nep-reg New Economics Papers
on Regulation
Issue of 2010‒05‒29
sixteen papers chosen by
Christian Calmes
Universite du Quebec en Outaouais

  1. Is the Leverage of European Commercial Banks Pro-Cyclical? By Angelo Baglioni; Andrea Boitani; Massimo Liberatore; Andrea Monticini
  2. Generic drug pricing in Canada: components of the value-chain By Aidan Hollis
  3. Recovery determinants of distressed banks: Regulators, market discipline, or the environment? By Kick, Thomas; Koetter, Michael; Poghosyan, Tigran
  4. Reputational contagion and optimal regulatory forbearance By Alan D. Morrison; Lucy White
  5. Competition and stability in banking By Vives, Xavier
  6. The Environment and Directed Technical Change By Acemoglu, Daron; Aghion, Philippe; Bursztyn, Leonardo; Hemous, David
  7. A Perplexed Economist Confronts 'Too Big to Fail' By Scherer, F. M.
  8. The Economics of Smoking Bans By Charles A.M. de Bartolome; Ian J. Irvine
  9. The role of state aid control in improving bank resolution in Europe By André Sapir; Mathias Dewatripont
  10. Externality-correcting taxes and regulation. By Christiansen, V.; Smith, S.
  11. Liquidity and Capital Requirements and the Probability of Bank Failure By Philipp Johann König
  12. Heat waves, droughts, and preferences for environmental policy By Owen, Ann L.; Conover, Emily; Videras, Julio; Wu, Stephen
  13. The Influence of Collusion on Price Changes: New Evidence from Major Cartel Cases By Korbinian von Blanckenburg; Alexander Geist; Konstantin A. Kholodilin
  14. Collusive networks in market-sharing agreements under the presence of an antitrust authority By Roldan, Flavia
  15. Incorporating Equity in Regulatory and Benefit-Cost Analysis Using Risk Based Preferences By Scott Farrow
  16. Level of Access and Competition in Broadband Markets By Bourreau, Marc; Dogan, Pinar

  1. By: Angelo Baglioni (DISCE, Università Cattolica); Andrea Boitani (DISCE, Università Cattolica); Massimo Liberatore (DISCE, Università Cattolica); Andrea Monticini (DISCE, Università Cattolica)
    Abstract: Detecting whether banks?leverage is indeed procyclical is relevant to support the view that booms and crises may be reinforced by some sort of supply side ?nancial accelerator, whilst ?nding a plausible ex- planation of banks?behaviour is crucial to trace the road for a sensible reform of ?nancial regulation and managers? incentives. The paper shows that procyclical leverage appears to be well entrenched in the behaviour of a sample of major European banks, which are commonly labelled as mainly "commercial banks".
    Keywords: Banks, Pro-cyclicality, Financial Regulation.
    JEL: G21 E3
    Date: 2010–05
  2. By: Aidan Hollis
    Abstract: The problem of obtaining fair pricing for generic drugs has led to a series of regulatory measures in Canadian provinces. This paper offers a new way of thinking about the problems that need to be addressed, by considering three core components of the value chain of getting generic drugs to Canadians: litigation, production, and pharmacy services. The paper proposes that each component of this value chain should be paid for separately, using a royalty to reward successful litigation that benefits payers; a competitive market framework to pay for production; and a transparent, independent regulatory process to set dispensing fees for pharmacies. This approach would enable the total expenditures to match costs, would enable provinces to set appropriate quality and convenience standards for pharmacy, and would provide a measure of predictability for investors. The paper emphasizes that it is important to establish a separate mechanism for rewarding litigation that eliminates invalid patents. The savings to Canadians from such litigation exceeds one billion dollars annually. Without addressing the need to reward this valuable activity, it is dangerous for payers to drive down generic prices, since generic firms will lack incentives to invest in costly litigation. The paper also encourages governments to establish independent regulatory authorities to set fair fees for pharmacies by employing processes similar to those used in other price regulation agencies.
