nep-reg New Economics Papers
on Regulation
Issue of 2010‒07‒10
eighteen papers chosen by
Oleg Eismont
Russian Academy of Sciences

  1. Structured Finance Influence on Financial Market Stability – Evaluation of Current Regulatory Developments By Schuetz, Sebastian Alexander
  2. Financial Turmoil in the Banking Sector and the Asian Lamfalussy Process: The Case of Four Economies By Hsu, Chen-Min; Liao, Chih-Feng
  3. Toward a Combined Merchant-Regulatory Mechanism for Electricity Transmission Expansion By William Hogan; Juan Rosellón; Ingo Vogelsang
  4. Incentives for Transmission Investment in the PJM Electricity Market: FTRs or Regulation (or Both?) By Juan Rosellón; Zdenka Mysliková; Eric Zenón
  5. Lessons from Japan's Banking Crisis, 1991–2005 By Fujii, Mariko; Kawai, Masahiro
  6. "Three Futures for Postcrisis Banking in the Americas: The Financial Trilemma and the Wall Street Complex" By Gary A. Dymski
  7. Lumpy Investment in Regulated Natural Gas Pipelines: An Application of the Theory of the Second Best By Dagobert L. Brito; Juan Rosellón
  8. An Economic Approach to Abuse of Dominance By Federico Etro; Ioannis Kokkoris
  9. Macroeconomic trouble and policy challenges in the wake of the financial bust By Angel Asensio
  10. The Growth of Extended Entry Tournaments and the Decline of Institutionalised Occupational Labour Markets in Britain By David Marsden
  11. Fairness Ex Ante & Ex Post – The Benefits of Renegotiation in Media Markets By Christoph Engel; Michael Kurschilgen
  12. Social Norms and Behavior in the Local Commons Through the Lens of Field Experiments By Cardenas, Juan-Camilo
  13. L'expérience américaine de 1933-1935 et la formation des institutions : lectures keynésienne et régulationniste By Michel Rocca
  14. Collective Action forWatershed Management: Field Experiments in Colombia and Kenya By Cardenas, Juan-Camilo; Rodriguez, Luz Angela; Johnson, Nancy
  15. Does Hospital Competition Improve Efficiency? An Analysis of the Recent Market-Based Reforms to the English NHS By Zack Cooper; Stephen Gibbons; Simon Jones; Alistair McGuire
  16. The Determinants of Music Piracy in a Sample of College Students By Bellemare, Marc F.; Holmberg, Andrew M.
  17. Social and environmental filters to market incentives: common land persistence in 19th century Spain By Francisco J. Beltrán Tapia
  18. The Question of Land and Infrastructure Development in India: Urgently Required Reforms for Fairness and Infrastructural Development By Sebastian Morris; Ajay Pandey

  1. By: Schuetz, Sebastian Alexander
    Abstract: In 2007 the world faced one of the biggest financial crises ever. It was the third important financial crisis in the last 12 years. Spillovers to the real economy and moral hazard behaviour of carpetbaggers resulted in enormous pressure on worldwide political institutions to approve a more rigorous regulation on financial institutions and to predict financial crises via early warning systems. We analyzed the performance of structured finance ratings and structured finance issuance/outstanding to detect the main shortcomings of the subprime crisis. Afterwards, we explain the behaviour of market participants with theoretical models and a survey of institutions involved in securitization. With the conclusions of this analysis we evaluate the EU regulation on credit rating agencies and current Basel II enhancements. Finally we can determine that most regulatory enhancements are in accordance with our analyzed shortcomings. Some approaches like the introduction of a leverage ratio are counterproductive and a danger for worldwide economic growth.
    Keywords: Structured Finance; Ratings; Regulation; Subprime Crisis; Basel II; Leverage Ratio
    JEL: G18 G28
    Date: 2010–06–30
  2. By: Hsu, Chen-Min (Asian Development Bank Institute); Liao, Chih-Feng (Asian Development Bank Institute)
    Abstract: This paper investigates the prevailing financial regulatory structures and impact of the current financial turmoil on banking performance in four economies: the People's Republic of China (PRC); Hong Kong China; Singapore; and Taipei,China. Both the PRC and Hong Kong, China operate under a fragmented financial regulatory structure, while Singapore and Taipei,China have integrated structures. We examine the role of an integrated financial regulatory structure in helping financial institutions mitigate the impact of the financial crisis, using financial indicators of banks' capital structure and operating performance in these four economies between 2003 and 2008. Our analysis of the indicators reveals that banking performance under a fragmented financial regulatory structure is not worse than under integrated regulation. This implies that financial regulatory structure is not the main reason why Asian financial institutions suffered only limited losses from the current global financial crisis. However, given the growing complexity of the global financial system, and the relative weakness of current financial regulatory structures in Asia, this paper suggests that East Asian governments should refer to the Lamfalussy Process in the European Union and set up an Asia Financial Stability Dialogue to facilitate policy coordination for regional financial sector stability and development.
