nep-reg New Economics Papers
on Regulation
Issue of 2011‒11‒14
seventeen papers chosen by
Oleg Eismont
Russian Academy of Sciences

  1. Bank governance and regulation. By Laeven, L.
  2. Subordinated debt, market discipline, and bank risk By Chen , Yehning; Hasan, Iftekhar
  3. Business Cycle and Bank Capital Regulation: Basel II Procyclicality By Guangling (Dave) Liu; Nkhahle Seeiso
  4. Optimal capital structure and Regulatory Control By Carlos Pérez Montes
  5. Transmission Investment in the Peruvian Electricity Market: Theory and Applications By Erix Ruiz; Juan Rosellón
  6. Add-on Pricing, Naive Consumers, and the Hidden Welfare Costs of Education By Kosfeld, Michael; Schüwer, Ulrich
  7. A report to the Federal Insurance Office By Tatom, John
  8. Effects of licensing reform on firm innovation : evidence from India By Seker, Murat
  9. The new regulation of public infrastructure services in the European Union. Challenges for territorial cohesion By Judith Clifton; Daniel Díaz-Fuentes; Marcos Fernández-Gutiérrez; Julio Revuelta
  10. Viewing risk measures as information. By Dominique Guegan; Wayne Tarrant
  11. Growing out of the Crisis through Prudential Regulation of Large Financial Institutions and Redefined Government Responsibilities By Marcel Boyer
  12. Impact of administrative environment on opportunity and necessity entrepreneurship in Europe. By Justyna Anders
  13. Regulation and Welfare: Determinantes da Escolha de Canais pelo Cliente Corporativo: Um Estudo do Mercado Industrial de Tecnologia da Informação By Soares, Guilherme; Bortoluzzo, Adriana Bruscato; Barros, Henrique Machado
  14. From growth to green growth -- a framework By Hallegatte, Stephane; Heal, Geoffrey; Fay, Marianne; Treguer, David
  15. The Promise and Problems of Pricing Carbon: Theory and Experience By Joseph E. Aldy; Robert Stavins
  16. Trade in Environmental Goods, with Focus on Climate-Friendly Goods and Technologies By ZhongXiang Zhang; ;
  17. Home-bias Politics, Financial Deregulation and Economic Growth: A Causal Relationship By He, Qichun

  1. By: Laeven, L. (Universiteit van Tilburg)
    Date: 2011
  2. By: Chen , Yehning (National Taiwan University); Hasan, Iftekhar (Lally School of Management, Rensselaer Polytechnic Institute, and Bank of Finland)
    Abstract: This paper demonstrates that subordinated debt (‘subdebt’ thereafter) regulation can be an effective mechanism for disciplining banks. Under our proposal, investors buy the subdebt of a bank only if they receive favourable information about the bank, and the bank is subject to a regulatory examination if it fails to issue subdebt. By forcing banks to be examined when they are likely weak, subdebt regulation not only reduces the chance that managers of distressed banks can take value-destroying actions to benefit themselves, but may also encourage banks to lower asset risk. It shows that subdebt regulation and bank capital requirements can be complements for alleviating the banks’ moral hazard problems. It also suggests that to make subdebt regulation effective, regulators may need impose ceilings on the interest rates of subdebt, prohibit collusion between banks and subdebt investors, and require the subdebt to convert into the issuing bank’s equity when the government takes over or provides open assistance to the bank.
    Keywords: subordinated debt regulation; bank capital regulation; market discipline; moral hazard; contingent capital certificate
    JEL: G21 G28
    Date: 2011–10–06
  3. By: Guangling (Dave) Liu (Department of Economics, University of Stellenbosch); Nkhahle Seeiso (Department of Economics, University of Stellenbosch)
    Abstract: This paper studies the impact of bank capital regulation on business cycle fluctuations. In particular, we study the procyclical nature of Basel II claimed in the literature. To do so, we adopt the Bernanke et al. (1999) ``financial accelerator" model (BGG), to which we augment a banking sector. We first study the impact of a negative shock to entrepreneurs' net worth and a positive monetary policy shock on business cycle fluctuations. We then look at the impact of a negative net worth shock on business cycle fluctuations 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 amplifies 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
  4. By: Carlos Pérez Montes (Banco de España)
    Abstract: This article studies how the managers of a regulated firm can use debt and equity contracts to constrain the regulator’s policy through the contingent transfer of control to external investors with high relative liquidation value. External finance increases regulated income and facilitates investment, but managers generally choose socially excessive levels of outside funds. If bankruptcy law favors reorganization over liquidation, the managers’s value of debt for a given investment level decreases. In the presence of income risk, regulatory ex ante commitment can increase the firm’s value if the regulator’s preference for continuation is high relative to that of managers.
