nep-reg New Economics Papers
on Regulation
Issue of 2011‒04‒16
twelve papers chosen by
Oleg Eismont
Russian Academy of Sciences

  1. Regulation of Network Infrastructure Investments: An Experimental Evaluation By Henze, B.; Noussair, C.N.; Willems, Bert
  2. Entry decisions after deregulation: the role of incumbents' market power By Lorenzo Ciari; Riccardo De Bonis
  3. Acquisitions, Entry and Innovation in Network Industries By Norbäck, Pehr-Johan; Persson, Lars; Tåg, Joacim
  4. Taming Manias: On the Origins, Inevitability, Prediction and Regulation of Bubbles and Crashes By Jeffrey SATINOVER; Didier SORNETTE
  5. Bankruptcy: is it enough to forgive or must we also forget? By Ronel Elul; Piero Gottardi
  6. Contingent capital to strengthen the private safety net for financial institutions: Cocos to the rescue? By von Furstenberg, George M.
  7. The Law NOME: Some Implications for the French Electricity Markets By Creti, Anna; Pouyet, Jérôme; Sanin, Maria-Eugenia
  8. A Shot at Regulating Securitization By Kiff, John; Kisser, Michael
  9. Do capital buffers mitigate volatility of bank lending? A simulation study By Heid, Frank; Krüger, Ulrich
  10. Methods for Estimating Economic Damages from Environmental Contamination By Shideler, Dave; Dicks, Michael R.
  11. Can Vertical Separation Reduce Non-Price Discrimination and Increase Welfare? By Duarte Brito; Pedro Pereira; João Vareda
  12. SEE Regional Wholesale Market Design: Recommendations, Available Options and Implementation By Sakellaris, Kostis

  1. By: Henze, B.; Noussair, C.N.; Willems, Bert (Tilburg University, Center for Economic Research)
    Abstract: This paper reports the results of an experiment evaluating three regulatory schemes for network infrastructure, in terms of their ability to generate efficient levels of capacity investment. We compare the performance of (1) price cap regulation, (2) a regulatory holiday for new capacity, and (3) price cap regulation with long term contracts combined with a secondary market. We find that the price cap regulation outperforms the regulatory holiday as the latter creates an incentive to underinvest relative to optimal levels. Long term contracts also fail to improve on single price-cap regulation, and can provide more noisy signals about future demand and thus reduce investment.
    Keywords: Infrastructure Investment;Experiment;Price Cap;Regulatory Holiday
    JEL: C9 L51 L95
    Date: 2011
  2. By: Lorenzo Ciari (European University Institute - Firenze (I)); Riccardo De Bonis (Banca d'Italia, Economics and International Relations Area)
    Abstract: This paper investigates the role of incumbents' market power in shaping the entry decisions of Italian banks after branching liberalization in 1990. Using a unique dataset on 260 banks, we find that entry over the 1990-1995 period was targeted towards markets that were more competitive to begin with, i.e. where banking spreads were smaller. The results confirm the entry deterrent role of market power in the short-run and show a long run effect of regulation that survives after the removal of administrative barriers. The capacity of market power to discourage entry is confirmed in instrumental variables specifications, where we use the characteristics of the local banking markets in 1936, a proxy for tightness of banking regulation, to identify an exogenous source of variation in the spreads.
    Keywords: banking, barriers to entry, deregulation, market power
    JEL: G28 L1 L5
    Date: 2011–04
  3. By: Norbäck, Pehr-Johan (Research Institute of Industrial Economics (IFN)); Persson, Lars (Research Institute of Industrial Economics (IFN)); Tåg, Joacim (Research Institute of Industrial Economics (IFN))
    Abstract: Why do so many high-priced acquisitions of entrepreneurial firms take place in network industries? We develop a theory of commercialization (entry or sale) in network industries showing that high equilibrium acquisition prices are driven by the incumbents' desire to prevent rivals from acquiring innovative entrepreneurial firms. This preemptive motive becomes more important when there is an increase in network effects. A consequence is higher innovation incentives under an acquisition relative to entry. A policy enforcing strict compatibility leads to more entry, but can be counterproductive by reducing bidding competition, thereby also reducing acquisition prices and innovation incentives.
