental variables enter positively, and their quadratic terms exhibit signi cantly negative parameter estimates. This, in turn, indicates a positive but diminishing impact of environmental regulation on investment.
    Keywords: Investment; environmental regulation; pollution abatement costs; Europe.
    JEL: D92 H23 Q52
    Date: 2010–01–13
  9. By: Ojo, Marianne
    Abstract: The main argument of this paper is, namely, the need for greater emphasis on disclosure requirements and measures – particularly within the securities markets. This argument is justified on the basis of lessons which have been drawn from the recent Financial Crises, one of which is the inability of bank capital requirements on their own to address funding and liquidity problems. The engagement of market participants in the corporate reporting process, a process which would consequently enhance market discipline, constitutes a fundamental means whereby greater measures aimed at facilitating prudential supervision could be extended to the securities markets. Auditors, in playing a vital role in financial reporting, as tools of corporate governance, contribute to the disclosure process and towards engaging market participants in the process. This paper will however consider other means whereby transparency and disclosure of financial information within the securities markets could be enhanced, and also the need to accord greater priority to prudential supervision within the securities markets. Furthermore, the paper draws attention to the need to focus on Pillar 3 of Basel II, namely, market discipline. It illustrates how through Pillar 3, market participants like credit agencies can determine the levels of capital retained by banks – hence their potential to rectify or exacerbate pro cyclical effects resulting from Pillars 1 and 2. The challenges encountered by Pillars 1 and 2 in addressing credit risk is reflected by problems identified with pro cyclicality, which are attributed to banks’ extremely sensitive internal credit risk models, and the level of capital buffers which should be retained under Pillar Two. Such issues justify the need to give greater prominence to Pillar 3. As a result of the influence and potential of market participants in determining capital levels, such market participants are able to assist regulators in managing more effectively, the impact of systemic risks which occur when lending criteria is tightened owing to Basel II's procyclical effects. Regulators are able to respond and to manage with greater efficiency, systemic risks to the financial system during periods when firms which are highly leveraged become reluctant to lend. This being particularly the case when such firms decide to cut back on lending activities, and the decisions of such firms cannot be justified in situations where such firms’ credit risk models are extremely sensitive – hence the level of capital being retained is actually much higher than minimum regulatory Basel capital requirements. In elaborating on Basel II's pro cyclical effects, the gaps which exist with internal credit risk model measurements will be considered. Gaps which exist with Basel II's risk measurements, along with the increased prominence and importance of liquidity risks - as revealed by the recent financial crisis, and proposals which have been put forward to mitigate Basel II's procyclical effects will also be addressed.
    Keywords: Capital Requirements Directive (CRD); Post BCCI Directive; prudential supervision; liquidity; capital; maturity mismatches; regulation
    JEL: K2 G3 D82 D53 G2 F3 F21
    Date: 2010–01
  10. By: Amigues, Jean-Pierre (Toulouse School of Economics); Chakravorty, Ujjayant (University of Alberta, Department of Economics); Moreaux, Michel (Toulouse School of Economics)
    Abstract: Regulation of environmental externalities like global warming from the burning of fossil fuels (e.g., coal and oil) is often done by capping both emission flows and stocks. For example, the European Union and states in the Northeastern United States have introduced caps on flows of carbon emissions while the stated goal of the Intergovernmental Panel on Climate Change (IPCC) which provides the science behind the current global climate negotiations is to stabilize the atmospheric stock of carbon. Flow regulation is often local or regional in nature, while stock regulation is global. How do these multiple pollution control efforts interact when a nonrenewable resource creates pollution? In this paper we show that local and global pollution control efforts, if uncoordinated, may exacerbate environmental externalities. For example, a stricter cap on emission flows may actually increase the global pollution stock and hasten the date when the global pollution cap is reached.
    Keywords: dynamics; environmental regulation; externalities; nonrenewable resources; pollution
    JEL: Q12 Q32 Q41
    Date: 2009–11–01
  11. By: Herr, Annika
    Abstract: Hospital markets are often characterised by price regulation and the existence of different ownership types. Using a Hotelling framework, this paper analyses the effect of different objectives of the hospitals on quality, profits, and overall welfare in a price regulated duopoly with symmetric locations. In contrast to other studies on mixed oligopolies, this paper shows that in a duopoly with regulated prices privatisation of the public hospital may increase overall welfare depending on the difference of the hospitals' marginal costs and the weight of the additional public hospital's motive. --
    Keywords: mixed oligopoly,price regulation,quality,hospital competition
    JEL: L13 I18 H42
    Date: 2009
  12. By: Olivier Bomsel (CERNA - Centre d'économie industrielle - Mines ParisTech); Heritiana Ranaivoson (CERNA - Centre d'économie industrielle - Mines ParisTech)
    Abstract: The digitization of copyrighted goods and the dematerialization of their distribution over the Internet have weakened copyright, a key institution of the creative industries. One factor affecting the value of copyright stems from the broadband roll-out, wherein copyright enforcement costs have become higher than the estimated benefits of copyright. This paper analyzes the causes of this situation and suggests how a graduated response to infringers may durably decrease copyright enforcement costs. Beginning with a review of the economic literature on copyright focusing on its industrial aspects, the study then analyzes how the consumers' impunity provides incentives to “free ride” on copyright all along the vertical distribution chain. This rapidly increases copyright enforcement costs. Next, the paper describes both the graduated response mechanism and the voluntary agreement which initiated this system in France. In conclusion, this study argues that increasing the cost of free-riding for the final consumer should lead to a decrease of copyright enforcement costs and, therefore, higher returns in the creative industries.
