nep-reg New Economics Papers
on Regulation
Issue of 2011‒10‒22
sixteen papers chosen by
Oleg Eismont
Russian Academy of Sciences

  1. On the regulation of unobserved emissions By Tsur, Yacov; de Gorter, Harry
  2. Innovations in globalized regulation : opportunities and challenges By Levy, Brian
  3. Regulation, competition and fraud: evidence from retail gas stations in Mexico By Arteaga, Julio Cesar; Flores, Daniel
  4. An Economic policy and legal analysis of the Micro Finance Institutions (Development & Regulation) Bill, 2011 By Shubho Roy; Renuka Sane; Susan Thomas
  5. Optimal monitoring of credit-based emissions trading under asymmetric information By Ian A. MacKenzie; Markus Ohndorf
  6. The Twoâ€Tiered Politics of Financial Reform in the United States By Wooley, John T.; Ziegler, J. Nicholas
  7. A real options analysis of dual labor markets and the single labor contract By Gete, Pedro; Porchia, Paolo
  8. Determinants of Trade with Solar Energy Technology Components: Evidence on the Porter Hypothesis? By Felix Groba
  9. Australia's Carbon Tax: A Sheep in Wolf's Clothing? By Spash, Clive L.; Lo, Alex Y.
  10. The Economics Implications of House Price Capitalization A Survey of an Emerging Literature By Christian A. L. Hilber
  11. Assessing the Impact of Mali's Water Privatization across Stakeholders By Antonio Estache; Emili Griffel-Tatjé
  12. Law, economic growth and human development By Simplice A., Asongu
  13. Complementing Bagehot: Illiquidity and insolvency resolution By Eijffinger, Sylvester C W; Nijskens, Rob
  14. When bigger isn’t better: Bail outs and bank behaviour By Li, Han Hao; Miller, Marcus; Zhang, Lei
  15. The Design and Implementation of U.S. Climate Policy: An Introduction By Don Fullerton; Catherine Wolfram
  16. Comparison of Privatization Processes of Telecom Services in India and Brazil By Jain, Rekha

  1. By: Tsur, Yacov; de Gorter, Harry
    Abstract: Regulation of nonpoint source pollution often relies in one way or another on policy instruments based on ambient indicators. For wellknown reasons, enforcement of ambient-based policies is, at best, limited. If no individual choices or actions are observed, than ambientbased regulation might be the only feasible approach. Often, some relevant individual indicators, such as output or certain inputs, are observable. For such cases, we offer a regulation mechanism that does away with ambient indicators. The mechanism implements the optimal output-abatement-emission allocation and gives rise to the full information outcome when the social cost of transfers is nil. Special attention is given to the regulation of (unobserved) abatement.
    Keywords: Nonpoint source pollution, abatement, asymmetric information, regulation mechanism, implementation., Environmental Economics and Policy,
    Date: 2011
  2. By: Levy, Brian
    Abstract: This paper lays out a comparative framework for assessing the potential, limitations and challenges of a variety of emerging institutional innovations in globalized regulation. The framework highlights two dimensions of effectiveness -- the comprehensiveness of coverage, and the credibility of the regulatory regime. Performance in relation to these two dimensions is assessed for three distinctive approaches to globalized regulation: i) Government-centric approaches, including treaties, extra-territorial regulation and government networks -- seven examples are assessed in the paper. ii) Civil regulation, including both joint initiatives by private firms and civil society, and wholly private self-regulatory approaches -- with eight examples assessed. iii) Hybrid approaches, involving multiple governmental and non-governmental stakeholders -- with three examples assessed. Overall, the assessment points to an abundance of innovation -- but a seeming failure of the many innovations to deliver more than, at best, partial successes in meeting the credibility and comprehensiveness criteria for effectiveness. The paper concludes by suggesting ways in which the distinct elements of different approaches might be combined so that the whole can be more, rather than less, than the sum of its parts. The way forward is likely to be incremental and cumulative, bottom-up as well as top down -- transcending a too neat, and ultimately unhelpful, bifurcation between civil society advocacy and technocratic rule-making.<BR>
    Keywords: Regulatory Regimes,Public Sector Corruption&Anticorruption Measures,Public Sector Regulation,Social Accountability,Labor Policies
    Date: 2011–10–01
  3. By: Arteaga, Julio Cesar; Flores, Daniel
    Abstract: Mexican gas stations across the country buy and sell gasoline at regulated common prices. Therefore, authorities that set these prices do not take into account competition conditions of each market. In this paper we establish the effect of a regulated mark-up price as well as competition on the incentives that gas stations in Mexico have to dispense less amount of gasoline than what consumers pay for. The results of theoretical and empirical work indicate that a higher regulated mark-up price reduces the incentives of gas stations to cheat. Similarly, more intense competition among the retailers of a given market decreases the average shortage.