    Date: 2010–01–17
  3. By: Kick, Thomas; Koetter, Michael; Poghosyan, Tigran
    Abstract: Based on detailed regulatory intervention data among German banks during 1994-2008, we test if supervisory measures affect the likelihood and the timing of bank recovery. Severe regulatory measures increase both the likelihood of recovery and its duration while weak measures are insignificant. Results seem not to be driven by regulators directing measures to particularly bad banks. That is, our results remain intact when we exclude banks that eventually exit the market due to restructuring mergers or moratoria. More transparent publication requirements of public incorporation that indicate more exposure to market discipline are barely or not at all significant. Increasing earnings and cleaning credit portfolios are consistently of importance to increase recovery likelihood, whereas earnings growth accelerates the timing of recovery. Macroeconomic conditions also matter for bank recovery. Hence, concerted micro- and macro-prudential policies are key to facilitate distressed bank recovery. --
    Keywords: Bank distress,capital support,regulation,recovery
    JEL: G28 C41 G21
    Date: 2010
  4. By: Alan D. Morrison (Said Business School, University of Oxford, United Kingdom.); Lucy White (Harvard Business School, Soldiers Field, Boston, Massachusetts 02163, USA.)
    Abstract: This paper examines common regulation as cause of interbank contagion. Studies based on the correlation of bank assets and the extent of interbank lending may underestimate the likelihood of contagion because they do not incorporate the fact that banks have a common regulator. In our model, the failure of one bank can undermine the public’s confidence in the competence of the banking regulator, and hence in other banks chartered by the same regulator. Thus depositors may withdraw funds from other, unconnected, banks. The optimal regulatory response to this ‘panic’ behaviour can be to privately exhibit forbearance to the initially failing bank in the hope that it - and hence other vulnerable banks - survives. By contrast, public bailouts are ineffective in preventing panics and must be bolstered by other measures such as increased deposit insurance coverage. Regulatory transparency improves confidence ex ante but impedes regulators’ ability to stem panics ex post. JEL Classification: G21, G28.
    Keywords: Contagion, Reputation, Bank Regulation.
    Date: 2010–05
  5. By: Vives, Xavier (IESE Business School)
    Abstract: I review the state of the art of the academic theoretical and empirical literature on the potential trade-off between competition and stability in banking. There are two basic channels through which competition may increase instability: by exacerbating the coordination problem of depositors/investors on the liability side and fostering runs/panics, and by increasing incentives to take risk and raise failure probabilities. The competition-stability trade-off is characterized and the implications of the analysis for regulation and competition policy are derived. It is found that optimal regulation may depend on the intensity of competition.
    Keywords: trade-off; competition; stability; banking;
    Date: 2010–04–05
  6. By: Acemoglu, Daron (Harvard); Aghion, Philippe (Institute for International Economic Studies, Stockholm University); Bursztyn, Leonardo (Harvard); Hemous, David (Harvard)
    Abstract: This paper introduces endogenous and directed technical change in a growth model with environmental constraints. 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. 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 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.
    Keywords: environment; exhaustible resources; directed technological change; innovation
    JEL: C65 O30 O31 O33
    Date: 2010–04–25
  7. By: Scherer, F. M. (Harvard University)
    Date: 2010–04
  8. By: Charles A.M. de Bartolome (University of Colorado); Ian J. Irvine (Concordia University, Montreal)
    Abstract: While the empirical literature on smoking bans is extensive, little theory has been developed. This paper examines the welfare impact of smoking bans in an economy where smokers’ utility is reduced by a workplace/public place ban. The government has two instruments - increasing the price through taxation, or limiting when the product can be consumed through a ban. Its ability to reduce smoking through taxation is limited by a black market where cigarettes are not taxed. We show that the quantity instrument (ban) is always welfareenhancing. The model has application to other addictive activities.
    Keywords: smoking, workplace ban, public place ban, government control, taxation
    Date: 2010–05–01
  9. By: André Sapir; Mathias Dewatripont
    Abstract: The financial crisis exposed Europe's inadequacy in developing an effective banking resolution framework that could bring together national authorities and set guidelines for their coordination. The European Commission, through its assessment of state aid cases, managed to avoid single market distortions and mitigate moral hazard. This Policy Contribution explains why in the long-term Europe needs a single resolution authority. The authors Bruegel Senior Research Fellow André Sapir, Mathias Dewatripont, ULB and CEPR; Gregory Nguyen, National Bank of Belgium, and Peter Praet, National Bank of Belgium, show how in the short-term, the European Commission, through its state aid control discipline, can set the foundation for a new crisis resolution architecture. It can act as a substitute to improve coordination among member states and complement a European resolution authority once it is set up.
    Date: 2010–05
  10. By: Christiansen, V.; Smith, S.
    Abstract: Much of the literature on externalities has considered taxes and direct regulation as alternative policy instruments. Both instruments may in practice be imperfect, reflecting informational deficiencies and other limitations. We analyse the use of taxes and regulation in combination, to control externalities arising from individual consumption behaviour. We consider cases where taxes are either imperfectly differentiated to reflect individual differences in externalities, or where some consumption escapes taxation. In both cases we characterise the optimal instrument mix, and show how changing the level of direct regulation alters the optimal externality tax.
