nep-reg New Economics Papers
on Regulation
Issue of 2010‒06‒04
fifteen papers chosen by
Christian Calmes
Universite du Quebec en Outaouais

  1. A General Framework for Regulation and Liberalization in Network Industries By Christian Jaag; Urs Trinkner
  2. Regulating Altruistic Agents By Anthony Heyes; Sandeep Kapur
  3. ALCOHOL REGULATION AND CRIME By Carpenter, Christopher; Dobkin, Carlos
  4. Proof of Local Stability of the Rate-of-Return Regulation Process By Nezlobin, Alexander; Rajan, Madhav V.; Reichelstein, Stefan
  5. The political, regulatory and market failures that caused the US financial crisis By Tarr, David G.
  6. From Liberalization Towards Integration: Have Markups of EU Electricity Firms Changed? By Ziga Zarnic
  7. Dynamic Provisioning: Some Lessons from Existing Experiences By de Lis, Santiago Fernández; Herrero, Alicia Garcia
  8. Taxing risk and the optimal regulation of financial institutions By Narayana Kocherlakota
  9. Risk Management and Regulation Compliance with Tradable Permits under Dynamic Uncertainty By Pasquale Lucio Scandizzo; Odin K Knudsen
  10. Increased-Liability Equity: A Proposal to Improve Capital Regulation of Large Financial Institutions By Admati, Anat R.; Pfleiderer, Paul
  11. Can banks circumvent minimum capital requirements? The case of mortgage portfolios under Basel II By Christopher Henderson; Julapa Jagtiani
  12. Deals versus rules : policy implementation uncertainty and why firms hate it By Hallward-Driemeier, Mary; Khun-Jush, Gita; Pritchett, Lant
  13. Regulatory zoning and coastal housing prices: a bayesian hedonic approach (In French) By Monique DANTAS (GREThA UMR CNRS 5113); Frédéric GASCHET (GREThA UMR CNRS 5113); Guillaume POUYANNE (GREThA UMR CNRS 5113)
  14. Did bankruptcy reform cause mortgage default rates to rise? By Wenli Li; Michelle J. White; Ning Zhu
  15. The Effect of Allowance Allocations on Cap-and-Trade System Performance By Hahn, Robert W.; Stavins, Robert N.

  1. By: Christian Jaag; Urs Trinkner
    Abstract: This paper provides a general framework to understand, assess and develop regulations in network industries.
    Keywords: Regulation, Network Industries, Universal Service, Access, Bottleneck
    JEL: K23 M21 L00 L51
    Date: 2009–08
  2. By: Anthony Heyes (Royal Holloway, University of London); Sandeep Kapur (Department of Economics, Mathematics & Statistics, Birkbeck)
    Abstract: Altruism or `regard for others' can encourage self-restraint among generators of negative externalities, thereby mitigating the externality problem. We explore how introducing impure altruism into standard regulatory settings alters regulatory prescriptions. We show that the optimal calibration of both quantitative controls and externality taxes are affected. It also leads to surprising results on the comparative performance of instruments. Under quantity-based regulation welfare is increasing in the propensity for altruism in the population; under price-based regulation the relationship is non-monotonic. Price-based regulation is preferred when the population is either predominantly altruistic or predominantly selfish, quantity-based regulation for cases in between.
    Date: 2010–05
  3. By: Carpenter, Christopher; Dobkin, Carlos
    Abstract: We provide a critical review of research in economics that has examined causal relationships between alcohol use and crime. We lay out several causal pathways through which alcohol regulation and alcohol consumption may affect crime, including: direct pharmacological effects on aggression, reaction time, and motor impairment; excuse motivations; venues and social interactions; and victimization risk. We focus our review on four main types of alcohol regulations: price/tax restrictions, age-based availability restrictions, spatial availability restrictions, and temporal availability restrictions. We conclude that there is strong evidence that tax- and age-based restrictions on alcohol availability reduce crime, and we discuss implications for policy and practice.
    Keywords: Health Economics and Policy, Public Economics,
    Date: 2010–03
  4. By: Nezlobin, Alexander (New York University); Rajan, Madhav V. (Stanford University); Reichelstein, Stefan (Stanford University)
    Abstract: This note provides the proof of proposition 5 in our paper titled "Dynamics of Rate-of-Return Regulation."
