nep-reg New Economics Papers
on Regulation
Issue of 2011‒08‒22
sixteen papers chosen by
Oleg Eismont
Russian Academy of Sciences

  1. Investment in Cleaner Technology and Signaling Distortions in a Market with Green Consumers By Aditi Sengupta
  2. Capital Regulation and Tail Risk By Enrico Perotti; Lev Ratnovski; Razvan Vlahu
  3. Better Economic Regulation: The Role of the Regulator By OECD
  4. Business Cycle and Bank Capital Regulation: Basel II Procyclicality By Guangling (Dave) Liu; Nkhahle E. Seeiso
  5. Enforcement of Labor Regulation and Informality By Almeida, Rita K.; Carneiro, Pedro
  6. Taxation and Regulation of Bonus Pay By Besley, Timothy J.; Ghatak, Maitreesh
  7. BASEL III: responses to consultative documents, vital aspects of the consultative processes and the journey culminating in the present framework (Part 1) By Ojo, Marianne
  8. Conference summary: federal regulation of the prepaid card industry: costs, benefits, and changing industry dynamics By Philip Keitel
  9. The mechanics and regulation of variable payout annuities By Vittas, Dimitri
  10. Racial Discrimination and Competition By Ross Levine; Alexey Levkov; Yona Rubinstein
  11. The treatment of risk and uncertainty in the US social cost of carbon for regulatory impact analysis By Dietz, Simon
  12. Unforeseen Events Wait Lurking: Estimating Policy Spillovers From U.S. To Foreign Asset Prices By Trung Bui; Tamim Bayoumi
  13. The Impact of the Global Financial Crisis on Microfinance and Policy Implications By Gabriel Di Bella
  14. Firm's damages from antitrust & abuse of dominant position investigations By Fotis, Panagiotis
  15. Systemic Risk Exposures: A 10-by-10-by-10 Approach By Darrell Duffie
  16. Optimal Control of Broadcasting Spectrum with a Variety-Reception Tradeoff and Consumers’ Income Sensitivity By Amnon Levy; Benoit Freyens

  1. By: Aditi Sengupta
    Abstract: I analyze the pricing and investment behavior of a firm that signals the environmental attribute of its production technology through its price to uninformed environmentally conscious consumers. I then analyze the effect of change in environmental regulation on the signaling outcome and the firm's ex ante incentive to invest in cleaner technology. When regulation is weak, a firm signals cleaner technology through higher price; in this case, the firm earns lower profit when it has cleaner technology and thus, has no incentive to invest in cleaner technology. The price charged by the clean firm declines sharply beyond a critical level of regulation. When regulation is sufficiently stringent, the firm with cleaner technology charges lower price but earns higher signaling profit, and ex ante the firm has positive incentive to invest in cleaner technology. With weak regulation, the incentive of the firm to directly disclose its environmental performance rather than signal it through price (signaling distortion of profit) is increasing in the level of regulation, but the opposite holds when regulation is sufficiently stringent.
    Keywords: Environmental consciousness; Environmental regulation; Incomplete information; Investment; Signaling
    JEL: D42 D43 D82 L51
    Date: 2011–08
  2. By: Enrico Perotti; Lev Ratnovski; Razvan Vlahu
    Abstract: The paper studies risk mitigation associated with capital regulation, in a context where banks may choose tail risk assets. We show that this undermines the traditional result that higher capital reduces excess risk-taking driven by limited liability. Moreover, higher capital may have an unintended effect of enabling banks to take more tail risk without the fear of breaching the minimal capital ratio in non-tail risky project realizations. The results are consistent with stylized facts about pre-crisis bank behavior, and suggest implications for the optimal design of capital regulation.
    Keywords: Banking; Capital regulation; Risk-taking; Tail risk; Systemic risk
    JEL: G21 G28
    Date: 2011–08
  3. By: OECD
    Abstract: Good transport services contribute strongly to the productivity of an economy and extend the range of activities accessible to consumers. Good services require adequate infrastructure and reasonable usage conditions to that infrastructure. Much transport infrastructure is capital intensive and lumpy. Such cost structures imply that there will be few service providers. In some circumstances the structure of costs and technology is such that economic regulation is the best way to drive efficient outcomes. Achieving the right governance structures – including the question of when to regulate and how to regulate – is central to performance of the sector and the subject of this paper, which summarises discussions at a Roundtable1 held in December 2010.
