nep-reg New Economics Papers
on Regulation
Issue of 2012‒03‒08
twenty-one papers chosen by
Oleg Eismont
Russian Academy of Sciences

  1. Aggregate Litigation and Regulatory Innovation: Another View of Judicial Efficiency By Ramello, Giovanni B.
  2. What drives investment in telecommunications? The role of regulation, firms’ internationalization and market knowledge By Daniel Montolio; Elisa Trujillo
  3. An Economic Analysis of the Regulation of Pharmaceutical Markets. By [no author]
  4. "Too Big to Fail: Motives, Countermeasures, and the Dodd-Frank Response" By Bernard Shull
  5. Firm Size Distortions and the Productivity Distribution: Evidence from France By Luis Garicano; Claire Lelarge; John Van Reenen
  6. Sudden Floods, Macroprudention Regulation and Stability in an Open Economy By Pierre-Richard Agénor; K. Alper; L. Pereira da Silva
  7. Corruption as a response to regulation By Noel D., Johnson; William, Ruger; Jason, Sorens; Steven, Yamarik
  8. Food Safety Regulation and Firm Productivity:Evidence from the French Food Industry By Bontemps, Christophe; Nauges, Céline; Réquillart, Vincent; Simioni, Michel
  9. Regulatory Reform of OTC Derivatives and Its Implications for Sovereign Debt Management Practices: Report by the OECD Ad Hoc Expert Group on OTC Derivatives - Regulations and Implications for Sovereign Debt Management Practices By OECD
  10. Potential Impacts of Subprime Carbon on Australia’s Impending Carbon Market By Patrick Hamshere; Liam Wagner
  11. Optimal Design of Bank Bailouts: Prompt Corrective Action By J-P. Niinimaki
  12. Do Regulators Overestimate the Costs of Regulation? By David Simpson
  13. Making Climate Policy Efficient Implementing a Model for Environmental Policy Efficiency By Hansson, Sven Ove; Edvardsson Björnberg, Karin; Vredin Johansson, Maria
  14. Putting a Floor on Energy Savings: Comparing State Energy Efficiency Resource Standards By Palmer, Karen; Grausz, Samuel; Beasley, Blair; Brennan, Tim
  15. Prices versus Quantities versus Bankable Quantities By Harrison Fell; Ian A. MacKenzie; William A. Pizer
  16. Empowering Customer Choice in Electricity Markets By Douglas Cooke
  17. Quantifying the Distribution of Environmental Outcomes for Regulatory Environmental Justice Analysis By Kelly B. Maguire; Glenn Sheriff
  18. Fair Value Reclassifications of Financial Assets during the Financial Crisis By Jannis Bischof; Ulf Brüggemann; Holger Daske
  19. Regulatory Enforcement, Politics, and Institutional Distance: OSHA Inspections 1990-2010 By Juergen Jung; Michael D. Makowsky
  20. The Excess Cost of Supplementary Constraints in Climate Policy: The Case of Sweden’s Energy Intensity Target By Broberg, Thomas; Forsfält, Tomas; Östblom, Göran
  21. Energy Efficiency Resource Standards: Economics and Policy By Brennan, Timothy J.; Palmer, Karen

  1. By: Ramello, Giovanni B.
    Abstract: In this article, we argue that aggregate litigation and the court system can not only restore the protection of victims and the production of deterrence, but also play a pivotal role in stimulating regulatory innovation. This is accomplished through a reward system that seems largely to mimic the institutional devices used in other domains, such as intellectual property rights, by defining a proper set of incentives. Precisely the described solution relies on creating a specific economic framework able to foster economies of scale and grant a valuable property right over a specific litigation to an entrepreneurial individual, who in exchange provides the venture capital needed for the legal action, and produces inputs and focal points for amending regulations. In this light, aggregate litigation thus can be equally seen as an incubator for regulation.
    Keywords: aggregate litigation, efficiency, market for risk, hierarchy, regulation, innovation, asbestos
    JEL: K41 O31 G32 L23
    Date: 2012–01
  2. By: Daniel Montolio (Universitat de Barcelona & IEB); Elisa Trujillo (Universitat de Barcelona & IEB)
    Abstract: The aim of this paper is to classify the firms operating in the European telecommunications market according to their degree of internationalization and market knowledge, and to test the effects of this classification and the existence of access regulation on infrastructure investment in European broadband markets. To do so, we construct a (unique) data set for the 27 European countries for the period 2002 to 2009. We estimate, by means of panel data techniques (and instrumental variables to control for any potential endogeneity problem), an investment equation for all firms and separate equations for entrant and incumbent firms. Our results show no significant relation between regulation and total investment. The variables capturing the degree of internationalization and market knowledge have a positive and significant effect on total investment, being a positive and significant effect on entrants’ investment, but no significant impact on that of incumbent firms. This result indicates that, under the current regulatory framework, the firms that invest most are entrants with international experience, while the expansion of incumbents into other countries does not affect their investments in their home countries.