    Date: 2009–12
  5. By: Tarr, David G.
    Abstract: This paper discusses the key regulatory, market and political failures that led to the 2008-2009 United States financial crisis. While Congress was fixing the Savings and Loan crisis, it failed to give the regulator of Fannie Mae and Freddie Mac normal bank supervisory power. This was a political failure as Congress was appealing to narrow constituencies. In the mid-1990s, to encourage home ownership, the Administration changedenforcement of the Community Reinvestment Act, effectively requiring banks to lower bank mortgage standards to underserved areas. Crucially, the risky mortgage standards then spread to other sectors of the market. Market failure problems ensued as banks, mortgage brokers, securitizers, credit rating agencies, and asset managers were all plagued by problems such as moral hazard or conflicts of interest. The author explains that financial deregulation of the past three decades is unrelated to the financial crisis, and makes several recommendations for regulatory reform.
    Keywords: Debt Markets,Access to Finance,Emerging Markets,Banks&Banking Reform,Bankruptcy and Resolution of Financial Distress
    Date: 2010–05–01
  6. By: Ziga Zarnic
    Abstract: This paper presents an ex-post empirical analysis of the impact of European electricity mar- ket reforms on markups of rms. The working hypothesis is that further economic integration would bring competition into electricity markets re ected by lower markups of electricity rms. The results show that reforms have gradually reduced the markups, but the markup premium of incumbent rms is on average larger than theoretical models would predict under eective economic integration. Considering regional proximity and heterogeneity of rms along the supply chain, the results suggest that better market access and cross-border arbitrage disci- plined the markups, but have not led to competitive market outcomes due to prevailing market concentration and insucient unbundling of transmission and distribution channels.
    Keywords: Economic integration; electricity rms; EU; price-cost margins; service market regulation
    JEL: F10 L11 L51 L94
    Date: 2010
  7. By: de Lis, Santiago Fernández (Asian Development Bank Institute); Herrero, Alicia Garcia (Asian Development Bank Institute)
    Abstract: After analyzing the different reasons why the financial system and also the regulatory framework induced procyclicality, this paper reviews the experiences of three countries which have introduced dynamic provisioning as a regulatory tool to limit procyclicality. The case of Spain—the country with the longest experience—is reviewed, as well as those of Colombia and Peru—countries that have recently adopted dynamic provisioning. A number of policy lessons are drawn from that comparison.
    Keywords: dynamic provisioning; colombia; peru; spain; bank regulation; procyclical
    JEL: E32 G21 G28 G32
    Date: 2010–05–26
  8. By: Narayana Kocherlakota
    Abstract: Knowing that bailouts are inevitable because governments will rescue firms whose collapse may cause systemic failure, financial institutions fail to internalize risks their investments impose on society, thereby creating a “risk externality.” This paper proposes that just as taxes are imposed to deal with pollution externalities, taxes can also address risk externalities. ; The size of the optimal tax depends on risk-related attributes and may be difficult for supervisors to calculate and implement. A market-based method can estimate its appropriate magnitude. For a particular financial institution, the government should sell “rescue bonds” paying a variable coupon linked to the size of the bailouts or other government assistance received by the institution or its owners. Coupon prices will reflect the market’s judgment of an institution’s risk profile and can therefore be used to set the tax. ; A well-designed tax system can entirely eliminate the risk externality generated by inevitable government bailouts.
    Keywords: Financial crises ; Taxation ; Risk ; Regulation
    Date: 2010
  9. By: Pasquale Lucio Scandizzo (Faculty of Economics, University of Rome "Tor Vergata"); Odin K Knudsen (JPMorgan Chase & Co)
    Abstract: In this paper, we explore the effects of dynamic uncertainty on the risk management of regulated industries and emission market. We consider as major sources of uncertainty the stochastic growth of demand for the industry output (e.g. electric energy) and the ensuing lack of information on the pollution levels of individual firms, their behavior and the behavior of the regulator. These sources of uncertainty are common in pollution permit trading as not only does the market respond to the volatility of fundamentals but also to the vagaries of the institutional structure, created by public policy and enforced through regulation. The paper shows that in the presence of strategic behavior on the part of the agents involved, even though both the level and the volatility of output increases over time, trading of permits is a highly effective instrument of risk management, since it allows the firms to pool the risks arising from the volatile environment, thereby simplifying enforcement, reducing emissions and improving resource allocation. Moreover, uncertainty plays a subtle influencing role, since on one hand it broadens the regulator’s deterrent power over potential polluters, while on the other it reduces the expected value of the sanction for the individual firm.
