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on Regulation |
| By: | Lev Ratnovski; Enrico Perotti; Razvan Vlahu |
| Abstract: | The paper studies risk mitigation associated with capital regulation, in a context where banks may choose tail risk asserts. We show that this undermines the traditional result that high 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: | Bank regulations , Banks , Capital , Economic models , Risk management , |
| Date: | 2011–08–08 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:11/188&r=reg |
| By: | David L. Millimet; Jayjit Roy |
| Abstract: | The validity of existing empirical tests of the Pollution Haven Hypothesis (PHH) is constantly under scrutiny due to two shortcomings. First, the issues of unobserved heterogeneity and measurement error in environmental regulation are typically ignored due to the lack of a credible, traditional instrumental variable. Second, while the recent literature has emphasized the importance of geographic spillovers in determining the location choice of foreign investment, such spatial eects have yet to be adequately incorporated into empirical tests of the PHH. As a result, the impact of environmental regulations on trade patterns and the location decisions of multinational enterprises remains unclear. In this paper, we circumvent the lack of a traditional instrument within a model incorporating geographic spillovers utilizing three novel identication strategies. Using state-level panel data on inbound U.S. FDI, relative abatement costs, and other determinants of FDI, we consistently nd (i) evidence of environmental regulation being endogenous, (ii) a negative impact of own environmental regulation on inbound FDI in pollution-intensive sectors, particularly when measured by employment, and (iii) larger eects of environmental regulation once endogeneity is addressed. Neighboring environmental regulation is not found to be an important determinant of FDI. Key Words: Foreign Direct Investment, Environmental Regulation, Spillovers, Instrumental Variables, Control Function, Heteroskedasticity |
| JEL: | C31 F21 Q52 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:apl:wpaper:11-10&r=reg |
| By: | Marco A Espinosa-Vega; Juan Sole; Rafael Matta; Charles Kahn |
| Abstract: | Until the recent financial crisis, the safety and soundness of financial institutions was assessed from the perspective of the individual institution. The financial crisis highlighted the need to take systemic externalities seriously when rethinking prudential oversight and the regulatory architecture. Current financial reform legislation worldwide reflects this intent. However, these reforms have overlooked the need to also consider regulatory agencies’ forbearance and information sharing incentives. In a political economy model that explicitly accounts for systemic connectedness, and regulators’ incentives, we show that under an expanded mandate to explicitly oversee systemic risk, regulators would be more forbearing towards systemically important institutions. We also show that when some regulators have access to information regarding an institutions’ degree of systemic importance, these regulators may have little incentive to gather and share it with other regulators. These findings suggest that (and we show conditions under which) a unified regulatory arrangement can reduce the degree of systemic risk vis-á-vis a multiple regulatory arrangement. |
| Keywords: | Bank regulations , Banks , Economic models , External shocks , Financial institutions , Financial risk , Liquidity , |
| Date: | 2011–08–10 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:11/193&r=reg |
| By: | Ping, Luo (Asian Development Bank Institute) |
| Abstract: | Reform of financial regulation is a priority on the international agenda. At the call of the Group of Twenty Finance Ministers and Central Bank Governors (G-20), a number of new international standards have been issued, most notably Basel III. As a member of the G-20, the Financial Stability Board (FSB), and the Basel Committee on Banking Supervision, the People’s Republic of China (PRC) is now on a faster track in adopting international standards. However, the key issue for the PRC—as well as many other emerging markets—is to how to keep focused on the domestic policy agenda while adopting the new global standards. |
| Keywords: | financial regulation; basel iii; prc financial sector |
| JEL: | E44 E52 E58 G18 G28 |
| Date: | 2011–09–15 |
| URL: | http://d.repec.org/n?u=RePEc:ris:adbiwp:0310&r=reg |
| By: | Joanne Evans (University of Surrey); Paul Levine (University of Surrey); Neil Rickman (University of Surrey and CEPR); Francesc Trillas (Universitat Autonoma de Barcelona) |