    Keywords: Copyright, Creative industries, Regulation enforcement costs, Digitization, Graduated response.
    Date: 2009–12
  13. By: Lionel Fontagne; Cristina Mitaritonna
    Abstract: We compute ad valorem equivalents (AVEs) for the regulation in three service sectors (i.e. fixed telecom, mobile telecom, distribution) applied by selected emerging countries. We start with qualitative information on the restrictions applied by each country in each sector on the basis of which we apply a multivariate statistical approach, to transform this qualitative data into a trade restrictiveness synthetic index (STRI). In a second stage we estimate the average impact of STRI on price cost margins, using a method avoiding the usual two-stage estimation. In the third stage, this impact is used to calculate the AVE of the STRI estimated in the first step. It is shown that the STRI has a significant effect on the price-cost margins of the individual firms only when controlled for Regional trade Agreements and exception to the MFN clause in the considered sector. Lastly, we compute tariff equivalents for the STRIs previously calculated using the estimated impact. More than half our AVEs are larger than 50% and one AVE out of six is above 100%.
    Keywords: Services; ad valorem equivalents
    JEL: F13
    Date: 2009–12
  14. By: Anne-Celia Disdier; Lionel Fontagne
    Abstract: In May 2003, the United States, Canada and Argentina launched a World Trade Organization (WTO) case against the European Union concerning its authorization regime for biotech products. In November 2006, the WTO condemned this regime. Using a gravity equation, we estimate the reduction in exports of potentially affected products from the complainants to the European Union. Our results suggest that the European moratorium and product-specific measures have a negative effect on trade, as do safeguard measures adopted by Germany, Italy and Greece.
    Keywords: GMOs; protection; WTO panels; environment
    JEL: F13 F18
    Date: 2009–07
  15. By: Florian Baumann (Eberhard Karls University, Department of Economics); Tim Friehe (University of Konstanz, Department of Economics); Kristoffel Grechenig (Max Planck Institute for Research on Collective Goods, Bonn)
    Abstract: This article shows that it may be socially optimal to grant accident victims less than full compensation. In our framework, firms are liable under product liability but also invest in care to prevent consumers switching to competitors. Affecting the partition of consumers by means of care-taking is not desirable from a social standpoint. Consequently, it may be optimal to reduce liability below full compensation in order to adjust firms’ care incentives.
    Keywords: Tort law; product liability, care level, asymmetric information, switching
    JEL: K13
    Date: 2010–01
  16. By: Benito Arruñada
    Abstract: Registering originative business contracts allows entrepreneurs and creditors to choose, and courts to enforce market-friendly “contract” rules that protect innocent third parties when adjudicating disputes on subsequent contracts. This reduces information asymmetry for third parties, which enhances impersonal trade. It does so without seriously weakening property rights, because it is rightholders who choose or activate the legal rules and can, therefore, minimize the cost of any possible weakening. Registries are essential not only to make the chosen rules public but to ensure rightholders’ commitment and avoid rule-gaming, because independent registries make rightholders’ choices verifiable by courts. The theory is supported by comparative and historical analyses.
    Keywords: property rights, theory of the firm, business registries, formalization, starting a business, impersonal transactions.