    Keywords: risk; permits; regulation; enforcement; dynamic uncertainty; option; pricing; equilibrium
    JEL: K34 H40 Q52
    Date: 2010–05–28
  10. By: Admati, Anat R. (Stanford University); Pfleiderer, Paul (Stanford University)
    Abstract: While it is recognized that the high degree of leverage used by financial institutions creates systemic risks and other negative externalities, many argue that financial institutions must rely on extensive debt financing since equity financing is "expensive." Some of the reasons debt is attractive to financial institutions, such as tax benefits and implicit guarantees, are due to subsidies that exacerbate the negative externalities associated with leverage, and are therefore not legitimate from a public policy perspective. Another argument given for high levels of debt financing is that debt serves as a disciplining device for managers who would otherwise make suboptimal or wasteful investment decisions. We propose a mechanism that allows financial institutions to maintain the contractual obligations of debt while avoiding or reducing many of the costs associated with it, including deadweight bankruptcy costs, agency costs due to risk shifting, and under-investment associated with debt overhang. Essentially, we propose a way to increase the liability of the equity issued by the financial institution without changing the limited-liability nature of publicly-held securities. The increased liability is backed by a proposed "Equity Liability Carrier," which holds the increased-liability equity of the financial institution as well as safe liquid assets. In addition to reducing or eliminating the agency problems associated with leverage, this structure concentrates the incentives to monitor and control managers within equity holders, and reduces the need for inefficient liquidation, implicit guarantees and bailouts. Our proposal can be viewed as a way for regulators to impose effectively higher capital requirements, while allowing financial institutions to undertake significant debt commitments.
    JEL: G21 G28 G32 G38 H81 K23
    Date: 2009–12
  11. By: Christopher Henderson; Julapa Jagtiani
    Abstract: The recent mortgage crisis has resulted in several bank failures as the number of mortgage defaults increased. The current Basel I capital framework does not require banks to hold sufficient amounts of capital to support their mortgage lending activities. The new Basel II capital rules are intended to correct this problem. However, Basel II models could become too complex and too costly to implement, often resulting in a trade-off between complexity and model accuracy. In addition, the variation of the model, particularly how mortgage portfolios are segmented, could have a significant impact on the default and loss estimated and, thus, could affect the amount of capital that banks are required to hold. This paper finds that the calculated Basel II capital varies considerably across the default prediction model and segmentation schemes, thus providing banks with an incentive to choose an approach that results in the least required capital for them. The authors also find that a more granular segmentation model produces smaller required capital, regardless of the economic environment. In addition, while borrowers' credit risk factors are consistently superior, economic factors have also played a role in mortgage default during the financial crisis.
    Keywords: Capital ; Banks and banking ; Basel capital accord
    Date: 2010
  12. By: Hallward-Driemeier, Mary; Khun-Jush, Gita; Pritchett, Lant
    Abstract: Firms in Africa report"regulatory and economic policy uncertainty"as a top constraint to their growth. This paper argues that often firms in Africa do not cope with policy rules, rather they face deals: firm-specific policy actions that can be influenced by firm actions (such as bribes) and characteristics (such as political connections). Using Enterprise Surveydata, the paper demonstrates huge variability in reported policy actions across firms notionally facing the same policy. The within-country dispersion in firm-specific policy actions is larger than the cross-national differences in average policy. The analysis shows that variability in this policy implementation uncertainty within location-sector-size cells is correlated with firm growth rates. These measures of implementation variability are more strongly related to lower firm employment growth than are measures of"average"policy action. The paper shows that the de jure measures such as Doing Business indicators are virtually uncorrelated with ex-post firm-level responses, further evidence that deals rather than rules prevail in Africa. Strikingly, the gap between de jure and de facto conditions grows with the formal regulatory burden. The evidence also shows more burdensome processes open up more space for making deals; firms may not incur the official costs of compliance, but they still pay to avoid them. Finally, measures of institutional capacity and better governance are closely associated with perceived consistency in implementation.