    Keywords: gasoline pricing; regulation; competition; fraud
    JEL: L11 K42
    Date: 2010–10–18
  4. By: Shubho Roy (Indira Gandhi Institute of Development Research); Renuka Sane (Indira Gandhi Institute of Development Research); Susan Thomas (Indira Gandhi Institute of Development Research)
    Abstract: In response to the Second Micro Finance Crisis in Andhra Pradesh, which took place in October 2010, the Ministry of Finance has pro- posed a new Micro Finance Institutions (Development & Regulation) Bill. This paper undertakes a detailed analysis of the draft Bill in terms of both economic policy and law. This analysis reveals many weak links, including: a lack of clarity on the objectives of the Bill; an insufficient focus on protection of the rights of the micro-borrower; lack of clarity about the definition of thrift; the loss of accountability that comes with multiple regulatory agencies; concerns about the rule of law; and constitutional issues about powers of the Centre versus the State Government.
    Keywords: microfinance, regulation, crisis resolution, consumer credit, consumer protection, regulatory objectives
    JEL: G20 G21 G28 K12 K23
    Date: 2011–10
  5. By: Ian A. MacKenzie (ETH Zurich, Switzerland); Markus Ohndorf (ETH Zurich, Switzerland)
    Abstract: Project-based emissions trading schemes, like the Clean Development Mechanism, are particularly prone to problems of asymmetric information between project parties and the regulator. In this paper, we extend the general framework on incomplete enforcement of policy instruments to reflect the particularities of credit-based mechanisms. The main focus of the analysis is to determine the regulator’s optimal spot-check frequency given plausible assumptions of incomplete enforcement under asymmetric information on reduction costs and heterogeneous verifiability of projects. We find that, depending on the actual abatement cost and penalty schemes, optimal monitoring for credit-based systems is often discontinuous and significantly differs from the one to be applied for cap-and-trade schemes or environmental taxes. We conclude that, in a real-world context, project admission should ultimately be based on the criterion of verifiability.
    Keywords: Environmental regulation, Project-based emissions trading systems, Audits and compliance.
    JEL: K32 D42 D82 Q58
    Date: 2011–10
  6. By: Wooley, John T.; Ziegler, J. Nicholas
    Abstract: The literature on regulation has typically emphasized the ability of concentrated interest groups to secure the rules they prefer. One view argues that concentrated interests are consistently able to impose diffuse costs across large and unorganized interests. A second, largely compatible, view emphasizes the ability of powerful interest groups to mobilize expertise and to provide informational goods to politicians who adjust their legislative proposals accordingly. This paper shows that the Dodd†Frank legislation for financial reregulation in 2010 departs from both versions of this now conventional wisdom. Instead, this paper shows that both political parties adopted what we call a twoâ€tier political strategy of (1) maintaining good relations with the established financial elite and (2) simultaneously responding to the demands of grassâ€roots advocacy groups for more stringent regulation. As a result, Doddâ€Frank Act falls far short of a thoroughâ€going redesign of the regulatory landscape, but also amounted to considerably more than business as usual. While the Doddâ€Frank Act creates new regulatory instruments and powers that hold the potential for farâ€reaching changes, most of the existing agencies and market participants remain intact. This pattern of twoâ€tier politics is evident through the four primary policy domains treated in the legislation: macroprudential regulation, consumer protection, reestablishment of the partition between deposit banking versus proprietary trading (the Volcker Rule), and the regulation of derivatives trading.
    Keywords: Finance and Financial Management
    Date: 2011–10–17
  7. By: Gete, Pedro; Porchia, Paolo
    Abstract: We study the optimal hiring and firing decisions of a firm under two different firing costs regulations: 1) Dual labor markets characterized by high firing costs for workers with seniority above a threshold ("permanent workers") and by low costs for "temporary workers". 2) The Single Labor Contract, a policy proposal to make firing costs increasing in seniority at the job. We focus on the option value implied by the regulations and obtain some new results: the optimal firing rule is a constant function of worker's productivity only for permanent workers. For temporary workers it varies with seniority at the job because the firm tries to keep alive the option to fire at low cost. In the Dual regulation the workers more likely to be fired are those close to become permanent. On the contrary, the Single Contract transfers that maximum firing to the new hires. Thus, fired workers are fired sooner under the Single Contract. However, if both regulations have the same average firing cost for workers who become permanent, temporary workers are less likely to be fired in the Single Contract. Moreover, this new regulation increases hiring and average employment duration. It also reduces turnover among temporary workers, but at the expense of higher turnover among permanent workers who are more often replaced by temporary workers.