    Keywords: Telecommunications, regulation, investment, internationalization, knowledge
    JEL: L96 L51 F21 F23 D83
    Date: 2011
  3. By: [no author]
    Abstract: Regulation in pharmaceutical markets is pervasive in most countries, especially in Europe. The nature of existing regulations is diverse, as they serve a number of purposes: guaranteeing safety, efficacy and security of drug usage; but also ensuring patients access to treatment, preserving affordability and fostering pharmaceutical innovation. A number of regulatory interventions are purposely designed to bring about more efficient pharmaceutical markets. These interventions are ultimately intended to increase welfare for patients today and patients tomorrow. Welfare today requires ensuring patients access to existing pharmacological treatment at an affordable cost. Welfare tomorrow requires ensuring a continued effort on research and development to produce pharmaceutical innovations that respond to currently unmet medical needs. The chapters of this thesis focus on a number of regulatory interventions that attract notable attention due to their effect on access, affordability and innovation. These include the regulation of pharmaceutical parallel trade, direct-to-consumer advertising of prescription drugs and off-patent pharmaceutical markets. By assessing the impact of public interventions on market outcomes and patients welfare, this thesis aims at contributing to the debate about optimal regulation of pharmaceutical markets.
    Date: 2012
  4. By: Bernard Shull
    Abstract: Government forbearance, support, and bailouts of banks and other financial institutions deemed "too big to fail" (TBTF) are widely recognized as encouraging large companies to take excessive risk, placing smaller ones at a competitive disadvantage and influencing banks in general to grow inefficiently to a "protected" size and complexity. During periods of financial stress, with bailouts under way, government officials have promised "never again." During periods of financial stability and economic growth, they have sanctioned large-bank growth by merger and ignored the ongoing competitive imbalance. Repeated efforts to do away with TBTF practices over the last several decades have been unsuccessful. Congress has typically found the underlying problem to be inadequate regulation and/or supervision that has permitted important financial companies to undertake excessive risk. It has responded by strengthening regulation and supervision. Others have located the underlying problem in inadequate regulators, suggesting the need for modifying the incentives that motivate their behavior. A third explanation is that TBTF practices reflect the government's perception that large financial firms serve a public interest-they constitute a "national resource" to be preserved. In this case, a structural solution would be necessary. Breakups of the largest financial firms would distribute the "public interest" among a larger group than the handful that currently hold a disproportionate concentration of financial resources. The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 constitutes the most recent effort to eliminate TBTF practices. Its principal focus is on the extension and augmentation of regulation and supervision, which it envisions as preventing excessive risk taking by large financial companies; Congress has again found the cause for TBTF practices in the inadequacy of regulation and supervision. There is no indication that Congress has given any credence to the contention that regulatory motivations have been at fault. Finally, Dodd-Frank eschews a structural solution, leaving the largest financial companies intact and bank regulatory agencies still with extensive discretion in passing on large bank mergers. As a result, the elimination of TBTF will remain problematic for years to come.
    Keywords: Too Big to Fail; Banking Policy; Antitrust; Government Policy; Regulation
    JEL: G21 G28
    Date: 2012–02
  5. By: Luis Garicano; Claire Lelarge; John Van Reenen
    Abstract: A major empirical challenge in economics is to identify how regulations (such as firing costs) affect economic efficiency. Almost all countries have regulations that increase costs when firms cross a discrete size threshold. We show how these size-contingent regulations can be used to identify the equilibrium and welfare effects of regulation through combining a new model with the firm-level distributions of size and productivity. Our framework adapts the Lucas (1978) model to a world with size-contingent regulations and applies this to France where there are sharp increases in firing costs (which we model as a labor tax) when firms employ 50 or more workers. Using administrative data on the population of firms 2002 through 2007, we show how this regulation has major effects on the distribution of firm size (a "broken power law") and productivity. We then econometrically recover the key parameters of the model in order to estimate the costs of regulation which appear to be nontrivial.