    Keywords: asian financial regulation; global financial crisis; asian banking; prc; asian financial institutions; asian financial sector
    JEL: F42 G18 G21
    Date: 2010–06–28
  3. By: William Hogan; Juan Rosellón; Ingo Vogelsang
    Abstract: Electricity transmission pricing and transmission grid expansion have received increasing regulatory and analytical attention in recent years. Since electricity transmission is a very special service with unusual characteristics, such as loop flows, the approaches have been largely tailor-made and not simply taken from the general economic literature or from the more specific but still general incentive regulation literature. An exception has been Vogelsang (2001), who postulated transmission cost and demand functions with fairly general properties and then adapted known regulatory adjustment processes to the electricity transmission problem. A concern with this approach has been that the properties of transmission cost and demand functions are little known but are suspected to differ from conventional functional forms. The assumed cost and demand properties in Vogelsang (2001) may actually not hold for transmission companies (Transcos). Loop-flows imply that certain investments in transmission upgrades cause negative network effects on other transmission links, so that capacity is multidimensional. Total network capacity might even decrease due to the addition of new capacity in certain transmission links. The transmission capacity cost function can be discontinuous. There are two disparate approaches to transmission investment: one employs the theory based on long-run financial rights (LTFTR) to transmission (merchant approach), while the other is based on the incentive-regulation hypothesis (regulatory approach). An independent system operator (ISO) could handle the actual dispatch and operational pricing. The transmission firm is regulated through benchmark or price regulation to provide long-term investment incentives while avoiding congestion. In this paper we consider the elements that could combine the merchant and regulatory approaches in a setting with price-taking electricity generators and loads.
    Keywords: Electricity transmission, Incentive regulation, Financial transmission rights, Loop-flow problem
    JEL: D24 L51 L94
    Date: 2010
  4. By: Juan Rosellón; Zdenka Mysliková; Eric Zenón
    Abstract: This paper presents an application of a mechanism that provides incentives to promote transmission network expansion in the area of the US electric system known as PJM. The applied mechanism combines the merchant and regulatory approaches to attract investment into transmission grids. It is based on rebalancing a two-part tariff in the framework of a wholesale electricity market with locational pricing. The expansion of the network is carried out through the sale of financial transmission rights for the congested lines. The mechanism is tested for 14-node and 17-node geographical coverage areas of PJM. Under Laspeyres weights, it is shown that prices converge to the marginal cost of generation, the congestion rent decreases, and the total social welfare increases. The mechanism is shown to adjust prices effectively given either non-peak or peak demand.
    Keywords: Electricity transmission expansion, incentive regulation, PJM
    JEL: L51 L91 L94 Q40
    Date: 2010
  5. By: Fujii, Mariko (Asian Development Bank Institute); Kawai, Masahiro (Asian Development Bank Institute)
    Abstract: The Japanese government's response to the financial crisis in the 1990s was late, unprepared and insufficient; it failed to recognize the severity of the crisis, which developed slowly; faced no major domestic or external constraints; and lacked an adequate legal framework for bank resolution. Policy measures adopted after the 1997–1998 systemic crisis, supported by a newly established comprehensive framework for bank resolution, were more decisive. Banking sector problems were eventually resolved by a series of policies implemented from that period, together with an export-led economic recovery. Japan's experience suggests that it is vital for a government not only to recapitalize the banking system but also to provide banks with adequate incentives to dispose of troubled assets from their balance sheets, even if that required the government to mobilize regulatory measures to do so, as was done in Japan in 2002. Economic stagnation can cause new nonperforming loans to emerge rapidly, and deplete bank capital. If the authorities do not address the banking sector problem promptly, then the crisis will prolong and economic recovery will be substantially delayed.
