nep-reg New Economics Papers
on Regulation
Issue of 2010‒08‒21
sixteen papers chosen by
Oleg Eismont
Russian Academy of Sciences

  1. Price regulation in oligopoly. By Corchón, Luis C.; Marcos, Félix
  2. Competitive, but too small - productivity and entry-exit determinants in European business services By Kox, Henk L.M.; Leeuwen, George van; Wiel, Henry van der
  3. The Porter Hypothesis at 20: Can Environmental Regulation Enhance Innovation and Competitiveness? By Stefan Ambec; Mark A. Cohen; Stewart Elgie; Paul Lanoie
  4. Capital Requirements and Credit Rationing By Itai Agur
  5. Taxes, Permits, and Climate Change By Louis Kaplow
  6. Efficiency effects of quality of service and environmental factors: experience from Norwegian electricity distribution By Growitsch, Christian; Jamasb, Tooraj; Wetzel, Heike
  7. Competition, Efficiency, and Soundness in Banking: An Industrial Organization Perspective By Schaeck, K.; Cihák, M.
  8. Are Banks Too Big to Fail or Too Big to Save? International Evidence from Equity Prices and CDS Spreads By Demirgüc-Kunt, A.; Huizinga, H.P.
  9. Emergence of Rating Agencies: Implications for Establishing a Regional Rating Agency in Asia By Tsai, Ying Yi; Liu, Li-Gang
  10. Has the European Union Achieved a Single Pharmaceutical Market? By Aysegul Timur; Gabriel Picone; Jeffrey S. DeSimone
  11. The Impact of Public Guarantees on Bank Risk Taking: Evidence from a Natural Experiment By Gropp, R.; Grundl, C.; Guttler, A.
  12. Public Monopoly and Economic Efficiency: Evidence from the Pennsylvania Liquor Control Board's Entry Decisions By Katja Seim; Joel Waldfogel
  13. Growth Forecasts, Belief Manipulation and Capital Markets By Lundtofte, Frederik; Leoni, Patrick
  14. A diagnostic framework for assessing public investment management By Rajaram, Anand; Le, Tuan Minh; Biletska, Nataliya; Brumby, Jim
  15. Impacts of Greenhouse Gas Emission Regulations on the U.S. Sugar Industry By Taylor, Richard D.; Koo, Won W.
  16. Climate Change and Carbon Tax Expectations By Hoel, Michael

  1. By: Corchón, Luis C.; Marcos, Félix
    Abstract: In this paper we consider price regulation in oligopolistic markets when firms are quantity setters. We consider a market for a homogeneous good with a special form of the demand function (Ï-linearity), constant returns to scale and identical firms. Marginal costs can take two values only: low or high. The regulator knows all parameters except marginal costs. Assuming that the regulator is risk neutral, we characterize the optimal policy and show how this policy depends on the basic parameter of demand and costs
    Date: 2010–01
  2. By: Kox, Henk L.M.; Leeuwen, George van; Wiel, Henry van der
    Abstract: The paper investigates whether scale effects, market structure, and regulation determine the poor productivity performance of the European business services industry. We apply parametric and nonparametric methods to estimate the productivity frontier and subsequently explain the distance of firms to the productivity frontier by market characteristics, entry- and exit dynamics and national regulation. The frontier is assessed using detailed industry data panel for 13 EU countries. Our estimates suggest that most scale advantages are exhausted after reaching a size of 20 employees. This scale inefficiency is persistent over time and points to weak competitive selection. Market and regulation characteristics explain the persistence of X-inefficiency (sub-optimal productivity relative to the industry frontier). More entry and exit are favourable for productivity performance, while higher market concentration works out negatively. Regulatory differences also appear to explain part of the business services' productivity performance. In particular regulation-caused exit and labour reallocation costs have significant and large negative impacts on the process of competitive selection and hence on productivity performance. Overall we find that the most efficient scale in business services is close to 20 employees and that scale inefficiencies show a hump-shape pattern with strong potential scale economies for the smallest firms and diseconomies of scale for the largest firms. The smallest firms operate under competitive conditions, but they are too small to be efficient. And since this conclusion holds for about 95 out of every 100 European business services firms, this factor weighs heavily for the overall productivity performance of this industry.