    Keywords: Firm size, productivity, labor regulation, power law
    JEL: L11 L51 J8 L25
    Date: 2012–02
  6. By: Pierre-Richard Agénor; K. Alper; L. Pereira da Silva
    Abstract: We develop a dynamic stochastic model of a middle-income, small open economy with a two-level banking intermediation structure, a risk-sensitive regulatory capital regime, and imperfect capital mobility. Firms borrow from a domestic bank and the bank borrows on world capital markets, in both cases subject to an endogenous premium. A sudden flood in capital flows generates an expansion in credit and activity, and asset price pressures. Countercyclical regulation, in the form of a Basel III-type rule based on real credit gaps, is effective at promoting macroeconomic stability (defined in terms of the volatility of a weighted average of inflation and the output gap) and financial stability (defined in terms of the volatility of a composite index of the nominal exchange rate and house prices). However, because the gain in terms of reduced volatility may exhibit diminishing returns, a countercyclical regulatory rule may need to be supplemented by other, more targeted, macroprudential instruments.
    Date: 2012–02
  7. By: Noel D., Johnson; William, Ruger; Jason, Sorens; Steven, Yamarik
    Abstract: Previous research has found a negative effect of corruption on growth in the United States. However, some theory suggests corruption might have a positive impact in places with dysfunctional political institutions. This paper investigates whether the corruption-growth link is conditional on the extent of government involvement across U.S. states. Even though no state approaches the level of government intervention found in many developing countries, we still find evidence that corruption’s harmful effects on growth are smaller when regulation is greater.
    Keywords: Corruption; U.S. States; Growth; Regulation
    JEL: O1 D7 H7 K4
    Date: 2012–02
  8. By: Bontemps, Christophe (GREMAQ,INRA); Nauges, Céline (LERNA-INRA); Réquillart, Vincent; Simioni, Michel (GREMAQ,INRA)
    Abstract: The purpose of this article is to assess whether food safety regulations imposed by the European Union in the 2000s may have induced a slow-down in the productivity of firms in the food processing sector. The impact of regulations on costs and productivity has seldom been studied. This article contributes to the literature by measuring productivity change using a panel of French food processing firms for the years 1996 to 2006. To do so, we develop an original iterative testing procedure based on the comparison of the distribution of efficiency scores of a set of firms. Our results confirm that productivity decreased in two major food processing sectors (poultry and cheese) at the time when safety regulation was reinforced.
    Date: 2012–01
  9. By: OECD
    Abstract: This report analyses the possible implications for public debt management practices arising from regulatory changes for over the counter derivatives (OTCD) that are being developed worldwide to strengthen the resiliency of the financial system. Many OECD sovereigns use OTCD in their debt management activities (mainly interest rate swaps and cross-currency swaps). Some of the regulatory initiatives for OTCD markets may lead to changes in sovereign and dealer practices. Potential changes include modifications to collateralization requirements, the use of central clearing for OTCD trades, and increased pre- and post-trade reporting. Issues around sovereign exemptions and the transition of existing OTCD portfolios may also require attention from sovereign debt managers...
    Keywords: government policy and regulation, debt management, sovereign debt, general financial markets, international financial markets
    JEL: G15 G18 H63
    Date: 2011–09–30
  10. By: Patrick Hamshere (Department of Economics, University of Queensland); Liam Wagner (Department of Economics, University of Queensland)
    Abstract: This paper examines the potential impacts of subprime carbon credits on the impending Australian carbon market. Subprime carbon could potentially be created in carbon offset markets that lack adequate regulation, as projects face risks that can overstate emissions abatement. Recent research suggests that subprime carbon credits will likely cause significant price instability in carbon markets, with some authors drawing parallels to the US market for mortgage backed securities during the subprime mortgage crisis (Chan, 2009). To assess the impacts of subprime carbon credits on the impending Australian carbon market, carbon price fundamentals are examined using a marginal abatement cost curve for the year 2020. The 2020 Australian marginal abatement cost curve is derived using a bottom-up model of the Australian electricity sector, as well as findings by the (DCC, 2009) and (McKinsey, 2008). Impacts are evaluated under several scenarios, which consider different trading scheme limits on the use of offsets; different proportions of offset credits that are subprime; and different emissions reduction targets. The results suggest that subprime carbon credits will always result in overall emissions reductions to be overstated, while sometimes increasing price volatility in the carbon market, depending on the steepness of the marginal abatement cost curve, the proportion of offset credits that are subprime, and the trading schemes limits on the use of offsets. We conclude that carbon markets could benefit significantly from a carbon offsets regulator, which would ensure the environmental and financial integrity of offset credits.