    Keywords: Real Options; Dual Labor; Single Contract
    JEL: D21 J40 E24 D20 J01 D92 A10
    Date: 2011–10
  8. By: Felix Groba
    Abstract: Studies analyzing renewable energy market development usually investigate additional capacity or investment. Characteristics, roles and determinants of cross border trade with renewable energy system components remain blurred. Environmental regulation and renewable energy policies are important in promoting renewable energy use. Yet, the effect of respective policies on determining exports remains ambiguous. The Porter hypothesis and the lead market literature argue that environmental regulation leads to a comparative export advantage. Empirical studies testing both hypotheses reach diverging conclusions and rarely focus on the renewable energy sector. Using solar energy technology components, this study adds to the literature by explaining exports of environmental technologies. The analysis uses a gravity trade model and a unique panel dataset to test the role of renewable energy policies on environmental technology exports from OECD countries and to describe structure and development of international solar energy technology component trade. The results find a rapidly growing market with trade dominated by European countries. The study supports the Porter and the lead market hypotheses as early adopters of strong renewable energy policies have gained a comparative advantage. Analyzing the importer side, the study suggests that regulatory policies and import tariffs determine export flows of solar energy technology components.
    Keywords: Solar Energy Technologies, Energy Policy, Environmental Regulation and Trade, Trade Barriers
    JEL: F14 F18 Q42 Q55 Q56
    Date: 2011
  9. By: Spash, Clive L.; Lo, Alex Y.
    Abstract: The Australian Government has produced a CO2-equivalent tax proposal with a difference, it is a short prelude to an emission trading scheme that will allow the increasing rate of emissions to continue, while being a net cost to the Treasury. That cost extends to allowing major emitters to make guaranteed windfall profits from pollution permits. The emission trading scheme suffers numerous problems, but the issues raised show taxes can also be watered down and made ineffectual through concessions. Taxpayers will get no assets from the billions of dollars to be spent buying-off the coal generators or other polluters. The scheme hopes to stimulate private investors to create an additional 12 percent in renewable electricity generation by 2020. A serious emissions reducing alternative would be to create a nationalised electricity sector with 100 percent renewable energy within a decade. We explore the difficulties of implementing meaningful greenhouse gas taxes in Australia.
    Keywords: greenhouse gases; taxation; emission trading; climate change; regulation; renewable energy; Australia
    JEL: D62 Q54 H23 Q58
    Date: 2011–10–03
  10. By: Christian A. L. Hilber
    Abstract: House price capitalization - the adjustment of house prices to changes in local public service and tax levels - has long been thought to be a means of testing for efficiency in the local public sector. In this article I argue that the extent of house price capitalization itself may have important economic implications. In doing so I synthesize an emerging literature that explores the conditions under which public and private investments and intergovernmental transfers are capitalized into local house prices and the broader implications of such capitalization. The main insights are: (i) House price capitalization is more pronounced in locations with strict regulatory and/or geographical/physical supply constraints; (ii) capitalization can - under certain conditions - induce the provision of durable local public goods and club goods; and (iii) capitalization effects - which are habitually ignored by policy makers - have important adverse consequences for a wide range of policies such as intergovernmental aid or the mortgage interest deduction.
    Keywords: House price capitalization, homeownership, local public goods, club goods, land use regulation, land and housing supply, incentives to invest, redistribution
    JEL: D71 R21 R31
    Date: 2011–10
  11. By: Antonio Estache; Emili Griffel-Tatjé
    Abstract: This paper offers a quantitative evaluation of the distribution of the welfare of a water privatization experience in Mali among the key economic agents. The assessment is based on an index number inspired by Bennet (1920). The main results are as follows. First, taxpayers are the main losers as residual subsidies are much higher than expected at the time of privatization. Second and contrary to what is often claimed, users benefited through lower real water prices. Third, labor, intermediate suppliers and investors have also benefited. Fourth, foreign actors benefited. However, they did so much more than the domestic actors and this is probably what explains best the unhappiness of the Malians. Ultimately, it is the regulator’s decision to improve the relative distribution of gains that explains the departure of the private operator and the widespread sense of the failure of an experience that has generated welfare gains for users and workers, at least in the short run.