| Abstract: | Dynamic principal-agent settings with asymmetric information but no commitment are well known to create a ratchet effect. Here, the most efficient agents must be provided with extra 'information rent' as an incentive to relinquish their informational advantage over an uninformed principal; this causes welfare to fall. We study this problem in the case of regulatory procurement and show that delegation by the government to an independent regulator whose preferences differ from the government's can overcome this inefficiency, and we provide 'conservative' conditions under which this happens. Our solution reflects several aspects of many modern regulatory settings: government commitment to a particular regulator, the provision of independence to that regulator, and heterogeneity across available regulators. Our results also provide an analogy with the literatures on the benefits of delegation to independent principals in other settings, such as monetary policy, financial regulation and trade and hence contribute to this broader research agenda. |
| Keywords: | delegation; ratchet effect; procurement |
| JEL: | L51 |
| Date: | 2011–09 |
| URL: | http://d.repec.org/n?u=RePEc:sur:surrec:0911&r=reg |
| By: | Michael Keen |
| Abstract: | The financial crisis has prompted a reconsideration of the taxation of financial institutions, with practice outstripping principle: France, Germany, the United Kingdom and several other European countries have now introduced some form of bank tax, and the U.S. administration has revived its own proposal for such a charge. This paper considers the structure, appropriate rate, and revenue yield of corrective taxation of financial institutions addressed to two externalities, consequent on excessive risk-taking, prominent in the crisis: those that arise when such institutions are simply allowed to collapse, and those that arise when, to avoid the harm this would cause, their creditors are bailed out. It also asks whether corrective taxation or a regulatory capital requirement is the better way to address these concerns. The results suggest a potential role for taxing bank borrowing, perhaps as an adjunct to minimum capital requirements, at marginal rates that rise quite sharply at low capital ratios (but are likely lower when the government cannot commit to its bailout policy), reaching levels higher than those of the bank taxes so far adopted or proposed. |
| Date: | 2011–08–25 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:11/206&r=reg |
| By: | Jacques Thépot (LaRGE Research Center, Université de Strasbourg) |
| Abstract: | This paper explores the idea to regulate retailing industry through a tax on the store parking size. In Western economies, retailers use common resources (land use, road networks) contributing to the store accessibility that they do not pay for. This kind of free riding gives gross merchandisers and hypermakets a competitive advantage which establishes undue market power while creating, presumably, inefficiencies when social cost is taken into account. Hence the idea to tax the parking, which is a proxy measure of the accessibility resources used by the retailer. By using a standard model of horizontal differentiation, we explore the impact of parking taxation in a monopoly and in duopoly and we characterize optimal taxation policies. |
| Keywords: | spatial competition, optimal taxation, parking |
| JEL: | L13 H20 H40 R10 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:lar:wpaper:2011-06&r=reg |
| By: | Abdala Rioja, Yamile E |
| Abstract: | The present paper reviews the causes that led to the financial crisis. Unlike other interpretations, this paper does not place main significance on a single source or on a set of causes. I consider all major standpoints highlighted by research and media prior, during and after the financial market turmoil in 2007. When evidence permits, reasons are validated and their potential consequences are reviewed by means of reductio ad absurdum, specifically by proof by contradiction. This analysis proposes arguments that are in favor and against a specific source whenever applicable, so as to address each cause’s major implications and deterrents. Ultimately, this analysis reveals through graph theory the interconnections among the analyzed sources for the crisis and their forbearance as a cluster that projected the final downturn. |
| Keywords: | financial crisis, subprime crisis, systemic risk, financial regulation, monetary policy, global imbalances, global savings glut, shadow banking system, predatory lending, too big to fail, securitization, housing bubble, interest rates, credit ratings, toxic assets, liar loans, graph theory, directed graph, finitary relations |
| JEL: | F34 E44 G24 F42 E66 C65 E58 G18 G15 E52 G28 |
| Date: | 2011–09–13 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:33408&r=reg |
| By: | Carl Gaigné; Julie Le Gallo; Solène Larue; Bertrand Schmitt |
