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on Regulation |
| By: | Chen Zhou |
| Abstract: | This paper studies why the micro-prudential regulations fails to maintain a stable financial system by investigating the impact of micro-prudential regulation on the systemic risk in a cross-sectional dimension. We construct a static model for risk-taking behavior of financial institutions and compare the systemic risks in two cases with and without a capital requirement regulation. In a system with a capital requirement regulation, the individual risk-taking of the financial institutions are lower, whereas the systemic linkage within the system is higher. With a proper systemic risk measure combining both individual risks and systemic linkage, we find that, under certain circumstance, the systemic risk in a regulated system can be higher than that in a regulation-free system. We discuss a sufficient condition under which the systemic risk in a regulated system is always lower. Since the condition is based on comparing balance sheets of all institutions in the system, it can be verified only if information on risk-taking behaviors and capital structures of all institutions are available. This suggests that a macro-prudential framework is necessary for establishing banking regulations towards the stability of the financial system as a whole. |
| Keywords: | Banking regulation; systemic risk; capital requirement; macro-prudential regulation |
| JEL: | G28 G32 |
| Date: | 2010–07 |
| URL: | http://d.repec.org/n?u=RePEc:dnb:dnbwpp:256&r=reg |
| By: | Evans, Lewis; Hahn, Robert W. |
| Abstract: | A key question facing regulators is how to create an economic environment that encourages appropriate investment and innovation. In this paper we analyze the importance of technological change for both competition and regulation, with a particular focus on the regulation of telecommunications and the Internet. We recommend that dynamic efficiency should be used as the appropriate benchmark for judging the effectiveness of different regulatory approaches. Contrary to conventional wisdom, we find that incentive regulation, such as price caps, is not particularly good at promoting dynamic efficiency. Neither is traditional cost-of-service regulation. As an alternative, we suggested that antitrust, judiciously applied, is likely to be better at promoting dynamic efficiency. |
| Date: | 2010–05 |
| URL: | http://d.repec.org/n?u=RePEc:reg:wpaper:606&r=reg |
| By: | Noel, Pierre |
| Abstract: | We welcome the European Commission's proposal for a Regulation on the security of gas supply which, it is hoped, will be agreed at the Energy Council in May. The Regulation aims to help member states improve their gas security policies as ECFR argued the EU should do in a Policy Brief published before the gas crisis of January 20091. However, there remain some problems with the proposed Regulation, in particular the mechanism through which member states will be required to devise and implement gas security policies. This note aims to outline how these problems can be resolved. |
| Keywords: | Environment |
| Date: | 2010–02 |
| URL: | http://d.repec.org/n?u=RePEc:reg:rpubli:34&r=reg |
| By: | Weisman, Dennis L. |
| Abstract: | The Obama administration came into power championing a philosophical shift in regulatory and antitrust policy. The telecommunications industry was singled out by the administration as a case where past regulatory/antitrust policies may have been too permissive. Prominent policy issues slated for (re)examination include forbearance from network unbundling obligations, net neutrality regulation and prospective market failures in the provision of broadband. The principal objective of this article is to develop a set of competition and regulatory principles, firmly grounded in the law and economics literature, that can serve to inform the design of the optimal public policy for the telecommunications sector. |
| Date: | 2010–06 |
| URL: | http://d.repec.org/n?u=RePEc:reg:wpaper:603&r=reg |
| By: | Shleifer, Andrei |
| Abstract: | Regulation of economic activity is ubiquitous around the world, yet standard theories predict it should be rather uncommon. I argue that the ubiquity of regulation is explained not so much by the failure of markets, or by asymmetric information, as by the failure of courts to solve contract and tort disputes cheaply, predictably, and impartially. The approach accounts for the ubiquity of regulation, for its growth over time, as well as for the fact that contracts themselves are heavily regulated. It also makes predictions, both across activities and across jurisdictions, for the efficiency of regulation and litigation as strategies of enforcing efficient conduct. |
| Keywords: | Other Topics |
| Date: | 2010–01 |
| URL: | http://d.repec.org/n?u=RePEc:reg:wpaper:5&r=reg |