    Date: 2009–09
  11. By: Philipp Johann König
    Abstract: Using the model of Rochet and Vives (2004), this note shows that a prudential regulator can in general not mitigate a bank’s failure risk solely by means of liquidity requirements. However, their effectiveness can be restored if, in addition, minimum capital requirements are met. This provides a rationale for capital requirements beyond the commonly envoked reasoning that they are to be used to control the riskiness of banks’ asset portfolios.
    Keywords: prudential regulation, liquidity requirements, minimum capital requirements, global games
    JEL: G21 G28
    Date: 2010–05
  12. By: Owen, Ann L.; Conover, Emily; Videras, Julio; Wu, Stephen
    Abstract: Using data from a new household survey on environmental attitudes, behaviors, and policy preferences, we find that current weather conditions affect preferences for environmental regulation. Individuals who have recently experienced extreme weather (heat waves or droughts) are more likely to support laws to protect the environment even if it means restricting individual freedoms. We find evidence that the channel through which weather conditions affect policy preference is via perceptions of the importance of the issue of global warming. Furthermore, individuals who may be more sophisticated consumers of news are less likely to have their attitudes towards global warming changed by current weather conditions.
    Keywords: environmental regulation; global warming; environmental attitudes
    JEL: Q58
    Date: 2010–05–18
  13. By: Korbinian von Blanckenburg; Alexander Geist; Konstantin A. Kholodilin
    Abstract: In this paper, we compare the distribution of price changes between collusive and noncollusive periods for ten major cartels. The first moments focus on previous research. We extend the discussion to the third (skewness) and fourth (kurtosis) moments. However, none of the above descriptive statistics can be considered as a robust test allowing a differentiation between competition and cartel. Therefore, we implement the Kolmogorov-Smirnov test. According to our results, 8 out of 10 cartels were successful in controlling the market price for a number of years. The proposed methodology may be used for antitrust screening and regulatory purposes.
    Keywords: Cartel detection, collusion, competition policy
    JEL: L10 L60
    Date: 2010
  14. By: Roldan, Flavia (IESE Business School)
    Abstract: This paper studies how the presence of an antitrust authority affects market-sharing agreements made by firms. These agreements prevent firms from entering each other's market. The set of these agreements defines a collusive network, which is pursued by antitrust authorities. This article shows that while in the absence of the antitrust authority, a network is stable if its alliances are large enough when considering the antitrust authority, and more competitive structures can be sustained through bilateral agreements. Antitrust laws may have a pro-competitive effect, as they give firms in large alliances more incentives to cut their agreements at once.
    Keywords: market-sharing; economic networks; antitrust authorit; oligopoly;
    JEL: D43 K21 L41
    Date: 2010–04–07
  15. By: Scott Farrow (UMBC)
    Abstract: Governmental guidance for regulatory and benefit-cost analysis is targeted for applied analysts. Existing Federal guidance recommends sensitivity analysis in general without being specific regarding the implicit distributional assumptions of standard benefit-cost analysis. Recommendations for Federal guidance are developed to: 1) better communicate expectations for distributional analysis, 2) develop guidance for descriptive statistics related to distributional issues, and 3) integrate Government published measures of inequality aversion and to evaluate compensation for identified sensitive populations. While such actions have a data collection and analysis cost, they may make the results of regulatory analysis more relevant by investigating both efficiency and equity measures.
    Keywords: benefit, risk, equity, distribution, income
    JEL: H5 I3
    Date: 2009–10–01
  16. By: Bourreau, Marc (Institut Telecom and CREST-LEI); Dogan, Pinar (Harvard U)
    Abstract: In this paper, we consider an unregulated incumbent who owns a broadband infrastructure and decides on how much access to provide to a potential entrant. The level of access, i.e., the network elements that are shared in the provision of competing broadband services, not only determines the amount of investment the entrant needs to undertake to enter the market, but also the intensity of post-entry competition. We consider an access scheme that determines an access level and an associated two-part tariff. We show that the equilibrium level of access is higher when the sensitivity of product differentiation to the level of access is lower, and when the marginal investment cost is higher. We also show that the unregulated incumbent sets a suboptimally low (high) level of access if the degree of service differentiation is sufficiently high (low).
    Date: 2010–02

This nep-reg issue is ©2010 by Christian Calmes. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
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