    Keywords: Industrial regulation, capital structure, control rights, hold-up, bankruptcy
    JEL: L51 L52 G32 G33
    Date: 2011–11
  5. By: Erix Ruiz; Juan Rosellón
    Abstract: This research presents an application of the Hogan, Rosellón and Vogelsang (2010) (HRV) mechanism to promote electricity transmission network expansion in the Peruvian electricity transmission system known as SEIN (Sistema Eléctrico Interconectado Nacional). The HRV mechanism combines the merchant and regulatory approaches to promote investment into transmission grids. This mechanism gives incentives for efficient investment in expansion of the network by the rebalancing over time of the fixed and variable charges of a two-part tariff in the framework of a wholesale electricity market with locational pricing. The expansion of the network is carried out through the sale of Financial Transmission Rights (FTR's) for the congested lines. The mechanism is applied for 103 nodes of the SEIN using detailed characteristics of generators, nodes and transmission lines. Under Laspeyres weights and linear cost of expansion of transmission capacity, it is shown that prices converge to lower levels as a result of increased transmission capacity.
    Keywords: Electricity transmission expansion, incentive regulation, Peru, congestion management
    JEL: L51 L91 L94 Q40
    Date: 2011
  6. By: Kosfeld, Michael (Goethe University Frankfurt); Schüwer, Ulrich (Goethe University Frankfurt)
    Abstract: Previous research shows that firms shroud high add-on prices in competitive markets with naive consumers leading to inefficiency. We analyze the effects of regulatory intervention via educating naive consumers on equilibrium prices and welfare. Our model allows firms to shroud, unshroud, or partially unshroud add-on prices. Results show that consumer education may increase welfare; however, it may also decrease welfare if education is insufficient to alter the equilibrium information and pricing strategy of firms. Educating consumers may do more harm than good and should thus only be considered if the regulator is sufficiently well informed about consumer and firm behavior.
    Keywords: bounded rationality, competition, regulation, welfare, consumer protection
    JEL: D40 D80 L50
    Date: 2011–10
  7. By: Tatom, John
    Abstract: Perhaps the most important report that the FIO will ever make is the report on the system of state-based insurance regulation. By the end of January 2012, the FIO Director is to submit a report to Congress recommending changes to modernize and improve insurance regulation in the United States. This essentially means the FIO is being asked to propose its own mission and scope of operations and to lay out a road map to guide public policy decision-making moving forward in a major part of the financial services sector. Our focus here is on that report, but the discussion will also be useful in preparing other reports to the Congress mandated by DFA. This paper provides analysis and recommendations of NFI on the issues that the Congress has mandated for discussion in the FIO report to Congress early next year.
    Keywords: Dodd-Frank Act; Federal Insurance Office; insurance regulation
    JEL: G22 G18
    Date: 2011–08–03
  8. By: Seker, Murat
    Abstract: The regulatory environment in a country can affect firm performance. This study investigates the impact of a particular regulation, namely license requirements for certain firm activities, on the innovation performance of Indian firms. First it presents a model of firm and industry evolution that explains the dynamics of multi-product firms. Then, using a firm level panel data set, it shows that removal of license requirements led to roughly 5 percentage points faster innovation rates where innovation is measured as introduction of new product varieties that had not existed in the market. The results are robust to inclusion of controls for the other policy reforms that occurred during the period of licensing reform.
    Keywords: E-Business,Labor Policies,Microfinance,Markets and Market Access,Knowledge for Development
    Date: 2011–11–01
  9. By: Judith Clifton; Daniel Díaz-Fuentes; Marcos Fernández-Gutiérrez; Julio Revuelta
    Abstract: Public infrastructure services (or Services of General Economic Interest, SGEI) in the European Union have undergone significant reform in the recent period, including privatization, liberalization and deregulation. These reforms, however, have led to concerns about the potential impact of pursuing economic profitability over service quality, affordability, accessibility and universality. Traditionally, because SGEI have been understood as playing a key economic, social and strategic role, they have been subject to specific rules in the general interest: so-called Public Service Obligations (PSO). A key objective of PSO is to ensure equal access to services, independent of the place of residence, income or other factors. PSO are, therefore, a key instrument as regards ensuring equity and territorial cohesion. As such, it constitutes a fundamental concern in European regional policy. Traditionally, the regulation of SGEI has focused on the supply side, as it has been assumed competition in an integrated European market would benefit citizens. Despite this, little research has actually been done on evaluating regulation from the demand side, not to speak of applying a regional focus. The aim of this paper is to evaluate SGEI provision and regulation in the EU from the perspective of citizens as consumers using a regional perspective. We focus on the region (NUTS1) and the urban/rural character of the place of residence as possible determinants of disparities. To do so, a microeconometric analysis of citizens’ revealed and stated preferences is performed, focusing on three large European countries (Italy, Spain and the United Kingdom) for four services: electricity, gas, water and telecommunications. First, disparities in spending on the services are analyzed, using National Household Budget Surveys. Next, differences in dissatisfaction with service access and price are analyzed, using the Eurobarometer. Finally, we analyze whether lower consumption of a particular service in a particular region or rural area is related to problems of accessibility, affordability or to other factors. Findings show different regional patterns of services use. Moreover, serious and widespread problems are observed regarding equal access to services such as gas and telecommunications in rural areas, of some concern for the question of territorial cohesion.