| Abstract: | The well-known increase in the geographical concentration of hog production suggests the presence of agglomeration economies related to spatial spillovers and inter-dependencies among industries. In this paper, we examine whether the restrictions on land application of manure may weaken productivity gains arising from the agglomeration process. We develop a model of production showing the ambiguous spatial effect of land availability and the restriction on the manure application rate. Indeed, while the regulation of manure application triggers dispersion when manure is applied to land as a crop nutrient, it also prompts farmer to adopt manure treatment that favors agglomeration of hog production. Estimations of a reduced form of the spatial model with a spatial HAC procedure applied to data for French hog production for 1988 and 2000 confirm the ambiguous effect of land limitations induced by the restrictions on manure application. It does not prevent spatial concentration of hog production, and even boosts the role played by spatial spillovers in the agglomeration process. |
| Keywords: | hog production, land availability, manure application regulation, agglomeration economies, spatial econometrics |
| JEL: | Q10 Q53 R12 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:rae:wpaper:201102&r=reg |
| By: | Ana Espinola-Arredondo; Felix Munoz-Garcia (School of Economic Sciences, Washington State University) |
| Abstract: | This paper investigates the effect of monopoly subsidies on entry deterrence. We consider a potential entrant who observes two signals: the subsidy set by the regulator and the output level produced by the incumbent firm. We show that not only an informative equilibrium can be supported, where information about the incumbent's costs is conveyed to the entrant, but also an uninformative equilibrium, where the actions of regulator and incumbent conceal the monopolist's type, thus deterring entry. While the regulator?s role can support entry-deterrence practices, we demonstrate that his presence is nonetheless welfare improving. Furthermore, we compare equilibrium welfare relative to two benchmarks: complete information environments, and standard entry-deterrence games where the regulator is absent. |
| Keywords: | Entry deterrence; Signaling; Monopoly subsidies |
| JEL: | D82 H23 L12 Q5 |
| Date: | 2011–09 |
| URL: | http://d.repec.org/n?u=RePEc:wsu:wpaper:espinola-10&r=reg |
| By: | Norovsambuu Tumennasan (School of Economics and Management, Aarhus University, Denmark) |
| Abstract: | We revisit the question of whether price matching is anti-competitive in a capacity constrained duopoly setting. We show that the effect of price matching depends on capacity. Specifically, price matching has no effect when capacity is relatively low, but it benefits the firms when capacity is relatively high. Interestingly, when capacity is in an intermediate range, price matching benefits only the small firm but does not affect the large firm in any way. Therefore, one has to consider capacity seriously when evaluating if price matching is anti-competitive. If the firms choose their capacities simultaneously before pricing decisions, then the effect of price matching is either pro-competitive or ambiguous. We show that if the cost of capacity is high, then price matching can only (weakly) decrease the market price. On the other hand, if the cost of capacity is low, then the effect of price matching on the market price is ambiguous due to the multiplicity of equilibria. Therefore, this paper challenges the widely accepted belief that price matching is an anti-competititive practice if the firms choose their capacities simultaneously before pricing decisions. |
| Keywords: | Price matching, capacity constraint, quantity precommitment |
| JEL: | L00 |
| Date: | 2011–09–12 |
| URL: | http://d.repec.org/n?u=RePEc:aah:aarhec:2011-13&r=reg |
| By: | Alberto Cavaliere (Department of Economics and Quantitative Methods, University of Pavia); Valentina Giust (Sorgenia); Mario Maggi (Department of Economics and Quantitative Methods, University of Pavia) |
| Abstract: | Scarce storage capacity and distortions in access to gas storage are considered causes of market foreclosure in liberalized gas markets. We consider rules currently adopted in Europe for storage rationing and propose efficient rationing mechanism based on the value of storage, when other flexibility inputs are available. Firstly we analyse productive efficiency issues neglecting vertical restraints and strategic behaviour in the final market. Then we assume imperfect compettion in the downstream market for gas supplies, given the avaialbility of storage capacity upstream. We consider effciency issues in a two stage model comparing regulated storage tariffs – coupled with a centralizedrationing mechanism – with storage auctions. Finally we consider as an optimal mechanism the allocation of storage arising from welfare maximization by a social planner. We find that it is usually optimal to maximize the amount of storage capacity allocated to new entrants in the gas markets. Storage auctions deviates from the optimal mechanism, but still improve efficiency, with respect to current mechanisms, to the extent that they allocate storage according to its value. Furthermore storage allocation appear to be an extremeley powerful mechanism to improve competition and efficiency in gas markets. |
| Keywords: | Liberalization, Auctions, Essential Facilities |
| JEL: | L51 L95 D45 |
| Date: | 2011–07 |
| URL: | http://d.repec.org/n?u=RePEc:pav:wpaper:274&r=reg |