    Keywords: japan banking crisis; 1990s; bank capital; financial regulation
    JEL: G21 G28
    Date: 2010–06–29
  6. By: Gary A. Dymski
    Abstract: This would seem an opportune moment to reshape banking systems in the Americas. But any effort to rethink and improve banking must acknowledge three major barriers. The first is a crisis of vision: there has been too little consideration of what kind of banking system would work best for national economies in the Americas. The other two constraints are structural. Banking systems in Mexico and the rest of Latin America face a financial regulation trilemma, the logic and implications of which are similar to those of smaller nations’ macroeconomic policy trilemma. The ability of these nations to impose rules that would pull banking systems in the direction of being more socially productive and economically functional is constrained both by regional economic compacts (in the case of Mexico, NAFTA) and by having a large share of the domestic banking market operated by multinational banks. For the United States, the structural problem involves the huge divide between Wall Street megabanks and the remainder of the U.S. banking system. The ambitions, modes of operation, and economic effects of these two different elements of U.S. banking are quite different. The success, if not survival, of one element depends on the creation of a regulatory atmosphere and set of enabling federal government subsidies or supports that is inconsistent with the success, or survival, of the other element.
    Keywords: Banking; Financial Crisis; Trilemma; Wall Street; Mexico; United States; Financial Regulation; Megabanks; Regional Compacts; NAFTA
    JEL: E5 F3 G1 G2 O1 P5
    Date: 2010–06
  7. By: Dagobert L. Brito; Juan Rosellón
    Abstract: We address investment in regulated natural gas pipelines when investment is lumpy and the demand for gas is stochastic. This is a problem that can be solved in theory as a dynamic program, but a practical solution depends on functions and parameters that are either subjective or cannot be estimated. We then reformulate the problem from the standpoint of consumers that face incomplete markets. It is shown that for reasonable parameter values consumers prefer to pay for excess capacity rather than bear the risk of congestion. These strategies can be implemented with reasonably straightforward policies. Since the demand for gas is very inelastic, the welfare losses associated from small deviations from a first best optimum are minimal. This implies that the gas pipeline system can be regulated with a relatively simple set of transparent rules without any significant loss of welfare.
    Keywords: Transmission investment, Natural-gas regulation, Congestion management, Gas pipelines, Second-best theory.
    JEL: L51 L95
    Date: 2010
  8. By: Federico Etro; Ioannis Kokkoris
    Abstract: The European debate on abuse of dominance issues in antitrust has been recently characterized by an emphasis on purely economic aspects, and by an emerging consensus on the merits of taking an “effects-based approach” aimed at the maximization of consumer welfare and the protection of competition. The European Commission has recently issued a Guidance Paper on exclusionary abuses which purports to move EU enforcement on abuse of dominance in this direction. In spite of these developments, we are still far from reaching any consensus on the best way to apply competition policy to specific issues such as predatory pricing, bundling, vertical restraints, exclusive dealing and so on. We analyze the genesis of the European approach to antitrust and discuss the leading economic theories on competition policy and abuse of dominance, as developed by the Chicago School, the post-Chicago approach and the endogenous market structures approach. Finally, we use these economic foundations to analyze the EU approach to abuse of dominance, we examine the Guidance Paper, we provide a comparison with the American approach, and we discuss the implications of some recent important cases.
    Date: 2010–06
  9. By: Angel Asensio (CEPN - Centre d'économie de l'Université de Paris Nord - CNRS : UMR7115 - Université Paris-Nord - Paris XIII)
    Abstract: Contrasting with the 1929 great crisis, authorities intervened forcefully in 2008 to stop the disintegration of the financial system. Governments and central banks then sought to revise the prudential regulation in depth. It would be optimistic, however, to believe that prudential measures, alone, could deliver full economic recovery, for the collapse of the 'state of confidence' has fed depressive forces and policy challenges which could hold for a while, even once the financial sector is made safe. On the one hand, the economic slowdown and the direct and indirect assistance provided by the governments to the private sectors are having a heavy impact on public finances, meanwhile, on the other hand, the massive amounts of money which artificially inflated the prices of housing and financial products could produce inflationary pressures in the post-crisis period, unless a new assets bubble is allowed for. Authorities could therefore be facing high unemployment in a damaged context of public deficits and inflationary pressures. The paper aims at discussing these new challenges. The inadequacy of inflation targets and fiscal orthodoxy in a depressed economy is emphasized, and the outlines of a Post Keynesian alternative policy are examined.
    Keywords: alternative macroeconomic policy; monetary policy; fiscal policy; economic crisis; public debt; inflationary pressures
    Date: 2010–05
  10. By: David Marsden
    Abstract: In recent years, British labour markets have been characterised by a decline of institutionalregulation of entry routes into many occupations and internal labour markets. This paperexamines this change by comparing occupational labour markets for selected occupations inwhich institutional regulation has remained largely intact with those in which entry hasbecome more fluid. It argues that in the latter case, structured entry paths, which werecharacterised by competition at the ports of entry, have given way to extended entrytournaments in which competition is spread over a much longer time period. Using data fromthe New Earnings Survey panel for 1975-2001, it relates the comparatively greater growth inearnings inequality in these occupations to the emergence of extended entry tournaments. Aspay at the top has risen, greater competition for entry at the bottom has held down pay anddepressed conditions. It argues that many of the aspirant members of these occupationscompete for entry for too long, and then become trapped as it is too late to changeoccupation.