    JEL: O17 K22 K23 L59
    Date: 2010–01
  17. By: OECD
    Abstract: Debates exist between those who claim that environmental policy will impose additional burdens and costs on industries, thus impairing their competitiveness, and those who claim that improved environmental performance can spur competitiveness. These arguments often surface when new environmental policy regulation are considered, e.g. when the REACH Directive was introduced in Europe, or when a government is considering the introduction of a carbon tax.<p> The report develops a conceptual framework to shed some light on this difficult debate. Competitiveness impacts of environmental policies may derive from the policy itself, or from the improvements of the environmental performance that derives from the policy. These impacts can be analysed at either firm or industry levels; they may differ over the short and long term. Globalisation, with the increasing role of MNEs and mobile capital and labour, is adding more complexity.<p>This framework is used to decipher some of the messages that come out of empirical studies on these issues. Empirical evidence is mixed, and the paper identifies methodological and substantive reasons why empirical research fails to determine the relationship between environmental policy and competitiveness.<p>Lessons derive from this literature review. Typically, even when implementing the environmental policy is clearly in the overall interest of society, the costs and benefits of the policy are unlikely to be equally shared among economic agents. While some win, individual firms or industries may stand to lose. Policy design should make sure that the adverse competitiveness impacts are not unnecessarily large, for example by paying attention to predictability, transition periods, and transaction costs. Specific measures to support the losers in their adjustment can also be developed. Sometimes measures to mitigate the adverse competitiveness impacts of an environmental policy are necessary to achieve political support for the policy. In those instances, the planned measures should be carefully analysed from several angles to ensure that they do not inadvertently hurt the efficiency and effectiveness of the original policy. More work is required to further explore these issues, which are consequential for the design, the implementation and the enforcement of environmental policies.</p><BR>Il y a souvent débat entre ceux qui pensent que les politiques environnementales vont imposer des charges supplémentaires aux entreprises et ainsi détériorer leur compétitivité, et d’autres qui pensent qu’une meilleure performance environnementale est un facteur de compétitivité. Ces débats affleurent en particulier quand de nouvelles réglementations environnementales sont débattues, par exemple lorsque la directive REACH a été mise en œuvre en Europe, ou quand des gouvernements réfléchissent à l’introduction d’une taxe carbone.<p> Dans ce rapport, un cadre conceptuel est proposé, pour tirer des enseignements de ces débats. Les impacts d’une politique environnementale sur la compétitivité peuvent découler de la politique elle-même, ou des conséquences de la politique sur les performances environnementales. Ces impacts se mesurent au niveau des firmes ou des secteurs économiques ; ils peuvent être différents à court ou à long terme. La globalisation rend ces mécanismes encore plus complexes, avec le rôle accru des multinationales et la mobilité du capital et de l’emploi.<p> Le cadre conceptuel est utilisé pour donner un sens aux résultats des études empiriques sur ces thèmes. Ces résultats sont ambigus et le rapport propose des raisons à la fois méthodologiques et de fond qui expliquent pourquoi les recherches empiriques ne parviennent pas à comprendre la relation entre les politiques environnementales et la compétitivité.<p> L’analyse des sources documentaires fait ressortir quelques messages. Par exemple, même quand une politique environnementale a des effets positifs clairs sur l’ensemble de la collectivité, il est probable que les coûts et les bénéfices de cette politique soient inégalement répartis entre les agents économiques. Il se peut que certaines entreprises ou certains secteurs gagnent alors que d’autres perdent. La politique doit être conçue de sorte que les coûts ne soient pas indûment élevés, par exemple en annonçant à l’avance, en prévoyant des périodes de transition, et en étant attentifs aux coûts de transaction. Il est possible de prévoir des mesures dédiées aux perdants afin d’accompagner leurs ajustements. Dans certains cas, des mesures qui limitent les impacts négatifs d’une politique sur la compétitivité sont utiles pour susciter une adhésion à cette politique. Dans ces cas, les mesures envisagées doivent être analysées sous différents angles pour s’assurer qu’elles ne restreignent pas l’efficacité et l’efficience du projet initial. Des travaux complémentaires sont nécessaires pour étudier ces sujets qui sont importants pour la conception, la mise en œuvre et le respect des politiques environnementales.</p>
    Keywords: competitiveness, eco-innovation, environmental policy, globalisation, pollution haven, Porter hypothesis, resource efficiency, supply chain, circuits d’approvisionnement, compétitivité, éco-innovation, efficacité en ressources, hypothèse de Porter, mondialisation
    JEL: O31 O33 O38
    Date: 2010–01–11
  18. By: Korkeamäki, Timo (Hanken School of Economics and Bank of Finland); Rainio, Elina (Garantia Ltd.); Takalo, Tuomas (Bank of Finland Research)
    Abstract: A sweeping and protracted reform of corporate law took place in Finland in the 1970s. The reform brought significant improvements to investor protection and, similar to the US Sarbanes-Oxley Act, tightened disclosure rules at the cost of increasing the work load in corporate reporting. We find that the Finnish stock market generally reacts negatively to news of tightened disclosure rules and increased work loads, whereas news of delays in implementation of reform were largely positive. This raises the question of whether strengthening investor protection by requiring greater transparency necessarily promotes the development of financial markets. It also serves to remind that the implementation costs of reforms should not be overlooked.
    Keywords: corporate governance; investor protection; law and finance; transparency; Sarbanes-Oxley Act
    JEL: G34 K22
    Date: 2010–01–10

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