| By: | Guglielmo Caporale; Christophe Rault; Robert Sova; Anamaria Sova |
| Abstract: | According to the pollution haven hypotheses differences in environmental regulation affect trade flows and plant location. Specifically, environmental stringency should decrease exports and increase imports of “dirty” goods. This paper estimates a gravity model to establish whether the implementation of more stringent regulations in Romania has indeed affected its competitiveness and decreased exports towards its European trading partners. Our findings do not provide empirical support to the pollution haven hypothesis, i.e. environmental stringency is not found to affect significantly total trade, or its components (pollution intensive trade and pollution intensive trade related to non-resource-based trade). |
| Keywords: | environmental stringency, competiveness, gravity model |
| JEL: | F14 Q28 |
| Date: | 2010–06–01 |
| URL: | http://d.repec.org/n?u=RePEc:wdi:papers:2010-995&r=reg |
| By: | Yoo, Christopher S. |
| Abstract: | This article, written for the inaugural issue of a new journal, analyzes the extent to which the convergence of broadcasting and telephony induced by the digitization of communications technologies is forcing policymakers to rethink their basic approach to regulating these industries. Now that voice and video are becoming available through every transmission technology, policymakers can no longer define the scope of regulatory obligations in terms of the mode of transmission. In addition, jurisdictions that employ separate agencies to regulate broadcasting and telephony must reform their institutional structures to bring both within the ambit of a single regulatory agency. The emergence of intermodal competition will also place pressure on both telephone-style regulation, which protects against monopoly pricing and vertical exclusion, as well as broadcast-style regulation, which focuses on content and ownership structure. It will also force regulators to rethink social policies such as universal service and public broadcasting. At the same time, it is possible that convergence will be incomplete and that end users will maintain more than one network connection, which would reduce the danger of anticompetitive activity and allow policymakers to stop short of forcing every connection to be everything to everyone. Lastly, the increase in traffic volumes associated with the advent of Internet video may require the deployment of multicast protocols, content delivery networks, and more aggressive traffic management, all of which potentially implicate the debate over network neutrality currently taking place in the U.S. This article was published in Communications & Convergence Review 2009, vol. 1, no. 1, pp. 44-55. |
| Keywords: | Technology and Industry |
| Date: | 2009–12 |
| URL: | http://d.repec.org/n?u=RePEc:reg:rpubli:571&r=reg |
| By: | Laffont, Jean-Jacques (Université de Toulouse) |
| Abstract: | Regulators must understand basic principles of regulation, to explain with credibility their decissions, to asess the universality of the proposals, to develop new solutions, etc. For the relevance of economic theory, economists must fight to include in their frameworks enough constraints, as regulators face in practice, including technology constraints, even informational constraints, bureaucratic and political ones. Debates on regulation are turning around the world more important, defining the discussion frontier about the role of government in the economy. |
| Keywords: | regulation; economic theory; government in the economy |
| JEL: | D40 D80 L50 |
| Date: | 2010–08–03 |
| URL: | http://d.repec.org/n?u=RePEc:ris:uadewp:1999_001&r=reg |
| By: | Wiener, Jonathan B.; Alemanno, Alberto |
| Abstract: | ‘Quis custodiet ipsos custodes?’ asked the Roman poet Juvenal – ‘who will watch the watchers, who will guard the guardians?’1 As legislative and regulatory processes around the globe progressively put greater emphasis on impact assessment and accountability, (Verschuuren and van Gestel 2009, Hahn and Tetlock 2007), we ask: who oversees the regulators? Although regulation can often be necessary and beneficial, it can also impose its own costs. As a result, many governments have embraced, or are considering embracing, regulatory oversight--frequently relying on economic analysis as a tool of evaluation.We are especially interested in the emergence over the last four decades of a new set of institutional actors, the Regulatory Oversight Bodies (ROBs). These bodies tend to be located in the executive (or sometimes the legislative) branch of government. They review the flow of new regulations using impact assessment and benefit-cost analysis, and they sometimes also appraise existing regulations to measure and reduce regulatory burdens. Through these procedures of regulatory review, ROBs have become an integral aspect not only of regulatory reform programs in many countries, but also of their respective administrative systems. Although most academic attention focuses on the analytical tools used to improve the quality of legislation, such as regulatory impact assessment (RIA) or benefit-cost analysis, this chapter instead identifies the key concepts and issues surrounding the establishment and operation of ROBs across governance systems. It does so by examining and comparing the oversight mechanisms that have been established in the United States and in the EU and by critically looking into their origins, rationales, mandates, institutional designs and scope of oversight. |
