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on Regulation |
| By: | Ojo, Marianne |
| Abstract: | In what ways can changes to the structure of regulation (as well as other regulatory reforms) mitigate the effects of policies which trigger financial instability? More specifically policies, information asymmetries or externalities which could give rise to bank contagion, systemic/liquidity risks or procyclical effects? Whilst acknowledging that accounting standards play a fundamental role in addressing problems which could contribute to information asymmetries and ultimately systemic risks, this paper also highlights why the type of regulatory structure, clear allocation of responsibilities between regulators, as well as measures aimed at fostering accountability, constitute vital elements which could serve as safeguards in mitigating procyclical effects (as well as other factors) which could trigger financial instability. In achieving this aim, the paper focusses on the rationale for fair value accounting, as well as problematic issues arising from its implementation. The adoption of international accounting standards is considered to have a vital role in contributing to financial stability. This paper will also illustrate how the implementation of accounting standards and policies, in certain instances, have contrasted with Basel Committee initiatives aimed at mitigating procyclicality and facilitating forward looking provisioning. More importantly, the paper will highlight how and why differences between regulatory and accounting policies could (and should) be mitigated. |
| Keywords: | stability; liquidity risks; systemic risks; pro cyclicality; fair values; information; certainty; regulation; central banks; accountability; macro prudential regulation |
| JEL: | K2 D8 M4 E3 |
| Date: | 2011–03–05 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:29314&r=reg |
| By: | Carson, John |
| Abstract: | This paper canvasses the trends in self-regulation and the role of self-regulation in securities markets in different parts of the world. The paper also describes the conditions in which self-regulation might be an effective element of securities markets regulation, particularly in emerging markets. Use of self-regulation and self-regulatory organizations is often recommended in emerging markets as part of a broader strategy aimed at improving the effectiveness of securities regulation and market integrity. According to the International Organization of Securities Commissions, reliance on self-regulation is an optional feature of a regulatory regime. Self-regulatory organizations may support better-regulated and more efficient capital markets, but the value of self-regulation is again being questioned in many countries. Forces such as commercialization of exchanges, development of stronger statutory regulatory authorities, consolidation of financial services industry regulatory bodies, and globalization of capital markets are affecting the scope and effectiveness of self-regulation—and in particular the traditional role of securities exchanges as self-regulatory organizations. The paper reviews different models of self-regulation, including exchange self-regulatory organizations, member (or independent) self-regulatory organizations, and industry or dealers’ associations. It draws on examples of self-regulatory organizations from many markets to illustrate the degree of reliance on self-regulation, as well as the range of functions for which self-regulatory organizations are responsible, in markets around the world. Issues that are important to the effective operation of self-regulatory organizations are discussed, such as corporate governance, managing conflicts of interest, and regulatory oversight by government authorities. |
| Date: | 2011–01 |
| URL: | http://d.repec.org/n?u=RePEc:reg:wpaper:644&r=reg |
| By: | Anna Aubanell (Departament d'Economia i d'Història Econòmica, Universitat Autònoma de Barcelona) |
| Abstract: | The aim of this paper is to discover the origins of utility regulation in Spain, and to analyse, from a microeconomic perspective, its characteristics and the impact of regulation on consumers and utilities. Madrid and the Madrilenian utilities are taken as a case study. The electric industry in the period studied was a natural monopoly2. Each of the three phases of production, generation, transmission and distribution, had natural monopoly characteristics. Therefore, the most efficient form to generate, transmit and distribute electricity was the monopoly because one firm can produce a quantity at a lower cost than the sum of costs incurred by two or more firms. A problem arises because when a firm is the single provider it can charge prices above the marginal cost, at monopoly prices. When a monopolist reduces the quantity produced, price increases, causing the consumer to demand less than the economic efficiency level, incurring a loss of consumer surplus. The loss of the consumer surplus is not completely gained by the monopolist, causing a loss of social surplus, a deadweight loss. The main objective of regulation is going to be to reduce to a minimum the deadweight loss. Regulation is also needed because when the monopolist fixes prices at marginal cost equal marginal revenue there would be an incentive for firms to enter the market creating inefficiency. The Madrilenian industry has been chosen because of the availability of statistical information on costs and production. The complex industry structure and the atomised demand add interest to the analysis. This study will also provide some light on the tariff regulation of the period which has been poorly studied and will complement the literature on the US electric utilities regulation where a different type of regulation was implemented. |