    Keywords: Wage Level and Structure, Wage Differentials by Skill, Training, Professional Labor Markets and Occupations
    JEL: J31 J44
    Date: 2010–06
  11. By: Christoph Engel (Max Planck Institute for Research on Collective Goods, Bonn); Michael Kurschilgen (Max Planck Institute for Research on Collective Goods, Bonn)
    Abstract: The market for copyrights is characterised by a highly skewed distribution of profits: very few movies, books and songs generate huge profits, whereas the great bulk barely manages to recover production cost. At the moment when the owner of intellectual property grants a licence ("ex ante"), neither party knows the true value of the traded commodity. A seemingly odd norm from German copyright law, the so-called "bestseller provision", stipulates that the seller of a licence has a legally enforceable right to a bonus in case the work ("ex post") turns out a blockbuster. We experimentally explore the effect of the provision on market prices, on the number of deals struck and on perceived fairness. Our results show that the provision leads to lower prices for copyrights. More copyrights trade. The buyers perceive less ex-post unfairness.
    Keywords: experiment, fairness, Copyright, Uncertainty
    JEL: C91 K12
    Date: 2010–06
  12. By: Cardenas, Juan-Camilo
    Abstract: Behavior in the local commons is usually embedded in a context of regulations and social norms that the group of users face. Such norms and rules affect how individuals value material and non-material incentives and therefore determine their decision to cooperate or over extract the resources from the common-pool. This paper discusses the importance of social norms in shaping behavior in the commons through the lens of experiments, and in particular experiments conducted in the field with people that usually face these social dilemmas in their daily life. Through a large sample of experimental sessions with around one thousand people between villagers and students, I test some hypothesis about behavior in the commons when regulations and social norms constrain the choices of people. The results suggest that people evaluate several components of the intrinsic and material motivations in their decision to cooperate. While responding in the expected direction to a imperfectly monitored fine on over extraction, the expected cost of the regulation is not a sufficient explanatory factor for the changes in behavior by the participants in the experiments. Even with zero cost of violations, people can respond positively to an external regulator that issues a normative statement about a rule that is aimed at solving the social dilemma.
    Keywords: social norms, regulations, cooperation, collective action, common-pool resources, experimental economics, field experiments., Public Economics, D71, Q0, Q2, C9, H3, H4,
    Date: 2009–11–05
  13. By: Michel Rocca (LEPII - Laboratoire d'Économie de la Production et de l'Intégration Internationale - CNRS : UMR5252 - Université Pierre Mendès-France - Grenoble II)
    Abstract: Ce texte propose une lecture institutionnaliste de l'expérience américaine de 1929-1935 aux Etats-Unis. Le propos montre que les analyses d'inspiration libérale (Prescott) tout comme les analyses pré-keynésiennes de l'intervention publique (Kahn (1931), Mitnitzky (1934), Clark (1935), ...) minorent les effets de la relance par l'investissement autonome, du fait d'une insuffisante prise en compte du rôle des "innovations institutionnelles" installées par l'Administration Roosevelt dès mars 1933. Une lecture d'inspiration régulationniste de l'intervention publique face au moment déflationniste a l'avantage de faciliter cette analyse du rôle des institutions dans les grandes crises, même si leur théorisation reste encore embryonnaire. Le propos développe trois idées relatives à la dimension institutionnelle de l'expérience Roosevelt. Les innovations institutionnelles ont de grandes difficultés à émerger au moment où la déflation s'enclenche (I). Ces innovations sont structurelles bien que produites dans l'urgence et donc sans plan bien établi (II). Elles sont fondées dans une distance à la théorie mais n'en demeurent pas moins structurantes de la dynamique économique, compte tenu de leur caractère "disciplinaire" (III). Ce détour par l'analyse des "innovations institutionnelles" favorise une réconciliation entre la thèse keynésienne et l'approche régulationniste de l'expérience Roosevelt : la relance par la dépense publique, même modeste, est la condition de mise en oeuvre des réformes structurelles et de la capacité à imposer de nouvelles règles au régime capitaliste.