    Keywords: productivity; frontier models; scale; industry dynamics; regulation; European Union; business services
    JEL: L8 C34 L1 R38
    Date: 2010–07–01
  3. By: Stefan Ambec; Mark A. Cohen; Stewart Elgie; Paul Lanoie
    Abstract: Twenty years ago, Harvard Business School economist and strategy professor Michael Porter stood conventional wisdom about the impact of environmental regulation on business on its head by declaring that well designed regulation could actually enhance competitiveness. The traditional view of environmental regulation held by virtually all economists until that time was that requiring firms to reduce an externality like pollution necessarily restricted their options and thus by definition reduced their profits. After all, if there are profitable opportunities to reduce pollution, profit maximizing firms would already be taking advantage of those opportunities. Over the past 20 years, much has been written about what has since become known simply as the Porter Hypothesis (“PH”). Yet, even today, there is conflicting evidence, alternative theories that might explain the PH, and oftentimes a misunderstanding of what the PH does and does not say. This paper provides an overview of the key theoretical and empirical insights on the PH to date, draw policy implications from these insights, and sketches out major research themes going forward. <P>Il y a bientôt vingt ans, Michael Porter, économiste et professeur de stratégie de la Harvard Business School, a remis en question le paradigme généralement accepté quant à l’impact des réglementations environnementales sur la performance d’affaires, en affirmant que des politiques environnementales bien conçues pouvaient en fait améliorer la compétitivité des entreprises. Jusqu’alors, le point de vue dominant, accepté par la quasi-totalité des économistes, stipulait que d’imposer aux entreprises de réduire une externalité comme la pollution réduisait nécessairement les options à leur disposition et, par définition, leurs profits. Après tout, s’il y a des opportunités profitables de réduire la pollution, les firmes qui maximisent leurs profits auraient dû les identifier par elles-mêmes. Depuis 20 ans, beaucoup de choses ont été écrites sur ce qu’il est convenu d’appeler l’Hypothèse de Porter. Aujourd’hui, il y a diverses théories pour expliquer l’Hypothèse de Porter. Les résultats empiriques ne sont pas concluants et il subsiste une certaine confusion sur ce que dit et ne dit pas l’Hypothèse de Porter. Ce texte présente un survol des grands enjeux théoriques et empiriques entourant l’Hypothèse de Porter, en tire les grandes implications en termes de politiques publiques et propose des avenues de recherche pour le futur.
    Keywords: Porter Hypothesis, environmental policy, innovation, performance , Hypothèse de Porter, politiques environnementales, innovation, performance
    Date: 2010–08–01
  4. By: Itai Agur
    Abstract: This paper analyzes the trade-off between financial stability and credit rationing that arises when increasing capital requirements. It extends the Stiglitz-Weiss model of credit rationing to allow for bank default. Bank capital structure then matters for lending incentives. With default and rationing endogenous, optimal capital requirements can be analyzed. Introducing bank financiers, the paper also shows that uninsured funding raises the sensitivity of rationing to capital requirements. In a world with much wholesale finance, capital requirements have a stronger impact on the real economy. But wholesale finance also amplifies capital requirements’ effect on default rates.
    Keywords: Rationing; Capital requirements; Regulation; Wholesale finance; Deposit Insurance
    JEL: G21 G28
    Date: 2010–08
  5. By: Louis Kaplow
    Abstract: This essay revisits the question of instrument choice for the regulation of externalities in the context of climate change. The central point is that the Pigouvian prescription to equate marginal control costs with the expected marginal benefits of damage reduction should guide the design of both carbon taxes and permit schemes. Because expected marginal damage rises nonlinearly, a corresponding nonlinear tax – or an equivalent price implemented through a quantity-adjusted permit scheme – is second best. Also considered are political factors, distinctive features of regulating a stock pollutant, and ex ante distortions due to the anticipation of transition relief (such as by receiving more free permits for greater emissions). Finally, distributive concerns are examined, with emphasis on the conceptual and practical benefits of addressing distributive issues with the tax and transfer system rather through adjustments to regulatory schemes that usually render them less effective.