| Date: | 2011–02 |
| URL: | http://d.repec.org/n?u=RePEc:aub:uhewps:2011_08&r=reg |
| By: | Chalaux, Thomas; Conway, Paul; He, Ping; Herd, Richard; Yu, Jianxun |
| Abstract: | The extent of competition in product markets is an important determinant of economic growth in both developed and developing countries. This paper uses the 2008 vintage of the OECD indicators of product market regulation to assess the extent to which China’s regulatory environment is supportive of competition in markets for goods and services. The results indicate that, although competition is increasingly robust across most markets, the overall level of product market regulation is still restrictive in international comparison. These impediments to competition are likely to constrain economic growth as the Chinese economy continues to develop and becomes more sophisticated. The paper goes on to review various aspects of China’s regulatory framework and suggests a number of policy initiatives that would improve the extent to which competitive market forces are able to operate. Breaking the traditional links between state-owned enterprises and government agencies is an ongoing challenge. Reducing administrative burdens, increasing private sector involvement in network sectors and lowering barriers to foreign direct investment in services would also increase competition and enhance productivity growth going forward. Some of the reforms introduced by the Chinese government over the past two years go in this direction and should therefore help foster growth. |
| Date: | 2010–12 |
| URL: | http://d.repec.org/n?u=RePEc:reg:wpaper:648&r=reg |
| By: | Thakor, Anjan; Mehran, Hamid; Acharya, Viral V. |
| Abstract: | Banks face two moral hazard problems: asset substitution by shareholders (e.g., making risky, negative net present value loans) and managerial rent seeking (e.g., investing in inefficient “pet” projects or simply being lazy and uninnovative). The privately-optimal level of bank leverage is neither too low nor too high: It balances efficiently the market discipline imposed by owners of risky debt on managerial rent-seeking against the asset-substitution induced at high levels of leverage. However, when correlated bank failures can impose significant social costs, regulators may bail out bank creditors. Anticipation of this generates an equilibrium featuring systemic risk in which all banks choose inefficiently high leverage to fund correlated assets. A minimum equity capital requirement can rule out asset substitution but also compromises market discipline by making bank debt too safe. The optimal capital regulation requires that a part of bank capital be unavailable to creditors upon failure, and be available to shareholders only contingent on good performance. |
| Date: | 2010–12 |
| URL: | http://d.repec.org/n?u=RePEc:reg:wpaper:643&r=reg |
| By: | Charlot Olivier; Malherbet Franck; Terra Cristina (THEMA, Universite de Cergy-Pontoise; Universit´e de Rouen, CECO - Ecole Polytechnique, fRDB and IZA.; THEMA, Universite de Cergy-Pontoise) |
| Abstract: | This paper studies the impact of product and labor market regulations on informality and unemployment in a general framework where formal and informal firms are subject to the same externalities, differing only with respect to some parameter values. Both formal and informal firms have monopoly power in the goods market, they are subject to matching friction in the labor market, and wages are determined through bargaining between large firms and their workers. The informal sector is found to be endogenously more competitive than the formal one. We find that lower strictness of product or labor market regulations lead to a simultaneous reduction in informality and unemployment. The difference between these two policy options lies on their effect on wages. Lessening product market strictness increases wages in both sector but also increases the formal sector wage premium. The opposite is true for labor market regulation. Finally, we show that the so-called overhiring externality due to wage bargaining translates into a smaller relative size of the informal sector. |
| Keywords: | Informality; Product and Labor Market Imperfections; Firm Size |
| JEL: | E24 E26 J60 L16 O1 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:ema:worpap:2011-03&r=reg |
| By: | Brekke, Kurt Richard; Siciliani, Luigi; Straume, Odd Rune |