    Keywords: théorie de la régulation, crise économique, intervention de l'état ; politique publique ; Keynésianisme ; politique économique ; institution ; Etats-Unis
    Date: 2010–05–27
  14. By: Cardenas, Juan-Camilo; Rodriguez, Luz Angela; Johnson, Nancy
    Abstract: The dilemma of collective action around water use and management involves solving both the problems of provision and appropriation. Cooperation in the provision can be affected by the rival nature of the appropriation and the asymmetries in the access. We report two field experiments conducted in Colombia and Kenya. The Irrigation Game was used to explore the provision and appropriation decisions under asymmetric or sequential appropriation, complemented with a Voluntary Contribution Mechanism experiment which looks at provision decisions under symmetric appropriation. The overall results were consistent with the patterns of previous studies: the zero contribution hypotheses is rejected whereas the most effective institution to increase cooperation was face-to-face communication, and above external regulations, although we find that communication works much more effectively in Colombia. We also find that the asymmetric appropriation did reduce cooperation, though the magnitude of the social loss and the effectiveness of alternative institutional options varied across sites.
    Keywords: Collective Action, Watersheds, Field Experiments, Colombia, Kenya, Community/Rural/Urban Development, Environmental Economics and Policy, Institutional and Behavioral Economics, Q0, Q2, C9, H3, H4,
    Date: 2009–11–12
  15. By: Zack Cooper; Stephen Gibbons; Simon Jones; Alistair McGuire
    Abstract: This paper uses a difference-in-difference estimator to test whether the introduction of patientchoice and hospital competition in the English NHS in January 2006 has prompted hospitalsto become more efficient. Efficiency was measured using hospitals' average length of stay(LOS) for patients undergoing elective hip replacement. LOS was broken down into its twokey components: the time from a patient's admission until their surgery and the time fromtheir surgery until their discharge. Our results illustrate that hospitals exposed to competitionafter a wave of market-based reforms took steps to shorten the time patients were in thehospital prior to their surgery, which resulted in a decrease in overall LOS. We find thathospitals shortened patients' LOS without compromising patient outcomes or by operating onhealthier, wealthier or younger patients. Our results suggest that hospital competition withinmarkets with fixed prices can increase hospital efficiency.
    Keywords: Hospital Competition, Market Structure, Prospective Payment, Incentive Structure
    JEL: C21 I18 L1 R0
    Date: 2010–06
  16. By: Bellemare, Marc F.; Holmberg, Andrew M.
    Abstract: Why do some individuals pirate digital music while others pay for it? Using data on a sample of undergraduate students, we study the determinants of music piracy by looking at whether a respondent’s last song was obtained illegally or not. In doing so, we incorporate (i) the individual-specific transactions costs that constitute the effective price of illegal music; and (ii) individual willingness to pay (WTP) for digital music, which we elicit using a simple field experiment and which we use to control for the unobserved heterogeneity of preferences between respondents. Our empirical results indicate that a respondent’s subjective probability of facing a lawsuit and her degree of morality both have a negative impact on the likelihood that her last song was obtained illegally. These results are robust whether WTP is estimated parametrically or nonparametrically. We conclude by discussing the practical implications of our findings.
    Keywords: Music Piracy; Transactions Costs; Subjective Expectations
    JEL: D23 D12 K42 K11 L86
    Date: 2010–07–03
  17. By: Francisco J. Beltrán Tapia (Departamento de Estructura e Historia Económica y Economía Pública, Universidad de Zaragoza)
    Abstract: The regional diversity of communal persistence in 19th century Spain has been well documented by historiography. Although the explanation of this divergence has been attributed to the social and environmental context, together with the prevailing market incentives that characterized the different rural societies of this period, there has been no clear assessment of the role played by each. Through a comparative study of the historical data at the provincial level, this paper analyzes the relative contribution of these elements to that divergence. The results diminish the significance of market signals and show how the social and environmental conditions of these communities interacted to limit, or promote, the dismantling of the common lands.
    Keywords: Spain, 19th Century, common lands, privatization, socio-ecological context
    JEL: N43 N53 P48 P14
    Date: 2010–05
  18. By: Sebastian Morris; Ajay Pandey
    Abstract: In this paper an analytical critique of the law and restrictions as also of the framework of urban planning and a justification for why major change is required in the approach to land markets, land acquisition and urban planning is provided. They also provide the key elements of a reformed approach that can create a win-win framework for development. Also their suggestions on how the proposed Amendment to the Land Acquisition Act can be changed to make the Act functional and remove the residual perversities therein is being presented.[W.P. No. 2010-03-02]
    Keywords: analytical critique,law,restrictions,framework, urban planning, land markets, land acquisitionl, win-win framework
    Date: 2010

This nep-reg issue is ©2010 by Oleg Eismont. 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.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.