    Date: 2011–04
  4. By: Guangling (Dave) Liu; Nkhahle E. Seeiso
    Abstract: This paper studies the impacts of bank capital regulation on business cycle fluctuations. To do so, we adopt the Bernanke et al. (1999) "financial accelerator" model (BGG), to which we augment a banking sector to study the procyclical nature of Basel II claimed in the literature. We first study the impacts of a negative shock to entrepreneur's net worth and a positive monetary policy shock on business cycle fluctuations. We then look at the impacts of a negative shock to the entrepreneurs' net worth when the minimum capital requirement increases from 8 percent to 12 percent. Our comparison studies between the augmented BGG model with Basel I bank regulation and the one with Basel II bank regulation suggest that, in the presence of credit market frictions and bank capital regulation, the liquidity premium effect further ampliflies the financial accelerator effect through the external finance premium channel, which in turn, contributes to the amplification of Basel II procyclicality. Moreover, under Basel II bank regulation, in response to a negative net worth shock, the liquidity premium and the external finance premium rise much more if the minimum bank capital requirement increases, which in turn, amplify the response of real variables. Finally, small adjustments in monetary policy can result in stronger response in the real economy, in the presence of Basel II bank regulation in particular, which is undesirable.
    Keywords: Business cycle fluctuations, Financial accelerator, Bank capital requirement, Monetary policy
    JEL: E32 E44 G28 E50
    Date: 2011
  5. By: Almeida, Rita K. (World Bank); Carneiro, Pedro (University College London)
    Abstract: Enforcement of labor regulations in the formal sector may drive workers to informality because they increase the costs of formal labor. But better compliance with mandated benefits makes it attractive to be a formal employee. We show that, in locations with frequent inspections workers pay for mandated benefits by receiving lower wages. Wage rigidity prevents downward adjustment at the bottom of the wage distribution. As a result, lower paid formal sector jobs become attractive to some informal workers, inducing them to want to move to the formal sector.
    Keywords: informality, labor regulation
    JEL: J2 J3
    Date: 2011–08
  6. By: Besley, Timothy J.; Ghatak, Maitreesh
    Abstract: We explore the consequence for taxation and regulation of bonus pay when investors are protected by taxpayers from downside risk. The paper develops a model where workers in financial sector firms make decisions about effort and risk-taking which are influenced by the structure of bonus pay. Bailouts lead to too little effort, too much risk taking and increase inequality. We show that the optimal structure of bonuses can be implemented by a combination of a regulation on the structure of bonuses and a tax on their level.
    Keywords: bonus; incentives; taxation
    JEL: D53 D86 H21
    Date: 2011–08
  7. By: Ojo, Marianne
    Abstract: This paper is aimed at providing a comprehensive overview of, and responses to, four very vital components of the consultative processes which have contributed to the new framework known as Basel III. The paper will approach these components in the order of the consultative processes, namely, the capital proposals, the liquidity proposals and the Proposal to ensure the loss absorbency of regulatory capital at the point of non-viability. The capital proposals comprise proposals aimed at strengthening the resilience of the banking sector, the proposal relating to international framework for liquidity risk measurement, standards and monitoring and, the countercyclical capital buffer proposal. Whilst the capital proposals have been welcomed, there has been growing realisation since the aftermath of the recent Financial Crises that banks which have been complying with capital adequacy requirements could still face severe liquidity problems. As well as highlighting the importance of introducing counter cyclical capital buffers, the response to the countercyclical proposal draws attention to the need for greater focus on more forward looking provisions, as well as provisions which are aimed at addressing losses and unforeseen problems attributed to “maturity transformation of short-term deposits into long term loans.” The Basel Committee’s consultative document on the “Proposal to Ensure the Loss Absorbency of Regulatory Capital at the Point of Non Viability” sets out a proposal aimed at “enhancing the entry criteria of regulatory capital to ensure that all regulatory capital instruments issued by banks are capable of absorbing losses in the event that a bank is unable to support itself in the private market.” Amongst other issues addressed, the response to the consultative document highlights why the controlled winding down procedure also constitutes a means whereby losses could still be absorbed in the event that a bank is unable to support itself in the private market.