| Abstract: | In many markets, such as education, health care and public utilities, firms are often profit-constrained either due to regulation or because they have non-profit status. At the same time such firms might have altruistic concerns towards consumers. In this paper we study semi-altruistic firms’ incentives to invest in quality and cost-reducing effort when facing constraints on the distribution of profits. Using a spatial competition framework, we derive the equilibrium outcomes under both quality competition with regulated prices and quality-price competition. Profit constraints always lead to lower cost-efficiency, whereas the effects on quality and price are ambiguous. If altruism is high (low), profit-constrained firms offer higher (lower) quality and lower (higher) prices than firms that are not profit-constrained. Compared with the first-best outcome, the cost-efficiency of profit-constrained firms is too low, while quality might be over- or underprovided. Profit constraints may improve welfare and be a complement or substitute to a higher regulated price, depending on the degree of altruism. |
| Keywords: | Profit constraints; Quality competition; Semi-altruistic providers |
| JEL: | D21 D43 L13 L30 |
| Date: | 2011–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:8284&r=reg |
| By: | Paolo Angelini (Bank of Italy); Laurent Clerc (Banque de France); Vasco Cúrdia (Federal Reserve Bank of New York); Leonardo Gambacorta (Bank for International Settlements); Andrea Gerali (Bank of Italy); Alberto Locarno (Bank of Italy); Roberto Motto (European Central Bank); Werner Roeger (European Commission); Skander Van den Heuvel (Board of Governors of the Federal Reserve System); Jan Vlcek (International Monetary Fund) |
| Abstract: | We assess the long-term economic impact of the new regulatory standards (the Basel III reform), answering the following questions. (1) What is the impact of the reform on long-term economic performance? (2) What is the impact of the reform on economic fluctuations? (3) What is the impact of the adoption of countercyclical capital buffers on economic fluctuations? The main results are the following. (1) Each percentage point increase in the capital ratio causes a median 0.09 percent decline in the level of steady state output, relative to the baseline. The impact of the new liquidity regulation is of a similar order of magnitude, at 0.08 percent. This paper does not estimate the benefits of the new regulation in terms of reduced frequency and severity of financial crisis, analysed in Basel Committee on Banking Supervision (BCBS, 2010b). (2) The reform should dampen output volatility; the magnitude of the effect is heterogeneous across models; the median effect is modest. (3) The adoption of countercyclical capital buffers could have a more sizeable dampening effect on output volatility. These conclusions are fully consistent with those of reports by the Long-term Economic Impact group (BCBS, 2010b) and Macro Assessment Group (MAG, 2010b). |
| Keywords: | Basel III, countercyclical capital buffers, financial (in)stability, procyclicality, macroprudential |
| JEL: | E44 E61 G21 |
| Date: | 2011–02 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:opques:qef_87_11&r=reg |
| By: | Stan du Plessis (Department of Economics, University of Stellenbosch) |
| Abstract: | This paper is the story of success and failure in the financial markets, the markets for goods and services and in politics. It is a difficult story to tell because the crisis had many causes, but the focus here is on three main factors. First, the incentives that contributed to a credit-fuelled bubble, especially in property markets. Monetary and regulatory policies feature prominently in this part of the story. Second, because the housing bubble alone cannot explain the magnitude of the subsequent events, gearing in the financial sector, which affected asset markets unrelated to sub-prime mortgages will be examined. These developments are explained by reference to private financial sector decisions, including the role of the shadow-banking sector, and their regulatory backdrop. Finally, an answer will be sought to the question of how highly geared banks first became fragile and then failed with such dire consequences for the economy that massive policy intervention had become essential. The consequences of these large policy interventions and the international tensions caused by them are also explored. |
| Keywords: | Financial crisis, Banks, Financial regulation, Monetary policy, Fiscal policy, Currency wars |
| JEL: | G20 G28 E58 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:sza:wpaper:wpapers130&r=reg |
| By: | Damir Filipovi\'c; Robert Kremslehner; Alexander Muermann |
| Abstract: | Limited liability creates a conflict of interests between policyholders and shareholders of insurance companies. It provides shareholders with incentives to increase the risk of the insurer's assets and liabilities which, in turn, might reduce the value policyholders attach to and premiums they are willing to pay for insurance coverage. We characterize Pareto optimal investment and premium policies in this context and provide necessary and sufficient conditions for their existence and uniqueness. We then identify investment and premium policies under the risk shifting problem if shareholders cannot credibly commit to an investment strategy before policies are sold and premiums are paid. Last, we analyze the effect of solvency regulation, such as Solvency II or the Swiss Solvency Test, on the agency cost of the risk shifting problem and calibrate our model to a non-life insurer average portfolio. |
| Date: | 2011–03 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1103.1729&r=reg |
| By: | L. Lambertini; A. Tampieri |