| Keywords: | Regulatory Impact Analyses |
| Date: | 2010–03 |
| URL: | http://d.repec.org/n?u=RePEc:reg:rpubli:43&r=reg |
| By: | Fremeth, Adam R.; Holburn, Guy L. F. |
| Abstract: | We argue that information asymmetries between regulators and firms increase the administrative decision costs of initiating new policies due to the costs of satisfying evidentiary or ‘‘burden of proof’’ requirements. We further contend that regulators with better information about regulated firms—that is, with lower information asymmetries—have lower decision costs, thereby facilitating regulator policy making. To empirically test our predictions, we examine the relationship between regulatory informational environments and changes to regulated rates for all investor-owned electric utilities from 1980 to 2000. We exploit several natural sources of variation in the informational environments of US state utility regulators. These stem from the prior experiences and administrative resources of regulators, observable policy decisions of other regulatory agencies for a given utility, and differences in procedural regulations pertaining to rate increases and decreases. Our results suggest that as regulators acquire more information about utility operations, including from experience in office, they are more likely to enact rate decreases and less likely to implement rate increases. |
| Date: | 2010–02 |
| URL: | http://d.repec.org/n?u=RePEc:reg:rpubli:595&r=reg |
| By: | Weymouth, Stephen |
| Abstract: | The distributional implications of antitrust regulation imply a political cleavage between consumers and producers. I argue that the relative strength of these two groups depends on the level of democracy. In particular, an expansion of the franchise and competitive elections will increase the relative political weight of consumers, resulting in policies that favors their interests. An empirical implication of the argument is that the likelihood of effective competition policy reform increases with democracy. I test this proposition in two stages using an original dataset measuring competition agency design in 156 developing countries covering the period 1975-2007. First, I estimate hazard models on the timing of competition policy reform. Second, since “laws on the books” do not necessarily indicate a commitment to effective policy, I create an original index measuring governments’ commitments to antitrust policy. The index captures the independence of the agency, resource (budget and staffing) allocations, expert perceptions, and actual legal actions. The results of the empirical analysis support the proposition that democracy improves governments’ commitments to competition policy. |
| Date: | 2010–06 |
| URL: | http://d.repec.org/n?u=RePEc:reg:wpaper:600&r=reg |
| By: | Helland, Eric; Klick, Jonathan |
| Abstract: | In the United States insurance is regulated both by state insurance commissions and class action litigation. The interaction of these two systems has not been extensively studied. We examine four different facets of the regulation litigation tradeoff. The first is to examine whether regulator’s interest in a particular cause of action reduces the likelihood that class actions covering this cause of action will be filed in the regulator’s home state. We also examine several measures of regulatory stringency in the state to determine whether there is a substitution effect between regulatory action and litigation. We also examine whether class actions are less frequent when regulators issued an administrative decision on a particular issue previously or if there are no existing state laws on the particular issue. We examine the impact of electing judges on patterns of filing. The hypothesis is that elected judges are more sympathetic to plaintiffs and hence class actions are more likely to be filed in states that elect their judges. Lastly, we examine the impact of pervious litigation both in the state and the specific line of litigation. |
| Keywords: | Other Topics |
| Date: | 2010–02 |
| URL: | http://d.repec.org/n?u=RePEc:reg:rpubli:32&r=reg |
| By: | DeMuth, Christopher |