    Keywords: Counter cyclical buffers; liquidity risks; pro cyclicality; loan loss provisions; financial crises; bank; regulation; capital; insolvency; financial crises; moral hazard; Basel III
    JEL: K2 G21 E3
    Date: 2010–10
  8. By: Philip Keitel
    Abstract: On April 8-9, 2010, the Payment Cards Center of the Federal Reserve Bank of Philadelphia hosted a conference that brought together leaders in the prepaid card industry, regulators, consumer groups, law enforcement agents, and industry researchers to discuss the economics of prepaid cards and the benefits and costs of their regulation from the standpoint of several different product categories. In particular, the conference examined ways in which prepaid card products can differ, how the industry has developed over time, ongoing industry dynamics, ways in which the usefulness of prepaid products to criminals might be limited, whether consumers who use prepaid cards are adequately protected, and the challenges facing regulators. This paper summarizes the highlights from the presentations given at the conference and the discussions that ensued.
    Keywords: Point-of-sale-systems ; Consumer credit
    Date: 2011
  9. By: Vittas, Dimitri
    Abstract: This paper discusses the mechanics and regulation of participating and unit-linked variable payout annuities. These annuities offer benefits that are not fixed in either nominal or real terms but depend on the performance of the fund or funds in which the underlying reserve assets are invested, their profit sharing features, and the treatment of longevity risk. The paper focuses on the treatment of investment and longevity risks by different types of these annuities and underscores the challenge of establishing a robust and effective framework of regulation and supervision for these products. The paper also addresses the exposure of annuitants to integrity risk and places special emphasis on the need for a high level of meaningful transparency.
    Keywords: Debt Markets,Insurance&Risk Mitigation,Investment and Investment Climate,Pensions&Retirement Systems,Non Bank Financial Institutions
    Date: 2011–08–01
  10. By: Ross Levine; Alexey Levkov; Yona Rubinstein
    Abstract: We provide the first assessment of whether an intensification of product market competition reduces the racial wage gap exactly where taste-based theories predict that competition will reduce labor market discrimination. in economies where employers have strong racial prejudices. We use bank deregulation across the U.S. states to identify an intensification of competition among banks, which in turn lowered entry barriers facing nonfinancial firms, especially firms that depend heavily on bank credit. Consistent with taste-based theories, we find that competition boosted blacks' relative residual wages within the banking industry and bank-dependent industries, but only in states with strong tastes for discrimination.
    Keywords: Discrimination, imperfect competition, banks, regulation
    JEL: J7 J31 D43 D3 G21 G28
    Date: 2011–08
  11. By: Dietz, Simon
    Abstract: This note considers the treatment of risk and uncertainty in the recently established social cost of carbon (SCC) for analysis of federal regulations in the United States. It argues that the analysis of the US Interagency Working Group on Social Cost of Carbon did not go far enough into the tail of low-probability, high-impact scenarios, and, via its approach to discounting, it mis-estimated climate risk, possibly hugely. Given the uncertainty about estimating the SCC, the note concludes by arguing that there is in fact much to commend an approach whereby a quantitative, long-term emissions target is chosen, and the price of carbon for regulatory impact analysis is then based on estimates of the marginal cost of abatement to achieve that very target. --
    Keywords: Ambiguity,climate change,discounting,integrated assessment modelling,risk,social cost of carbon,uncertainty
    JEL: Q54
    Date: 2011
  12. By: Trung Bui; Tamim Bayoumi
    Abstract: Event studies are used to analyze the impact of U.S. financial, fiscal, and monetary policies from US to foreign asset prices across a range of G20 countries and Switzerland. The initial announcement that the Administration supported tighter regulation of banks led to a generalized fall in advanced economy bank shares compared to local equity markets. For later Dodd-Frank announcements, however, falls in U.S. bank equity prices were accompanied by increases in U.K. and Swiss valuations, implying a potential for regulatory arbitrage. Turning to macro policies, the 2008/9 fiscal and monetary stimulus packages generally supported foreign activity, while the impact of similar stimulus in 2010 is less clear.