    JEL: D61 D62 H21 H23 K32 Q52 Q54 Q58
    Date: 2010–08
  6. By: Growitsch, Christian (Energiewirtschaftliches Institut an der Universitaet zu Koeln); Jamasb, Tooraj (Faculty of Economics University of Cambridge); Wetzel, Heike (Energiewirtschaftliches Institut an der Universitaet zu Koeln)
    Abstract: Since the 1990s, efficiency and benchmarking analysis has increasingly been used in network utilities research and regulation. A recurrent concern is the effect of environmental factors that are beyond the influence of firms (observable heterogeneity) and factors that are not identifiable (unobserved heterogeneity) on measured cost and quality performance of firms. This paper analyses the effect of geographic and weather factors and unobserved heterogeneity on a set of 128 Norwegian electricity distribution utilities for the 2001-2004 period. <p> We utilize data on almost 100 geographic and weather variables to identify real economic inefficiency while controlling for observable and unobserved heterogeneity. We use the factor analysis technique to reduce the number of environmental factors into few composite variables and to avoid the problem of multicollinearity. We then estimate the established stochastic frontier models of Battese and Coelli (1992; 1995) and the recent true fixed effects models of Greene (2004; 2005) without and with environmental variables. <p> In the former models some composite environmental variables have a significant effect on the performance of utilities. These effects vanish in the true fixed effects models. However, the latter models capture the entire unobserved heterogeneity and therefore show significantly higher average efficiency scores.
    Keywords: Efficiency; Quality of service; Input distance function; Stochastic frontier analysis
    JEL: L15 L51 L94
    Date: 2010–08–11
  7. By: Schaeck, K.; Cihák, M. (Tilburg University, Center for Economic Research)
    Abstract: How can competition enhance bank soundness? Does competition improve soundness via the efficiency channel? Do banks heterogeneously respond to competition? To answer these questions, we exploit an innovative measure of competition [Boone, J., A new way to measure competition, EconJnl, Vol. 118, pp. 1245-1261] that captures the reallocation of profits from inefficient banks to their efficient counterparts. Based on two complementary datasets for Europe and the U.S., we first establish that the new competition indicator captures a broad variety of other characteristics of competition in a consistent manner. Second, we verify that competition increases efficiency. Third, we present novel evidence that efficiency is the conduit through which competition contributes to bank soundness. In a final examination of banks’ heterogeneous responses to competition, we find that smaller banks’ soundness measures respond more strongly to competition than larger banks’ soundness measures, and two-stage quantile regressions indicate that the soundness-enhancing effect of competition is larger in magnitude for sound banks than for fragile banks.
    Keywords: bank competition;efficiency;soundness;Boone indicator;quantile regression
    JEL: G21 G28
    Date: 2010
  8. By: Demirgüc-Kunt, A.; Huizinga, H.P. (Tilburg University, Center for Economic Research)
    Abstract: Deteriorating public finances around the world raise doubts about countries’ abilities to bail out their largest banks. For an international sample of banks, this paper investigates the impact of government indebtedness and deficits on bank stock prices and CDS spreads. Overall, bank stock prices reflect a negative capitalization of government debt and they respond negatively to deficits. We present evidence that in 2008 systemically large banks saw a reduction in their market valuation in countries running large fiscal deficits. Furthermore, the change in bank CDS spreads in 2008 relative to 2007 reflects countries’ deterioration of public deficits. Our results suggest that some systemically important banks can increase their value by downsizing or splitting up, as they have become too big to save, potentially reversing the trend to ever larger banks. We also document that a smaller proportion of banks are systemically important - relative to GDP - in 2008 than in the two previous years, which could reflect these private incentives to downsize.
