|
on Regulation |
| By: | Sanders Shaffer |
| Abstract: | There is a popular belief that the confluence of bank capital rules and fair value accounting helped trigger the recent financial crisis. The claim is that questionable valuations of long term investments based on prices obtained from illiquid markets created a pro-cyclical effect whereby mark to market adjustments reduced regulatory capital forcing banks to sell off investments which further depressed prices. This ultimately led to bank instability and the credit effects that reached a peak late in 2008. This paper analyzes a sample of large banks to attempt to measure the strength of the link between fair value accounting, regulatory capital rules, pro-cyclicality and financial contagion. The focus is on large banks because they value a significant portion of their balance sheets using fair value. They also hold investment portfolios that contain illiquid assets in large enough volumes to possibly affect the market in a pro-cyclical fashion. The analysis is based on a review of recent historical financial data. The analysis does not reveal a clear link for most banks in the sample, but rather suggests that there may have been other more significant factors putting stress on bank regulatory capital. |
| Keywords: | Global financial crisis ; Bank capital ; Banks and banking - Accounting |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedbqu:qau10-1&r=reg |
| By: | Benjamin Alarie (University of Toronto); Finn Poschmann (C.D. Howe Institute) |
| Abstract: | Canadian provincial governments have broad authority to impose direct taxes by passing enabling legislation in their respective legislatures. Governments may also use regulation to set fees, for example, to recover the cost of services they provide, but cannot use regulation to impose taxes that raise general revenue. Doing so would be unconstitutional. Governments nonetheless sometimes attempt to raise revenue by imposing levies that are deliberately mislabelled as “fees” – past efforts to do so have exposed provincial governments to successful constitutional challenges. This e-brief examines problematic example: the Ontario government recently ordered the Ontario Energy Board to impose a “fee” to be used to fund activities of the Ministry of Energy and Infrastructure; this fee is quite likely an unconstitutional tax. |
| Keywords: | Governance and Public Institutions, Ontario Energy Board, Independent Electricity System Operator (IESO), taxation, regulation, unconstitutional tax |
| JEL: | H25 H41 H71 L94 |
| Date: | 2010–04 |
| URL: | http://d.repec.org/n?u=RePEc:cdh:ebrief:98&r=reg |
| By: | He, Haoran (Department of Economics, School of Business, Economics and Law, Göteborg University) |
| Abstract: | This study investigates the validity of using stated preference (SP) estimates to predict policy effects on plastic bag consumption. Before implementation of a plastic bag regulation, when bags were still free of charge, we utilized an SP survey to elicit consumers’ contingent bag consumption in certain possible pricing scenarios. Following implementation of the regulation mandating charging for bags, we conducted another survey to collect actual consumption information. We thus have unique data to compare stated and revealed consumption. The comparison results show that consumers’ behavioral reactions to a policy change can be predicted reasonably well with SP techniques.<p> |
| Keywords: | China; contingent behavior; external validity; plastic bags; revealed behavior; stated preference |
| JEL: | C91 D12 Q53 |
| Date: | 2010–05–06 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:gunwpe:0444&r=reg |
| By: | Försund, Finn (University of Oslo); Hjalmarsson, Lennart (Department of Economics, School of Business, Economics and Law, Göteborg University) |
| Abstract: | To achieve a stable and reliable electricity supply, efficient provision of reserve capacity or, more generally, ancillary services is crucial. Because of the expansion of wind power with random variation in supply, and expected environmental restrictions in hydropower operation causing reductions in regulated hydropower capacity, the balancing power and system reliability issues have become topical in Scandinavia. Moreover, there seems to be a wide-spread opinion that increase in wind-power generation will lead to increased demand for regulating power, much higher prices for reserves and a much higher value of regulated hydro power. Thus, this chapter deals with the value of balance regulation power, or electricity reserves, in the Nordic electricity market, and we will address the issue of the future value of electricity reserves, hydro capacity in particular, that could be used either for energy production or to balance power production, and more generally discuss the value of balancing power in the Nordic electricity system. In the first, theoretical, part of this study we will apply a simple dynamic electricity generation model, involving hydropower, thermal power and wind power to derive the value of the water in a dam of a hydropower plant. In the second, more empirically oriented, part we will address a number of issues related to balance regulation and the value of balancing power with focus on the Nordic electricity market and against the background of an expanding generation capacity of intermittent renewable electricity, especially wind power.<p> |
| Keywords: | Electricity; ancillary services; reserve capacity; regulating power; wind power |
| JEL: | L94 Q40 Q51 |
| Date: | 2010–05–04 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:gunwpe:0441&r=reg |
| By: | Ojo, Marianne |