| Abstract: | This Review follows the structure of Retaking Rationality. In Part I we criticize the book’s narrative (summarized above) as cartoonish and unhistorical—we think it is confusing rather than helpful to understanding recent developments and controversies in cost-benefit analysis and the organization of regulatory decisionmaking within the executive branch. In Part II we consider the book’s “Eight Fallacies of Cost-Benefit Analysis.†We find that these discussions are generally well informed and interesting but suffer from the effort to squeeze cost-benefit issues into the antiregulation-versusproregulation narrative; moreover the discussions are often excessively abstract and ambitious concerning the function of cost-benefit analysis, and they entirely fail to support the thesis that cost-benefit fallacies have been used to defeat beneficial regulations. Finally, in Part III we discuss the authors’ arguments about the need for and practice of OMB/OIRA oversight of agency rulemaking. Here we criticize as naïve the book’s argument that there is no need for an institutional counterweight to agency parochialism and that OIRA’s role should be recast as one of coordination, calibration, and promotion of a proregulatory agenda against the forces of agency sloth. A concluding Part sums up our arguments. |
| Keywords: | Regulatory Reform |
| Date: | 2010–04 |
| URL: | http://d.repec.org/n?u=RePEc:reg:rpubli:573&r=reg |
| By: | Stavins, Robert N.; Hahn, Robert W. |
| 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. |
| Keywords: | Environment |
| Date: | 2010–03 |
| URL: | http://d.repec.org/n?u=RePEc:reg:rpubli:47&r=reg |
| By: | Lui, Kerri; Holburn, Guy L. F.; Morand, Charles |
| Abstract: | Even though governments may adopt favourable regulatory policies for renewable power generation, their ability to encourage private sector investment depends also on the presence of regulatory governance institutions that provide credible long-term commitments to potential investors. In the case of Ontario we contend that, despite large market potential and comparatively strong regulatory incentive policies, weak regulatory governance is one factor that has accounted for the challenges in attracting and implementing large scale private investment in power generation at a reasonable cost. We find empirical support for our arguments in a unique survey of 63 wind power firms that assessed private sector opinions about the investment environment for renewable energy in Ontario. Compared to a range of factors, firms rated the stability of regulatory policy among the weakest aspects of Ontario?s business environment. However, policy stability ranked among the most important factors in firms? assessments of the attractiveness of alternative jurisdictions in their location decisions. Subsequent interviews revealed that firms have responded to this risk in Ontario by explicitly pricing it into wind project financial models – implying higher wind power prices for ratepayers – and by directing investment funds to other jurisdictions. We argue that policy stability in Ontario may be improved by devolving greater decision-making authority to regulatory agencies in the energy sector and by strengthening their institutional independence. |
| Date: | 2010–07 |
| URL: | http://d.repec.org/n?u=RePEc:reg:rpubli:596&r=reg |
| By: | Alemanno, Alberto |
| Abstract: | More than twenty years after the EU eliminated its internal land borders, the Union still lacks an integrated airspace. This seems to be the most immediate regulatory lesson of the recent volcanic ash crisis. Yet more research is needed before establishing its net effects. In this brief report, I will provide a first-hand analysis of the regulatory answer developed across Europe in the aftermath of the eruption of the Icelandic volcano Eyjafjallajökull. While reconstructing the unfolding of the events and the procedures followed by the regulators, I will attempt to address some of the questions that I have repeatedly asked myself when stranded in Washington DC between 16 and 25 April 2010. Who did the assessment of the hazard posed by volcanic ash to jetliners? Who was competent to take risk management decisions, such as the controversial flight bans? Is it true that the safe level of volcanic ash was zero? How to explain the shift to a new safety threshold (of 2,000 mg/m3) only five days after the event? Did regulators overact? To what extent did they manage the perceived risk rather than the actual one? At a time when the impact of the volcanic ash cloud crisis is being closely scrutinised by both public authorities and the affected industries, it seems particularly timely to establish what happened during the worst aviation crisis in European history. This report was written one week after the event and relied on a limited number of sources available by 30 April 2010. |