    Keywords: Banking;Financial crisis;Credit default swap;Too big to fail;Too big to save
    JEL: G21 G28
    Date: 2010
  9. By: Tsai, Ying Yi (Asian Development Bank Institute); Liu, Li-Gang (Asian Development Bank Institute)
    Abstract: The present analysis sheds light on the setting up a regional rating agency in Asia in the wake of recent financial crisis. We investigate the policy facing a financial regulator while evaluating whether or not to admit new entrant into the credit rating market. In an incomplete contracting framework, we show that an impartial financial regulatory body (represented by a benevolent supranational organization) can facilitate credit ratings of high quality by allowing for the entry of new rating agencies on a non-single basis than it does for a mere single entry. This finding is caused by increased competition among the rating agencies, which induces higher quality of rating services even should rating agencies still exert below their maximum level of efforts.
    Keywords: credit rating agencies; moral hazard; incomplete contracting
    JEL: D43 D82 G24 L15
    Date: 2010–08–13
  10. By: Aysegul Timur; Gabriel Picone; Jeffrey S. DeSimone
    Abstract: This paper explores price differences in the European Union (EU) pharmaceutical market, the EU's fifth largest industry. With the aim of enhancing quality of life along with industry competitiveness and R&D capability, many EU directives have been adopted to achieve a single EU-wide pharmaceutical market. Using annual 1994–2003 data on prices of molecules that treat cardiovascular disease, we examine whether drug price dispersion has indeed decreased across five EU countries. Hedonic regressions show that over time, cross-country price differences between Germany and three of the four other EU sample countries, France, Italy and Spain, have declined, with relative prices in all three as well as the fourth country, UK, rising during the period. We interpret this as evidence that the EU has come closer to achieving a single pharmaceutical market in response to increasing European Commission coordination efforts.
    JEL: I11
    Date: 2010–08
  11. By: Gropp, R.; Grundl, C.; Guttler, A. (Tilburg University, Center for Economic Research)
    Abstract: In 2001, government guarantees for savings banks in Germany were removed following a law suit. We use this natural experiment to examine the effect of government guarantees on bank risk taking, using a large data set of matched bank/borrower information. The results suggest that banks whose government guarantee was removed reduced credit risk by cutting off the riskiest borrowers from credit. At the same time, the banks also increased interest rates on their remaining borrowers. The effects are economically large: the Z-Score of average borrowers increased by 7% and the average loan size declined by 13%. Remaining borrowers paid 57 basis points higher interest rates, despite their higher quality. Using a difference-in-differences approach we show that the effect is larger for banks that ex ante benefitted more from the guarantee. We show that both the credit quality of new customers improved (screening) and that the loans of existing riskier borrowers were less likely to be renewed (monitoring), after the removal of public guarantees. Public guarantees seem to be associated with substantial moral hazard effects.
    Keywords: banking;public guarantees;credit risk;moral hazard
    JEL: G21 G28 G32
    Date: 2010
  12. By: Katja Seim; Joel Waldfogel
    Abstract: While private monopolists are generally assumed to maximize profits, the goals of public enterprises are less well known. Using the example of Pennsylvania's state liquor retailing monopoly, we use information on store location choices, prices, wholesale costs, and sales to uncover the goals implicit in its entry decisions. Does it seek to maximize profits or welfare? We estimate a spatial model of demand for liquor that allows us to calculate counterfactual configurations of stores that maximize profit and welfare. We find that welfare maximizing networks have roughly twice as many stores as would maximize profit. Moreover, the actual network is much more similar in size and configuration to the welfare maximizing configuration. An alternative to a state monopoly would be the common practice of regulated private entry. While such regimes can give rise to inefficient location decisions, little is known about the size of the resulting inefficiencies. Even for a given number of stores, a simple characterization of free entry with our model results in a store configuration that produces welfare losses of between 3 and 9% of revenue. This is a third to half of the overall loss from unregulated free entry.
    JEL: L13 L21 L3 L81
    Date: 2010–08
  13. By: Lundtofte, Frederik (Department of Economics, Lund University); Leoni, Patrick (EUROMED Management)
    Abstract: We analyze how a benevolent government agency would optimally release information about the growth rate of the stochastic dividend process of the financial market. We investigate the effects of the agency's signal on the agents' optimal strategies and equilibrium asset prices. In the case where all investors are rational Bayesian updaters, we show that the agency's optimal choice is to release a manipulative signal (lie) with probability one. However, if there are some nonupdating (inattentive) agents, we find cases where it is optimal for the government agency to send a revealing signal with probability one.