    Keywords: Acquisitions; Commercialization; Compatibility; Entry; Network effects; Innovation; R&D; Regulation
    JEL: L10 L15 L26 L50 L86 O31
    Date: 2011–04–06
  4. By: Jeffrey SATINOVER (ETH Zurich and the King’s College); Didier SORNETTE (ETH Zurich and Swiss Finance Institute)
    Abstract: Chapter Summary: We consider the recent financial crisis as an overlapping sequence of interdependent financial bubbles followed by their collapse. Governments and regulatory agencies have made it a prime goal to moderate future crises. Many attempts at financial, economic and social engineering are plagued by an “illusion of control” typical of complex systems for which we offer some suggestive mathematical models. The “illusion of control” presents a significant challenge to effective resilience engineering. Furthermore, control may not only yield no benefit, but at times may exact perverse new costs. We argue that some markets almost always; almost all markets sometimes; and economies in general are truly “complex systems” in a technical sense; that as such, they are intrinsically characterized by periods of extremity and by abrupt state-transition; that they spend much time in a largely unpredictable state, but on the other enter periods of pre-crisis when they are predictable. In consequence of a system phase (or regime) transition, we argue that the most extreme events—the most influential ones—are susceptible to (probabilistic) prediction. In light of this analysis, we offer a small number of perhaps counter-intuitive suggestions, for example, that many of the present interventions in the “liquidity crisis” are ill-advised and possibly dangerous—e.g., the widespread attempts to artificially stimulate consumption in the absence of precautionary reserves and in the presence of huge liabilities; as an example of real-world, large-scale resilience engineering we suggest that bubble-prediction should be a mainstay of financial regulation.
    Keywords: financial bubbles; positive feedbacks; illusion of control; unintended consequences; dragon-kings; outliers; prediction; systemic instabilities
    JEL: G18
    Date: 2010–07
  5. By: Ronel Elul; Piero Gottardi
    Abstract: In many countries, lenders are restricted in their access to information about borrowers' past defaults. The authors study this provision in a model of repeated borrowing and lending with moral hazard and adverse selection. They analyze its effects on borrowers' incentives and access to credit, and identify conditions under which it is optimal. The authors argue that “forgetting” must be the outcome of a regulatory intervention by the government. Their model's predictions are consistent with the cross-country relationship between credit bureau regulations and the provision of credit, as well as the evidence on the impact of these regulations on borrowers' and lenders' behavior.
    Keywords: Bankruptcy
    Date: 2011
  6. By: von Furstenberg, George M.
    Abstract: This study examines the promise of reducing expected resolution costs of financial institutions through either voluntary or mandated addition of contingently convertible debt securities to their long-term financing mix. I model the stochastic process by which an initially very well capitalized banking firm may come to violate its minimum capital maintenance requirement. Conversion of cocos then provides a second chance because the firm's initial capitalization is restored. Although regulatory insolvency remains a distant threat, the expected reductions in the cost of bankruptcy and hence the cost of capital are such that cocos may win a place in the liability structure of financial institutions without the need for mandates. --
    Keywords: financial reforms,regulatory insolvency,contingent capital,bank regulations,cocos
    JEL: E44 G33 G38
    Date: 2011
  7. By: Creti, Anna; Pouyet, Jérôme; Sanin, Maria-Eugenia
    Abstract: The French law “Nouvelle Organisation du Marché de l’Électricité” makes available, at a regulated price, withdrawal rights to source low-cost electricity production from nuclear plants owned by the incumbent. Downstream market retailers benefit from such a measure, up to a given amount fixed by the law, to compete on a level playing field with the historical supplier. Our analysis assesses whether this production release programme is likely to result in a lower retail price. We show that whether pro-competitive effects arise depends not only on the amount of the preassigned capacity but also on the rules used to allocate it to retailers.
    Date: 2011–03
  8. By: Kiff, John (International Monetary Fund); Kisser, Michael (Dept. of Finance and Management Science, Norwegian School of Economics and Business Administration)
    Abstract: In order to incentivize stronger issuer due diligence effort, European and U.S. authorities are amending securitization-related regulations to force issuers to retain an economic interest in the securitization products they issue. The idea is that if loan originators and securitizers have more skin in the game they will more diligently screen the loans they originate and securitize. This paper uses a simple model to explore the economics of equity and mezzanine tranche retention in the context of systemic risk, accounting frictions and reduced form informational asymmetries. It shows that screening levels are highest when the loan originating bank retains the equity tranche. However, most of the time a profit maximizing bank would favor retention of the less risky mezzanine tranche, thereby implying a suboptimal screening effort from a regulator's point of view. This is mainly due to lower capital charges, loan screening costs and lower retention levels. This distortion gets even more pronounced in case the economic outlook is positive or profitability is high, thereby making the case for dynamic and countercyclical credit risk retention requirements. Finally, the paper also illustrates the importance of loan screening costs for the retention decision and thereby shows that an unanimous imposition of equity tranche retention might run the risk of shutting down securitization markets.