    Date: 2011–09
  10. By: Dominique Guegan (Centre d'Economie de la Sorbonne); Wayne Tarrant (Department of Mathematics - Wingate University)
    Abstract: Regulation and Risk management in banks depend on underlying risk measures. In general this is the only purpose that is seen for risk measures. In this paper, we suggest that the reporting of risk measures can be used to determine the loss distribution function for a financial entity. We demonstrate that a lack of sufficient information can lead to ambiguous risk situations. We give examples, showing the need for the reporting of multiple risk measures in order to determine a bank's loss distribution. We conclude by suggesting a regulatory requirement of multiple risk measures being reported by banks, giving specific recommendations.
    Keywords: Risk measure, Value at Risk, Bank capital.
    JEL: C16 G18 E52
    Date: 2011–08
  11. By: Marcel Boyer
    Abstract: I consider in this paper the challenges and pitfalls we must face to grow out for good of the recent and latent financial crisis and economic recession. I consider a brief history of the crisis and insist on the loss of confidence within the banking and financial sector, which propagated later to the real sector. I discuss ways to rebuild confidence and move out of a stable bad economic equilibrium, due in part to inefficiently designed bonus systems. Considering data on gross job creation and loss in the private sector, I challenge the sorcerer’s apprentices in reforming capitalism and I recall the role of creative destruction. I show that government deficits and economic growth are not good friends and I offer a reference to the Canadian experience of the two decades 1985-2005. Finally, I discuss fiscal reforms and renewed roles for governmental and competitive sectors in generating a more prosperous economy as well as some specific challenges we are facing today, in particular to redesign the regulatory framework of the financial sector <P>Je considère ici certains défis et écueils auxquels nous devons faire face pour sortir pour de bon des récentes et rampantes crise financière et récession économique. Je considère un bref historique de la crise et insiste sur la perte de confiance dans le secteur bancaire et financier, qui s’est propagé plus tard au secteur réel. Je discute des moyens de rétablir la confiance et de se sortir d'un équilibre économique mauvais mais stable, dû en partie à des systèmes incitatifs mal conçus. Considérant les données sur la création et la perte brutes d'emplois dans le secteur privé, je nous mets en garde contre les apprentis-sorciers en mal de réformer le capitalisme et je rappelle le rôle important et trop souvent oublié de la destruction créatrice. Je montre que les déficits publics et la croissance économique ne sont pas de bons comparses donnant en référence l'expérience canadienne des deux décennies 1985-2005. Enfin, je discute des réformes fiscales et des rôles renouvelés des secteurs gouvernemental et concurrentiel dans la génération d’une économie plus prospère, ainsi que certains défis spécifiques auxquels nous sommes confrontés aujourd'hui.
    Keywords: Financial crisis, confidence, creative destruction, fiscal reforms, prudential regulation, competitive social-democracy., Crise financière, confiance, destruction créatrice, réforme fiscale, réglementation prudentielle, social-démocratie concurrentielle
    Date: 2011–10–01
  12. By: Justyna Anders
    Abstract: The scope of the paper is to examine relationship between quality of administrative environment for business and propensity to become entrepreneur. Two different approaches to business activity are taken into account: opportunity and necessity entrepreneurship (Global Entrepreneurship Monitor, 2004). The analysis refers to period 2004-2009 and takes into account data for member states of the EU against the background of other selected economies: BRIC, Japan and the USA. The study is carried out to determine whether effects of regulation on GDP differences between developed and underdeveloped nations (Djankov, 2006) can also be attributed to direct measures of entrepreneurship and can be also grasped also in a relatively homogenous sample of the EU members. Data sources comprise selected results of Doing Business study (start up procedures, regulation of ongoing activities, labour market regulation, registering property, closing a business) by World Bank and Study on Entrepreneurship in Europe by Gallup for the European Commission. Single-linkage clustering will serve as a basis for identification of homogenous groups of courtiers. The results will be then analysed in view of potential factors that differentiate the clusters i.e. legal origins, administrative culture, social capital, human capital and access to finance. The studies on regulation and start ups, research on barriers for entrepreneurship in Europe, studies of social institutions and their impact on economic development will be taken into account as a theoretical background.