    Keywords: Social welfare; information; forecasting; asset pricing; inattention
    JEL: D80 G11 G12
    Date: 2010–07–31
  14. By: Rajaram, Anand; Le, Tuan Minh; Biletska, Nataliya; Brumby, Jim
    Abstract: This paper provides a pragmatic and objective diagnostic approach to the assessment of public investment management systems for governments. Since weaknesses in public investment management can negate the core argument that additional fiscal space allocated to public investments could enhance future economic prospects, attention to the processes that govern public investment selection and management is critical. The paper begins with a description of eight key"must-have"features of a well-functioning public investment system: (1) investment guidance, project development, and preliminary screening; (2) formal project appraisal; (3) independent review of appraisal; (4) project selection and budgeting; (5) project implementation; (6) project adjustment; (7) facility operation; and (8) project evaluation. The emphasis is placed on the basic processes and controls (linked at appropriate stages to broader budget processes) that are likely to yield the greatest assurance of efficiency in public investment decisions. The approach does not seek to identify best practice, but rather to identify the"must have"institutional features that would address major risks and provide an effective systemic process for managing public investments. The authors also develop a diagnostic framework to assess the main stages of the public investment management cycle. In principle, the identification of core weaknesses will allow reforms to focus scarce managerial and technical resources where they will yield the greatest impact. In addition, the framework is intended to motivate governments to undertake periodic self-assessments of their public investment systems and design reforms to enhance the productivity of public investment.
    Keywords: Investment and Investment Climate,Debt Markets,Public Sector Expenditure Policy,Housing&Human Habitats,Bankruptcy and Resolution of Financial Distress
    Date: 2010–08–01
  15. By: Taylor, Richard D.; Koo, Won W.
    Abstract: The objective of this study is to evaluate the changes in U.S. sugar production and Greenhouse Gas (GHG) emissions from the sugar industry if the United States regulates GHG emissions from domestic sugar processing facilities. A spatial equilibrium model is developed to optimize sugar production in the United States under a base scenario and three different levels of CO2e taxes or prices of carbon offsets. This research focuses on U.S. sugar production, both beet and cane sugar. In the model the United States is divided into 6 beet growing regions and 4 cane growing regions. The model also includes Mexico as a domestic sugar growing region as Mexico has the ability to export unlimited amount of sugar into the United States under NAFTA. A rest of the world region is included because the United States imports sugar from about 40 different nations. The results indicate that sugar production by the U.S. beet sugar industry will decrease substantially if carbon emissions are taxed in the United States. Production in the U.S. cane industry will also decrease, but only slightly. Sugar imports from Mexico will increase but the majority of the imported sugar will come from other countries as Mexicoâs ability to increase sugar production is limited. GHG emissions will decrease, but only slightly, because the GHG emissions that are reduced in the United States are replaced by GHG emission in other nations as U.S. sugar production is shipped overseas. However the impacts on the U.S. sugar industry would be substantial with GHG emission regulations.
    Keywords: GHG emissions, CO2e, Sugar, spatial equilibrium model, carbon tax, cap and trade, Agribusiness, Environmental Economics and Policy,
    Date: 2010–08
  16. By: Hoel, Michael (Dept. of Economics, University of Oslo)
    Abstract: If investors fear that future carbon taxes will be lower than currently announced by policy makers, long-run investments in greenhouse gas mitigation may be smaller than desirable. On the other hand, owners of a non-renewable carbon resource that underestimate future carbon taxes will postpone extraction compared with what they would have chosen had the policymakers been able to commit to the optimal tax path. If extraction costs rise rapidly as accumulated extraction rises, near-term emissions increase as a consequence of a downward bias in the expected future carbon taxes. Whether investments in greenhouse gas mitigation go up or down due to the expectation error depends on the time pro…le of the returns to the investment.
    Keywords: climate change; exhaustible resources; carbon tax
    JEL: H23 Q30 Q42 Q54
    Date: 2010–03–24

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