    Keywords: Securitization-related regulations; the economics of equity
    JEL: G00
    Date: 2011–04–06
  9. By: Heid, Frank; Krüger, Ulrich
    Abstract: Critics claim that capital requirements can exacerbate credit cycles by restricting lending in an economic downturn. The introduction of Basel 2, in particular, has led to concerns that risksensitive capital charges are highly correlated with the business cycle. The Basel Committee is contemplating a revision of the Basel Accord by introducing counter-cyclical capital buffers. Others claim that capital buffers are already large enough to absorb fluctuations in credit risk. We address the question of the pro-cyclical effects of capital requirements in a general framework which takes into account banks' potential adjustment strategies. We develop a dynamic model of bank lending behavior and simulate different regulatory frameworks and macroeconomic scenarios. In particular, we address two related questions in our simulation study: How do business fluctuations affect capital requirements and bank lending? To what extent does the capital buffer absorb fluctuations in the level of mimimum required capital? --
    Keywords: Minimum capital requirements,regulatory capital,capital buffer,cyclical lending,pro-cyclicality
    JEL: C61 E32 E44 G21
    Date: 2011
  10. By: Shideler, Dave; Dicks, Michael R.
    Abstract: While significant attention has been given to the decrease in property values associated with environmental contamination (i.e., stigma effects), little attention has been given to the stigma impacts on the local community as a whole. In addition, most estimates of stigma damages have been performed within a community, using distance from contamination or comparing contamination and non contamination areas in the community. In this article we determine stigma damages by analyzing property values in comparable communities and develop the rationale for estimating the community impact associated with environmental contamination that extends beyond the impact on individual property owners. These impacts were estimated for the environmental contamination from zinc smelting in the municipality of Blackwell, Oklahoma. The impacts were measured in terms of lost ad valorem tax revenue using hedonic pricing and average treatment effects.
    Keywords: environmental damages, environmental contamination, Environmental Economics and Policy, Q51,
    Date: 2011
  11. By: Duarte Brito (Universidade Nova de Lisboa and CEFAGE-UE); Pedro Pereira (Autoridade da Concorrência and IST); João Vareda (Autoridade da Concorrência and CEFAGE-UE)
    Abstract: We investigate if vertical separation reduces non-price discrimination and increases welfare. Consider an industry consisting of a vertically integrated firm and an independent retailer, which requires access to the vertically integrated firm's wholesaler services. The wholesaler can degrade the quality of input it supplies to either of the retailers. Discrimination occurs if one of the retailers is supplied an input of lower quality than its rival. We show that separation of the vertically integrated firm reduces discrimination against the independent retailer, although it does not guarantee no-discrimination. Furthermore, with separation, the wholesaler may discriminate against the vertically integrated firm's retailer. Vertical separation impacts social welfare through two e¤ects. First, through the double-marginalization effect, which is negative. Second, through the quality degradation effect, which can be positive or negative. Hence, the net welfare impact of vertical separation is negative or potentially ambiguous.
    Keywords: Vertigal integration; Vertical separation; Non-price discrimination.
    Date: 2011
  12. By: Sakellaris, Kostis
    Abstract: In 2005 the countries of South East Europe (SEE) committed themselves to develop a regional energy market in SEE. The World Bank offered to provide technical assistance and recommendations for the most effective implementation of the electricity wholesale market opening. This paper presents and discusses the main proposals of the Study for the SEE Regional Market Design. It then proceeds to the provision of recommendations on how the Study’s proposals can be enhanced and fit better to the current status of the SEE markets.
    Keywords: South East Europe; Regional Electricity Market; Market Design.
    JEL: Q48 Q40 L94 P31
    Date: 2011–01–25

This nep-reg issue is ©2011 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.
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