    Keywords: Environmental Economics&Policies,Microfinance,Public Sector Corruption&Anticorruption Measures,Climate Change Policy and Regulation,Climate Change Economics
    Date: 2010–05–01
  13. By: Monique DANTAS (GREThA UMR CNRS 5113); Frédéric GASCHET (GREThA UMR CNRS 5113); Guillaume POUYANNE (GREThA UMR CNRS 5113)
    Abstract: The priority for France’s “Grenelle II” environmental legislation is to reduce the consumption of space caused by urbanisation. The best tool for achieving this goal is zoning within a territorial planning framework. Yet zoning also tends to increase property values, due to the scarcity effects it provokes (restricting the supply of land) as well as its amenity effects (the capitalisation of land use externalities in housing pricing).\r\nThe present article studies the impact on property prices of the distance to regulated zones located on Arcachon Bay near Bordeaux in Southwest France – a region that is particularly conducive to this kind of analysis because it combines exceptional landscape quality and strong urban pressures. We have estimated a hedonic model corrected for spatial self-correlation. Heteroscedasticity is corrected using Bayesian simulation methods, as suggested by Le Sage and Parent (2006).\r\nThe findings reveal tension between urban and natural amenities in the determination of property prices. Proximity to facilities and coastal amenities increase prices. The impact on housing prices of zoning materialising through Land Use Plans (LUP) is corroborated. Protected natural zones tend to raise prices as long as long they are not used for agricultural or forestry activities. Conversely, proximity to zones of future urbanisation tends to lower housing prices.
    Keywords: LUP zoning, Hedonic price method, Bayesian spatial econometrics, Coastal
    JEL: Q15 Q24 Q51 R14
    Date: 2010
  14. By: Wenli Li; Michelle J. White; Ning Zhu
    Abstract: This paper argues that the U.S. bankruptcy reform of 2005 played an important role in the mortgage crisis and the current recession. When debtors file for bankruptcy, credit card debt and other types of debt are discharged - thus loosening debtors' budget constraints. Homeowners in financial distress can therefore use bankruptcy to avoid losing their homes, since filing allows them to shift funds from paying other debts to paying their mortgages. But a major reform of U.S. bankruptcy law in 2005 raised the cost of filing and reduced the amount of debt that is discharged. The authors argue that an unintended consequence of the reform was to cause mortgage default rates to rise. Using a large dataset of individual mortgages, they estimate a hazard model to test whether the 2005 bankruptcy reform caused mortgage default rates to rise. Their major result is that prime and subprime mortgage default rates rose by 14 percent and 16 percent, respectively, after bankruptcy reform. The authors also use difference-in-difference to examine the effects of three provisions of bankruptcy reform that particularly harmed homeowners with high incomes and/or high assets and find that the default rates of affected homeowners rose even more. Overall, they calculate that bankruptcy reform caused the number of mortgage defaults to increase by around 200,000 per year even before the start of the financial crisis, suggesting that the reform increased the severity of the crisis when it came.
    Keywords: Bankruptcy ; Law and legislation ; Foreclosure ; Default (Finance) ; Mortgage loans ; Global financial crisis
    Date: 2010
  15. By: Hahn, Robert W. (Sustainable Consumption Institute, University of Manchester and Georgetown Center for Business and Public Policy, Georgetown); Stavins, Robert N. (Harvard U and Resources for the Future)
    Abstract: We examine an implication of the "Coase Theorem" which has had an important impact both on environmental economics and on public policy in the environmental domain. Under certain conditions, the market equilibrium in a cap-and-trade system will be cost-effective and independent of the initial allocation of tradable rights. That is, the overall cost of achieving a given aggregate emission reduction will be minimized, and the final allocation of permits will be independent of the initial allocation. We call this the independence property. This property is very important because it allows equity and efficiency concerns to be separated in a relatively straightforward manner. In particular, the property means that the government can establish the overall pollution-reduction goal for a cap-and-trade system by setting the cap, and leave it up to the legislature--such as the U.S. Congress--to construct a constituency in support of the program by allocating the allowances to various interests without affecting either the environmental performance of the system or its aggregate social costs. Our primary objective in this paper is to examine the conditions under which the independence property is likely to hold--both in theory and in practice. A number of factors can call the independence property into question theoretically, including market power, transaction costs, non-cost-minimizing behavior, and conditional allowance allocations. We find that, in practice, there is support for the independence property in some, but not all cap-and-trade applications.
    JEL: H11 L51 Q58
    Date: 2010–03

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