| Abstract: | We build up a differential game to investigate the interplay between the quality of health care and the presence of an evolving disease in a duopoly where patients are heterogeneous along the income dimension. We prove unicity, stability and perfection of the open-loop Nash solution. Moreover, we identify the admissible parameter region wherein price regulation achieves the twofold objectives of ensuring cares to all patients and eradicating the disease. |
| JEL: | C73 H42 I11 I18 L13 |
| Date: | 2011–03 |
| URL: | http://d.repec.org/n?u=RePEc:bol:bodewp:wp737&r=reg |
| By: | Skedinger, Per (Research Institute of Industrial Economics (IFN)) |
| Abstract: | This article surveys the literature and adds to the evidence on the impact of employment protection legislation on employment. While stringent employment protection contributes to less turnover and job reallocation, the effects on aggregate employment and unemployment over the business cycle are more uncertain. Exploitation of partial reforms and the use of micro data in recent research appear not to have affected results regarding employment and unemployment in any systematic way. Labour market prospects of young people and other marginal groups seem to worsen as a consequence of increased stringency of the legislation. It is debatable whether marginal groups have gained much from the widespread policy strategy to liberalize regulations of temporary employment and leave regulations of regular employment intact. My own analysis suggests that increased stringency of regulations for regular work is associated with a higher incidence of involuntary temporary employment, particularly among the young. |
| Keywords: | Job security; Employment effects; Employment protection reforms |
| JEL: | J23 J50 K31 |
| Date: | 2011–03–14 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:iuiwop:0865&r=reg |
| By: | Aravindhakshan, Sijesh; Koo, Won W. |
| Abstract: | Energy, agriculture, and GHG emissions are highly interrelated. Several agricultural commodities are currently used as feedstock for biofuel production to replace fossil fuels. As the largest consumer of energy, the U.S. has taken several initiatives to reduce the use of fossil fuels, achieve energy security, and reduce GHG emissions. The industrial community of the U.S. invested heavily in biofuel and wind energy production. North Dakota has highest potential in producing wind energy and biomass from dedicated energy crops. Unfortunately these resources are not fully utilized for producing renewable energy. North Dakota is an energy intensive economy and per capita energy consumption is higher than other states. This technical bulletin provides a comprehensive report on the energy production and related emissions in the United States with special emphasis on North Dakota. The bulletin also discusses various alternative methods to reduce GHG emissions to meet the regulatory standards with a special emphasis on North Dakota. The study found that North Dakota produces the cheapest electricity and a major share is consumed outside the state. The price of electricity does not include negative externalities associated with burning lignite coal. North Dakota uses its potential to produce wind and corn ethanol to a great extent. The state level policies and financial supports are directed to wind industry and energy efficiency measures. The current renewable portfolio standards and non-compliance adversely affect the renewable energy industry in North Dakota. |
| Keywords: | Renewable energy, Wind power, Ethanol, Greenhouse gas emissions, Agriculture, Agribusiness, Resource /Energy Economics and Policy, |
| Date: | 2011–02 |
| URL: | http://d.repec.org/n?u=RePEc:ags:nddaae:101222&r=reg |
| By: | Martens, Anja Kristina |
| Abstract: | This paper analyzes drivers of global change and their impacts on the current and future availability and accessibility of water resources in the Nile Basin. Drivers include changes in demography, climate, the socioeconomy, and politics, all of which are likely to increase the demand for freshwater and thus competition over its use across riparian countries. As a result of historic bilateral agreements, Egypt, as the most downstream country, uses the lion's share of the Nile's waters, which makes reallocation particularly difficult. Egypt is nearly totally dependent on water from upstream countries but considers any change of the status quo a threat to its national (water) security. Ninety-six percent of Egypt's water originates outside its territory—86 percent in Ethiopia. This paper assesses the special upstream–downstream relationship in the Nile Basin and the potential for change as a result of global change. It hypothesizes that under global change, not only will water availability in the Nile Basin change but so will the current hydropolitical situation in the basin. In any case, meeting the challenges in the Nile Basin depends on cooperation among countries and regulation of competing interests and demands. Avenues for hydropolitical reform, including the Nile Basin Initiative, and the role of China and other donors or investors are discussed. The findings—that global change might well bring down the old hydropolitical regime—are confirmed by recent developments, in particular, the signing by five upstream countries of a new framework agreement for management and development of the Nile Basin. |