| Date: | 2010–05 |
| URL: | http://d.repec.org/n?u=RePEc:reg:rpubli:585&r=reg |
| By: | Borenstein, Severin |
| Abstract: | Human activity has disrupted the natural balance of greenhouse gases in the atmosphere and is causing climate change. Burning fossil fuels and deforestation result directly in about 9 gigatons of carbon (GtC) emissions per year against the backdrop of the natural carbon flux — emission and uptake — of about 210 GtC per year to and from oceans, vegetation, soils and the atmosphere. But scientific research now indicates that humans are also impacting the natural carbon cycle through less-direct, but very important, mechanisms that are more difficult to monitor and control. I explore the challenges this presents to market or regulatory mechanisms that might be used to reduce greenhouse gases: scientific uncertainty about these indirect processes, pricing heterogeneous impacts of similar human behaviors, and the difficulty of assigning property rights to a far larger set of activities than has previously been contemplated. While this does not undermine arguments for market mechanisms to control direct anthropogenic release of greenhouse gases, it suggests that more research is needed to determine how and whether these mechanisms can be extended to address indirect human impacts. |
| Date: | 2010–06 |
| URL: | http://d.repec.org/n?u=RePEc:reg:wpaper:607&r=reg |
| By: | Hlavac, Marek |
| Abstract: | The first half of the paper provides a brief overview of the European Union’s Emission Trading System (EU ETS), and discusses how emission allowances have been allocated during the first two phases of the trading scheme. I then discuss the effects of auctioning off more emission allowances during Phase III of the EU ETS. I conclude that such a change would reduce the windfall profits of the initial allowance holders, and provide additional revenues that participating governments could use to support a variety of policies, some of which I discuss. |
| Keywords: | environmental economics; emissions trading; European Union; windfall profits |
| JEL: | Q5 P26 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:24242&r=reg |
| By: | Ginsburg, Douglas H.; Moore, Derek W. |
| Abstract: | Neoclassical economics or “price theory†has had a profound effect upon antitrust analysis, first as practiced in academia and then as reflected in the jurisprudence of the Supreme Court of the United States. More recently, behavioral economics has had a large and growing influence upon legal scholarship generally. Still, behavioral economics has not yet affected judicial decisions in the United States in any substantive area of law. The question we address is whether that is likely to change in the foreseeable future, i.e., whether the courts’ present embrace of price theory in antitrust cases portends the courts’ imminent acceptance of behavioral economics in either antitrust or consumer protection cases. |
| Date: | 2010–04 |
| URL: | http://d.repec.org/n?u=RePEc:reg:rpubli:598&r=reg |
| By: | Leo, Evan; Hazlett, Thomas W. |
| Abstract: | The traditional system of radio spectrum allocation has inefficiently restricted wireless services. Alternatively, liberal licenses ceding de facto spectrum ownership rights yield incentives for operators to maximize airwave value. These authorizations have been widely used for mobile services in the U.S. and internationally, leading to the development of highly productive services and waves of innovation in technology, applications and business models. Serious challenges to the efficacy of such a spectrum regime have arisen, however. Seeing the widespread adoption of such devices as cordless phones and wi-fi radios using bands set aside for unlicensed use, some scholars and policy makers posit that spectrum sharing technologies have become cheap and easy to deploy, mitigating airwave scarcity and, therefore, the utility of exclusive rights. This paper evaluates such claims technically and economically. We demonstrate that spectrum scarcity is alive and well. Costly conflicts over airwave use not only continue, but have intensified with scientific advances that dramatically improve the functionality of wireless devices and so increase demand for spectrum access. Exclusive ownership rights help direct spectrum inputs to where they deliver the highest social gains, making exclusive property rules relatively more socially valuable. Liberal licenses efficiently accommodate rival business models (including those commonly associated with unlicensed spectrum allocations) while mitigating the constraints levied on spectrum use by regulators imposing restrictions in traditional licenses or via use rules and technology standards in unlicensed spectrum allocations. |
| Date: | 2010–03 |