| Abstract: | This paper illustrates how trust in management can be consolidated through the order and mode of application of enforcement measures (negotiating and punitive enforcement measures) which are employed in facilitating and maximising compliance with rules. “Whilst negotiating strategies are introduced initially to develop trust between the regulator and the regulated, resort is made to more punitive strategies where an absence of trust in the compliance activity has been confirmed.” In considering techniques which could be introduced to maximise compliance with rules, standards and principles, this paper not only highlights why responsive and negotiating strategies are more effective than deterrence based strategies in facilitating compliance with rules and principles, but also the importance of introducing some element of fairness and high degree of accountability into the decision making process. Whilst fairness is considered to be of greater significance to decisions founded on principles and discretion, accountability is a benefit and feature which is usually attributed to “bright lines rules”. Even though it is contended that issues related to legitimacy and accountability could still arise with group decisions, this paper seeks to demonstrate that some degree of accountability (along with the fairness attributed to group decisions) could be fostered through corporate and group decision making. Furthermore, the paper highlights how effective communication can be achieved, how such communication – as well as an effective system of communication, is vital to determining the point at which there should be a departure from the systematic application of rules. |
| Keywords: | communication; compliance; principles; enforcement; regulation; trust |
| JEL: | K2 D7 G3 |
| Date: | 2010–05–05 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:22500&r=reg |
| By: | Thomas Hazlett (School of Law, George Mason University); David Porter (Economic Science Institute, CHapman University); Vernon L. Smith (Economic Science Institute, Chapman University) |
| Abstract: | In the Federal Communications Commission, Ronald Coase exposed deep foundations via normative argument buttressed by astute historical observation. The government controlled scarce frequencies, issuing sharply limited use rights. Spillovers were said to be otherwise endemic. Coase saw that Government limited conflicts by restricting uses; property owners perform an analogous function via the “price system.” The government solution was inefficient unless the net benefits of the alternative property regime were lower. Coase augured that the price system would outperform. His spectrum auction proposal was mocked by communications policy experts, opposed by industry interests, and ridiculed by policy makers. Hence, it took until July 25, 1994 for FCC license sales to commence. Today, some 73 U.S. auctions have been held, 27,484 licenses sold, and $52.6 billion paid. The reform is a textbook example of economic policy success. We examine Coase’s seminal 1959 paper on two levels. First, we note the importance of its analytical symmetry, comparing administrative to market mechanisms under the assumption of positive transaction costs. This fundamental insight has had enormous influence within the economics profession, yet is often lost in current analyses. This analytical insight had its beginning in his acclaimed early article on the firm,6 and continued into his subsequent treatment of social cost. Second, we investigate why spectrum policies have stopped well short of the property rights regime that Coase advocated, considering rent-seeking dynamics and the emergence of new theories challenging Coase’s property framework. One conclusion is easily rendered: competitive bidding is now the default tool in wireless license awards. By rule of thumb, about $17 billion in U.S. welfare losses have been averted. Not bad for the first 50 years of this, or any, Article appearing in Volume II of the Journal of Law & Economics. |
| Date: | 2009–11 |
| URL: | http://d.repec.org/n?u=RePEc:chu:wpaper:10-02&r=reg |
| By: | Eleni A. Kaditi |
| Abstract: | Foreign investments are in the focus of most governments around the world. In order to be able to set a policy agenda which is successful in promoting FDI, it is necessary to understand their determinants. This paper examines whether and to what extent sound institutions and the degree of regulation deter or attract FDI flows in four economies of Southeastern Europe. In a dynamic panel analysis, a broad set of institutional and regulatory variables that may affect the decision of foreign investors to undertake investment projects in this region is examined, using firm-level data. Analysis shows that the quality of the institutional environment significantly influences foreign capital. Governments in this region should, therefore, focus primarily on creating a good legal system, having relatively stable political and economic conditions. |
| Keywords: | Foreign Investments, Corruption, Transition Economies |
| JEL: | F23 D73 P3 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:lic:licosd:26010&r=reg |
| By: | Karl Whelan (University College Dublin) |
| Abstract: | Did global imbalances cause the financial crisis? A number of influential figures have argued that inflows of foreign capital into the US due to the current account deficit helped to trigger the crisis. This paper argues that the evidence for this position is weak. The capital inflows into the US associated with the current account deficit were also not the key factor driving foreign purchases of US toxic assets. The so-called global savings glut was not as significant a pattern as is often presented. Macroeconomic policies that reduced global imbalances could have been adopted but these would probably not have prevented the crisis. Global policy efforts to prevent a recurrence of the financial crisis need to focus on improved banking regulation. Reducing global imbalances should be of secondary importance. |
| Date: | 2010–04–15 |
| URL: | http://d.repec.org/n?u=RePEc:ucn:wpaper:201013&r=reg |