    Date: 2011–08–01
  13. By: Gabriel Di Bella
    Abstract: The global financial crisis affected microfinance institutions (MFIs) as lending growth was constrained by scarcer borrowing opportunities, while the economic slowdown negatively impacted asset quality and profitability. It also brought to the fore the relatively high interest rates that MFIs charge to their (low-income) customers. This paper revisits the issue of systemic risk of MFIs, and finds that contrary to the evidence before the crisis, MFI performance is correlated not only to domestic economic conditions but also to changes in international capital markets. It also presents an empirical analysis of lending rates with the purpose of informing policy decisions, and finds that loan sizes, productivity, and MFI age contribute to explain differences in lending rate levels. This suggest that regulation (and policies) promoting MFI competition, and innovation in lending technologies have a better chance to result in decreased lending rates.
    Keywords: Global Financial Crisis 2008-2009 , Economic conditions , International capital markets , Interest rates on loans , Credit risk , Microfinance ,
    Date: 2011–07–26
  14. By: Fotis, Panagiotis
    Abstract: Competition authorities carry out investigations and impose legal penalties on firms which are caught infringing the competition law. The rationale of this policy is to prevent firms from distorting free competition in a way that is detrimental to economic efficiency and at the same time to deter them from engaging in cartels and other anti-competitive behaviour. In this paper I try to evaluate the impact of major antitrust & abuse of dominant position investigations on firm’s financial value. For this purpose I divide the period of each investigation into two sub periods: the ‘Investigation period”, which begins from the outset of the anticompetitive case and ends when the competition authority issues the statement of objections to the infringed firms and the ‘Deterrence period’, which follows the ‘Investigation period’ and ends with the final judgment of the court. I use aggregate regression based approach to estimate the Average & Cumulative Average Residuals of the firms which infringe articles 1 & 2 of Greek Competition Law. The empirical results imply that the release of the final decisions of the Hellenic Competition Commission and the Court of Appeal negatively affect the share price of the infringed firms.
    Keywords: Antitrust; competition policy; deterrence; anticompetitive practices; fines; time-series models; regression based approach; quantitative event study; marginal residuals
    JEL: C5 L4
    Date: 2011–07–01
  15. By: Darrell Duffie
    Abstract: Here, I present and discuss a “10-by-10-by-10” network-based approach to monitoring systemic financial risk. Under this approach, a regulator would analyze the exposures of a core group of systemically important financial firms to a list of stressful scenarios, say 10 in number. For each scenario, about 10 such designated firms would report their gains or losses. Each reporting firm would also provide the identities of the 10, say, counterparties with whom the gain or loss for that scenario is the greatest in magnitude relative to all counterparties. The gains or losses with each of those 10 counterparties would also be reported, scenario by scenario. Gains and losses would be measured in terms of market value and also in terms of cash flow, allowing regulators to assess risk magnitudes in terms of stresses to both economic values and also liquidity. Exposures would be measured before and after collateralization. One of the scenarios would be the failure of a counterparty. The “top ten” counterparties for this scenario would therefore be those whose defaults cause the greatest losses to the reporting firm. In eventual practice, the number of reporting firms, the number of stress scenarios, and the number of major counterparties could all exceed 10, but it is reasonable to start with a small reporting system until the approach is better understood and agreed upon internationally.
    JEL: G28 G32
    Date: 2011–08
  16. By: Amnon Levy (University of Wollongong); Benoit Freyens (University of Canberra)
    Abstract: A socially desirable number of royalties-paying users of a state-owned broadcasting spectrum is derived within an optimal control framework where the adjustment of the number of users to above-normal profits is adversely affected by sunk costs. The optimal control takes into account the tradeoff between the benefits from higher variety and royalties’ revenues and the costs of the intensified interferences associated with entry. It also considers the positive information-dissemination effect and the negative effort-diversion effect of broadcasts on aggregate income. The broadcasting industry’s optimal steady state is identified and its stability is analyzed.
    Keywords: Economics; Optimal Control; Spectrum; OTA Broadcasts; Variety;Interferences; Royalties
    JEL: C61 C62 D61 K23 L52
    Date: 2011

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