| URL: | http://d.repec.org/n?u=RePEc:reg:wpaper:570&r=reg |
| By: | Yochanan Shachmurove (Department of Economics, the City Collge of the City University of New York) |
| Abstract: | The examination of U.S. crises reveals that the current financial crisis follows past patterns. An investment bubble creates excess demand for new financing instruments. During the railroad bubbles of the nineteenth century loans were issued at a pace higher than many companies could pay back. The current housing bubble originated from issuing sub-prime mortgages that assume that housing prices would only rise. The increased demand for credit induces financial innovations and instruments that circumvent existing regulations. Inevitably, the bubble bursts. The history of financial crises teaches that policy reforms and new regulations cannot prevent future financial crises. |
| Keywords: | Financial Crises; Financial Regulations and Reforms; Banking Panics; Banking Runs; Nineteenth and Twentieth Century Crises; Bankruptcies; Federal Reserve Bank; Subprime Mortgage; Troubled Asset Relief Program (TARP); Collateralized Debt Obligations (CDO); Mortgage Backed Securities (MBO); Glass-Steagall Act; J.P. Morgan Chase; Bear Stearns; Augustus Heinze; Timothy Geithner; Paul Volcker |
| JEL: | E0 E3 E44 E5 E6 N0 N1 N2 G0 G18 G38 |
| Date: | 2010–08–06 |
| URL: | http://d.repec.org/n?u=RePEc:pen:papers:10-027&r=reg |
| By: | Hahn, Robert W.; Anthoff, David |
| Abstract: | In this essay, we describe some important themes in energy and environmental policy. There are two main reasons for our interest in these policies. First, such policies will likely be important in the coming decades as issues related to climate change and energy security come to the fore. Second, there are important lessons to be learned from a careful review of the actual performance of energy and environmental policies. We undertake a selective survey of the literature to highlight what is known about the efficiency of particular kinds of policies, laws and regulations in these areas. |
| Keywords: | Environment, Regulatory Reform |
| Date: | 2009–11 |
| URL: | http://d.repec.org/n?u=RePEc:reg:wpaper:6&r=reg |
| By: | Rosston, Gregory L.; Cramton, Peter; Kwerel, Evan; Skrzypacz, Andrzej |
| Abstract: | Spectrum auctions are used by governments to assign and price licenses for wireless communications. Effective auction design recognizes the importance of competition, not only in the auction, but in the downstream market for wireless communications. This paper examines several instruments regulators can use to enhance competition and thereby improve market outcomes. |
| Keywords: | Technology and Industry |
| Date: | 2010–03 |
| URL: | http://d.repec.org/n?u=RePEc:reg:wpaper:48&r=reg |
| By: | Borenstein, Severin |
| Abstract: | Utility regulators frequently focus as much or more on the distributional impact of electric rate structures as on their efficiency. The goal of protecting low-income consumers has become more central with recent increases in wholesale power costs and anticipation of significant costs of greenhouse gas emissions in the near future. These concerns have led to the widespread use of increasing-block pricing (IBP), under which the marginal price to the household increases as its daily or monthly usage rises. There is no cost basis for differentiating marginal price of electricity by consumption level, so perhaps nowhere is the conflict between efficiency and distributional goals greater than in the use of IBP. California has adopted some of the most steeply increasing-block tariffs in electric utility history. Combining household-level utility billing data with census data on income distribution by area, I derive estimates of the income redistribution effected by these increasing-block electricity tariffs. I find that the rate structure does redistribute income to lower-income groups, cutting the bills of households in the lowest income bracket by about 12% (about $5 per month). The effect would be about twice as large if not for the presence of another program that offers a different and lower rate structure to qualified low-income households. I find that the deadweight loss associated with IBP is likely to be large relative to the transfers. In contrast, I find that the means-tested program transfers income with much less economic inefficiency. A much larger share of the revenue redistributed by the IBP tariff, however, comes from the wealthiest quintile of households, so IBP may be a more progressive structure of redistribution. In carrying out the analysis, I also show that a common approach to studying (or controlling for) income distribution effects by using median household income within a census block group may substantially understate the potential effects. |
| Date: | 2010–03 |
| URL: | http://d.repec.org/n?u=RePEc:reg:wpaper:602&r=reg |