| By: | Raouf BOUCEKKINE (UNIVERSITE CATHOLIQUE DE LOUVAIN, Department of Economics and Core, Univerity of Glasgow, Department of Economics); Natali HRITONENKO (Prairie View A&M University, USA); Yuri YATSENKO (Houston Baptist University, USA) |
| Abstract: | This paper studies to which extent a firm using a scarce resource input and facing environmental regulation, can still manage to have a sustainable growth of output and profits. The firm has a vintage capital technology with two complementary factors, capital and a resource input subject to quota, the latter being increasingly scarce through an exogenously rising price. The firm can scrap obsolete capital and invest in adoptive and/or innovative R&D resource-saving activities. We show that there exists a threshold level for the growth rate of the resource price above which the firm will collapse. Below this threshold, two important properties are found. In the long-run, a sustainable growth is possible at a growth rate which is independent of the resource price. In the short-run, not only will the firms respond to increasing resource price by increasing R&D on average, but they will also reduce capital expenditures and speed up the scrapping of older capital goods. Finally, we identify optimal intensive Vs extensive transitional growth regimes depending on the history of the firms. |
| Keywords: | Vintage capital, technological progress, dynamic optimization, Sustainability, scarcity, environmental regulation |
| JEL: | C61 D21 D92 O33 Q01 |
| Date: | 2010–03–19 |
| URL: | http://d.repec.org/n?u=RePEc:ctl:louvir:2010010&r=reg |
| By: | Gregory Elliehausen |
| Abstract: | This paper reviews the behavioral literature on inter-temporal choice and decision making under uncertainty and assesses the evidence on behavioral influences affecting consumers' credit decisions. The evidence reviewed suggests that consumers often do not consider all information available in the market nor deliberately evaluate each alternative. Consumers simplify, take shortcuts, and use heuristics, which may not always be optimal but nevertheless may be an economical means for achieving desired goals. While most economists and psychologists agree that cognitive errors and time inconsistent behavior occur, the extent to which these phenomena impair actual decisions in markets is not at all clear. At this time, neither existing behavioral evidence nor conventional economic evidence supports a general conclusion that consumers' credit decisions are not rational or that markets do not work reasonably well. Empirical evidence suggests that behavioral research can help improve required information disclosures and contribute to more effective regulation, which enhances the performance of markets and improves individual outcomes. |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2010-25&r=reg |
| By: | Hans W. Friederiszick (ESMT Competition Analysis); Lars-Hendrik Röller (ESMT European School of Management and Technology) |
| Abstract: | This paper argues that empirical economic analysis in court proceedings is subject to important economic and legal restrictions, cumulating in a fundamental trade-off between accuracy and practicality. We draw lessons from two influential German court cases – the paper wholesaler cartel decision of 2007 and the cement cartel decision of 2009. We characterise the trade-offs arguing that they need to be well understood, made transparent, and that decisions on how to proceed in light of these trade-offs have to be taken upfront by the court. In this respect, we believe that the three-step procedure (design, application, and robustness checks) followed by the German court in the cement case is well suited to meet the appropriate legal standard and requirements, both with respect to accuracy and practicality. |
| Keywords: | antitrust law, horizontal anticompetitive practices, quantification of damages |
| JEL: | L12 L41 K21 K41 C10 |
| Date: | 2010–03–16 |
| URL: | http://d.repec.org/n?u=RePEc:esm:wpaper:esmt-10-001&r=reg |
| By: | George Pennacchi |
| Abstract: | This paper develops a structural credit risk model of a bank that issues deposits, shareholders' equity, and fixed or floating coupon bonds in the form of contingent capital or subordinated debt. The return on the bank's assets follows a jump-diffusion process, and default-free interest rates are stochastic. The equilibrium pricing of the bank's deposits, contingent capital, and shareholders' equity is studied for various parameter values haracterizing the bank's risk and the contractual terms of its contingent capital. Allowing for the possibility of jumps in the bank's asset value, as might occur during a financial crisis, has distinctive implications for valuing contingent capital. Credit spreads on contingent capital are higher the lower is the value of shareholders' equity at which conversion occurs and the larger is the conversion discount from the bond's par value. The effect of requiring a decline in a financial stock price index for conversion (dual price trigger) is to make contingent capital more similar to non-convertible subordinated debt. The paper also examines the bank's incentive to increase risk when it issues different forms of contingent capital as well as subordinated debt. In general, a bank that issues contingent capital has a moral hazard incentive to raise its assets' risk of jumps, particularly when the value of equity at the conversion threshold is low. However, moral hazard when issuing contingent capital tends to be less than when issuing subordinated debt. Because it reduces effective leverage and the pressure for government bailouts, contingent capital deserves serious consideration as part of a package of reforms that stabilize the financial system and eliminate "Too-Big-to-Fail." |
| Keywords: | Bank capital ; Risk ; Bank failures |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedcwp:1004&r=reg |