| Keywords: | Nile Basin, hydropolitics, Cooperation, Conflict, global change, Reform, |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:fpr:ifprid:01052&r=reg |
| By: | Antoine Dechezleprêtre (CERNA - Centre d'économie industrielle - Mines ParisTech, Grantham Research Institute on Climate Change and the Environment - London School of Economics and Political Science); Matthieu Glachant (CERNA - Centre d'économie industrielle - Mines ParisTech) |
| Abstract: | This paper examines the relative influence of domestic and foreign renewable energy policies on innovation activity in wind power using patent data from OECD countries from 1994 to 2005. We distinguish between the impact of demand-pull policies (e.g., guaranteed tariffs, investment and production tax credits), as reflected by wind power capacities installed annually, and technology-push policies (government support to R&D). We show that inventors respond to both domestic and foreign new capacities by increasing their innovation effort. However, the effect on innovation of the marginal wind turbine installed at home is 28 times stronger than that of the foreign marginal wind turbine. Unlike demandpull policies, public R&D expenditures only affect domestic inventors. A simple calculation suggests that the marginal million dollars spent on R&D support generates 0.82 new inventions, whereas the same amount spent on the deployment of wind turbines induces, at best, 0.06 new inventions (0.03 locally and 0.03 abroad). |
| Keywords: | innovation;public R&D;renewable energy policies;wind power |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:hal-00574108&r=reg |
| By: | Patrick Himmes; Christoph Weber (Chair for Management Sciences and Energy Economics, University of Duisburg-Essen) |
| Abstract: | The stylized model presented in this paper extends the approach developed by Fischer and Newell (2008) by analysing the optimal policy design in a context with more than one externality while taking explicitly into account uncertainty surrounding future emission damage costs. In the presence of massive uncertainties and technology spillovers, well-designed sup-port mechanisms for renewables are found to play a major role, notably as a means for compensating for technology spillovers, yet also for reducing the investors’ risks. How-ever, the design of these support mechanisms needs to be target-aimed and well-focused. Besides uncertainty on the state of the world concerning actual marginal emission damage, we consider the technological progress through R&D as well as learning-by-doing. A portfolio of three policy instruments is then needed to cope with the existing externalities and optimal instrument choice is shown to be dependent on risk aversion of society as a whole as well as of entrepreneurs. To illustrate the role of uncertainty for the practical choice of policy instruments, an em-pirical application is considered. The application is calibrated to recent global data from IEA and thus allows identifying the main drivers for the optimal policy mix. In addition to assumptions on technology costs and uncertainty of emission damage cost, the impor-tance of technology spillover clearly plays a key role. Yet under some plausible parame-ter settings, direct subsidies to production are found to be of lower importance than very substantial R&D supports. |
| Keywords: | Externality, technology, learning, uncertainty, climate change, spillover, renewable energy, policy |
| JEL: | O38 Q21 Q28 Q48 |
| Date: | 2011–03 |
| URL: | http://d.repec.org/n?u=RePEc:dui:wpaper:1102&r=reg |
| By: | Westner, Günther (E.ON Energy Projects GmbH); Madlener, Reinhard (E.ON Energy Research Center, Institute for Future Energy Consumer Needs and Behavior (FCN), RWTH Aachen University) |
| Abstract: | The economics of large-scale combined heat and power (CHP) generation for district heating (DH) applications are strongly affected by the costs and allocation mechanism of CO2 emission allowances. In the next period of the European emission trading system (EU ETS), from 2013 onwards, the allocation rules for CHP generation will be modified according to the principles announced in EU Directive 2009/29/EC. By means of a discounted cash-flow model we first show that the implementation of the modified allocation mechanism significantly reduces the expected net present value of large-scale CHP plants for DH. In a next step, by applying a spread-based real options model we analyze the decision-making problem of an investor who intends to invest in CHP generation. Our results provide some evidence that the modified EU ETS principles contribute to reducing the attractiveness of investments in energy-efficient large-scale CHP plants that feed into DH networks. In contrast, decentralized small-scale CHP, which is not subject to the EU ETS, may benefit from this development and could, therefore increasingly replace large-scale CHP assets. In other words, European legislation is indirectly promoting the further diffusion of decentralized CHP generation units. |
| Keywords: | Combined heat & power; Emission trading system; Investment under uncertainty; Spread; Real options |
| JEL: | C61 D81 Q41 Q43 |
| Date: | 2011–02 |
| URL: | http://d.repec.org/n?u=RePEc:ris:fcnwpa:2011_004&r=reg |