    Date: 2011–09
  13. By: Soares, Guilherme; Bortoluzzo, Adriana Bruscato; Barros, Henrique Machado
    Date: 2011–10
  14. By: Hallegatte, Stephane; Heal, Geoffrey; Fay, Marianne; Treguer, David
    Abstract: Green growth is about making growth processes resource-efficient, cleaner and more resilient without necessarily slowing them. This paper aims at clarifying these concepts in an analytical framework and at proposing foundations for green growth. The green growth approach proposed here is based on (1) focusing on what needs to happen over the next 5-10 years before the world gets locked into patterns that would be prohibitively expensive and complex to modify and (2) reconciling the short and the long term, by offsetting short-term costs and maximizing synergies and economic co-benefits. This, in turn, increases the social and political acceptability of environmental policies. This framework identifies channels through which green policies can potentially contribute to economic growth. However, only detailed country- and context-specific analyses for each of these channels could reach firm conclusion regarding their actual impact on growth. Finally, the paper discusses the policies that can be implemented to capture these co-benefits and environmental benefits. Since green growth policies pursue a variety of goals, they are best served by a combination of instruments: price-based policies are important but are only one component in a policy tool-box that can also include norms and regulation, public production and direct investment, information creation and dissemination, education and moral suasion, or industrial and innovation policies.
    Keywords: Environmental Economics&Policies,Climate Change Economics,Economic Theory&Research,Transport Economics Policy&Planning,Energy Production and Transportation
    Date: 2011–11–01
  15. By: Joseph E. Aldy; Robert Stavins
    Abstract: Because of the global commons nature of climate change, international cooperation among nations will likely be necessary for meaningful action at the global level. At the same time, it will inevitably be up to the actions of sovereign nations to put in place policies that bring about meaningful reductions in the emissions of greenhouse gases. Due to the ubiquity and diversity of emissions of greenhouse gases in most economies, as well as the variation in abatement costs among individual sources, conventional environmental policy approaches, such as uniform technology and performance standards, are unlikely to be sufficient to the task. Therefore, attention has increasingly turned to market-based instruments in the form of carbon-pricing mechanisms. We examine the opportunities and challenges associated with the major options for carbon pricing: carbon taxes, cap-and-trade, emission reduction credits, clean energy standards, and fossil fuel subsidy reductions.
    JEL: D02 F18 H23 K32 L38 Q28 Q48 Q5 Q54 Q58
    Date: 2011–11
  16. By: ZhongXiang Zhang (East-West Center); ;
    Abstract: Paragraph 31(iii) of the Doha Ministerial Declaration mandates to the liberalization of environmental goods and services. This mandate offers a good opportunity to put climate-friendly goods and services on a fast track to liberalization. Agreement on this paragraph should represent one immediate contribution that the WTO can make to fight against climate change. This paper presents the key issues surrounding the liberalization of trade in climate-friendly goods and technologies in WTO environmental goods negotiations. It begins with discussing what products to liberalize and how. Given that WTO Members are divided by this key issue, the paper explores options to move current negotiations on the liberalization of trade in environmental goods and technologies forward, both within and outside the WTO. Recognizing that there is no one-size-fits-all strategy for tariff liberalization for all countries and for all environmental goods, the paper suggests the need for a high degree of flexibility to accommodate different situations and stakes in the liberalization of trade in environmental goods. Given that there are simply not enough environmental markets or these markets are weak in many developing countries, the paper emphasizes that creating markets for environmental goods in developing countries is far more important than just improving market-access conditions for associated goods, and discusses how to best serve the interests and concerns of developing countries.
    JEL: F18 F13 P28 Q42 Q48 Q56 Q54 Q58 Q48
    Date: 2011–10
  17. By: He, Qichun
    Abstract: We re-examine the finance-growth nexus using the Chinese financial deregulation experience during the reform period 1981-1998. We use lagged home-bias political variables as instruments for financial deregulation. Dealing with weak instruments by LIML (limited-information maximum likelihood) estimation, we find that financial deregulation has a significant causal effect on economic growth. The result holds up when we control for conditional convergence, other growth determinants, and time and province effects.
    Keywords: Financial Deregulation; Home-bias Politics; Causality; Growth
    JEL: O21 G20
    Date: 2011–10–15

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.