    Keywords: privatization; regulation; efficiency; equity; distributional effects
    JEL: C60 D24 D33 L32
    Date: 2011–10
  12. By: Simplice A., Asongu
    Abstract: This paper cuts adrift the mainstream approach to the legal-origins debate on the law-growth nexus by integrating both overall economic and human components in our understanding of how regulation quality and the rule of law lie at the heart of economic and inequality adjusted human developments. Findings summarily reveal that legal-origin does not explain economic growth and human development beyond the mechanisms of law channels. As a policy implication results support benefits of the rule of law and quality of regulation as channels to economic growth and human development.
    Keywords: Law; economic growth; human development; developing countries
    JEL: O1 K2 P5 I0 K4
    Date: 2011–10–03
  13. By: Eijffinger, Sylvester C W; Nijskens, Rob
    Abstract: During the recent financial crisis, central banks have provided liquidity and governments have set up rescue programmes to restore confidence and stability, often against the LLR principle advocated by Bagehot. Using a model of a systemic bank suffering from liquidity shocks, we find that the unregulated bank keeps too much liquidity and monitors too little. A central bank can alleviate the liquidity problem, but induces moral hazard. Therefore, we introduce an additional authority that is able to bail out the bank either by injecting capital at a fixed return or by receiving an equity claim. This authority faces a trade-off: demanding a fixed premium increases investment but worsens moral hazard. Request for an equity claim by the fiscal authority reduces excessive risk taking at the expense of investment. This resembles the current situation on financial markets, in which banks take less risk but also provide less credit to the economy
    Keywords: Bailout; Bank Regulation; Capital; Lender of Last Resort; Liquidity
    JEL: E58 G21 G28
    Date: 2011–10
  14. By: Li, Han Hao; Miller, Marcus; Zhang, Lei
    Abstract: The traditional theory of commercial banking explains maturity transformation and liquidity provision assuming no asymmetric information and no excess profits. It captures the possibility of bank runs and business cycle risk; but it ignores the moral hazard problems connected with risk-taking by large banks counting on state bail outs. In this paper market concentration and risk-shifting is incorporated in an analytically tractable fashion; and the modified framework is used to consider measures to restore competition and stability--including, in particular, those recommended for the UK by the Independent Commission on Banking (2011), chaired by Sir John Vickers.
    Keywords: bailouts; money and banking; regulation; risk-taking; seigniorage
    JEL: E41 E58 G21 G28
    Date: 2011–10
  15. By: Don Fullerton; Catherine Wolfram
    Abstract: While economic models have already proven useful to analyze big picture questions about climate policy such as the choice between a carbon tax or cap-and-trade permit system, the 19 chapters in this book show how economic models also are useful to address the many remaining smaller questions that arise as policy is implemented. For example, chapters consider: the tradeoffs policymakers confront in deciding whether to implement the policy upstream on energy producers or downstream on energy users; how to monitor and enforce climate policy; how Federal actions might interact with climate policies at other levels of government or with other non-climate policies; the distributional effects of different policy variations; policies that might impact particular sectors, including residential energy use, agriculture and transportation; and specific questions regarding offsets, trade, innovation, and adaptation.
    JEL: H23 Q54 Q58
    Date: 2011–10
  16. By: Jain, Rekha
    Abstract: Apart from being BRIC countries, what India and Brazil have in common is a large service sector that contributes significantly to the GDP. The service sector contributed 66% to the Brazilian GDP and 59% to the Indian GDP in 2010. Telecommunication services are a significant part of it in both the countries. This paper compares the regulatory processes of privatization of telecom services in these countries and the consequences of these on the telecom firms broadly and on the sector as a whole. Indian companies, facing harsh competition and having refined their business models to compete in this environment acquired the necessary expertise to foray abroad, opportunistically building their businesses. The highly competitive regulatory policies in India, led to the emergence of innovative business models and creation of large domestic companies both in services and infrastructure segment and consequently acquiring the necessary expertise to foray abroad. Brazilian regulatory policies focused on financially sound business and were open to investment by operators in other countries. Facing difficult domestic situation, the operators from Europe saw the Brazilian market as a growth opportunity. The paper concludes that although both in Brazil and India, the objective of the telecom regulatory policies was to bring in privatization and competition, the variations in models followed by the two countries had led to sectoral outcomes that are very different. Brazilian telecom sector had shown higher penetration, both for telecom services in general and broadband in particular but domestic companies, other than one, which too was recently partially acquired by Portugal Telecom, have not emerged. Phased and controlled FDI in India combined with the hyper competitive scenario has led to the emergence of Indian telecom firms that have become significant global players.

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.