    Keywords: Carbon Offsets, Marginal Abatement Cost, Carbon Market Regulation, Subprime Carbon
    JEL: Q52 Q31 L51 G18 G01
    Date: 2012
  11. By: J-P. Niinimaki
    Abstract: The paper investigates the optimal design of bank bailouts. Under three types of ex post moral hazard that tempt banks to hide loan losses, the paper analyzes banking regulation via three Prompt Corrective Action instruments: prohibition of dividends, limits on compensation to managers and early closure policy. The first two have a mitigating effort on moral hazard but the last instrument has a damaging impact. As to bad debts and the cleaning of banks' balance sheets, asset insurance and equity capital motivate banks to disclose loan losses. In some cases, prohibition of dividends or limits on compensation to managers has the same effect.
    Keywords: Financial intermediation, Mechanism design, Bank bailouts, Banking regulation, Prompt Corrective Action
    JEL: G21 G28
    Date: 2011–11
  12. By: David Simpson
    Abstract: It has occasionally been asserted that regulators typically overestimate the costs of the regulations they impose. A number of arguments have been proposed for why this might be the case, with the most widely credited one being that regulators fail sufficiently to appreciate the effects of innovation in reducing regulatory compliance costs. Most existing studies have found that regulators are more likely to over- than to underestimate costs. Moreover, the ratio of ex ante estimates of compliance costs to ex post estimates of the same costs is generally greater than one. In this paper I argue that neither piece of evidence necessarily demonstrates that ex ante estimates are biased. There are several reasons to suppose that the distribution of compliance costs would be skewed, so that the median of the distribution would lie below the mean. It is not surprising, then, that most estimates would prove to be too high. Moreover, we would expect from a simple application of Jensen’s inequality that the expected ratio of ex ante to ex post compliance costs would be greater than one. In this paper I propose a regression-based test of the bias of ex ante compliance cost estimates, and cannot reject the hypothesis that estimates are unbiased. Despite the existence of a number of papers reporting ex ante and ex post compliance cost estimates, it is surprisingly difficult to get a large sample of such comparisons. My most salient finding does not concern the bias of ex ante cost estimates so much as their inaccuracy and the continuing paucity of careful studies.
    Keywords: benefit-cost analysis, cost estimation, ex ante, ex post, innovation, iterated expectations
    JEL: L51 Q52
    Date: 2011–12
  13. By: Hansson, Sven Ove (National Institute of Economic Research); Edvardsson Björnberg, Karin (National Institute of Economic Research); Vredin Johansson, Maria (National Institute of Economic Research)
    Abstract: We propose a framework for studies of efficiency in environmental poli-cies in the form of an iterative “policy cycle”. The policy cycle’s six ma-jor elements are goal-setting, choice of policy instruments (informa-tion/communication, voluntary agreements, economic instruments and regulation), enforcement, changes in behaviour of public and private agents, effects of policy measures and, finally, evaluation. Through itera-tions of the policy cycle (or parts of it), efficiency in environmental poli-cies can be improved. The policy cycle is applied to climate policies, both mitigation and adaptation and we identify important areas for future research.
    Keywords: Policy cycle; environmental efficiency; mitigation; adaptation; goal-setting; voluntary agreements; regulation; behavioural change; evaluation
    Date: 2011–09–01
  14. By: Palmer, Karen (Resources for the Future); Grausz, Samuel (Resources for the Future); Beasley, Blair (Resources for the Future); Brennan, Tim (Resources for the Future)
    Abstract: Energy efficiency resource standards (EERS) refer to policies that require utilities and other covered entities to achieve quantitative goals for reducing energy use by a certain year. EERS policies generally apply to electricity and natural gas sales and electricity peak demand, though they also cover other energy sources in Europe. Our study aggregates information about the requirements of existing EERS policies for electricity sales in the United States. We convert quantitative goals into comparable terms to compare the nominal stringency of EERS programs across states. EERS programs also differ in their nonquantitative requirements, including flexibility measures, measurement and verification programs, and penalties and positive incentives. We compare the U.S. policies to similar policies in the European Union and discuss important policy issues, including exogenous changes in fuel prices and issues with utility management of energy efficiency programs.
    Keywords: energy efficiency, electricity, energy efficiency resource standards, state regulation
    JEL: L94 L95 L51
    Date: 2012–02–27
  15. By: Harrison Fell; Ian A. MacKenzie; William A. Pizer
    Abstract: Quantity-based regulation with banking allows regulated firms to shift obligations across time in response to periods of unexpectedly high or low marginal costs. Despite its wide prevalence in existing and proposed emission trading programs, banking has received limited attention in past welfare analyses of policy choice under uncertainty. We address this gap with a model of banking behavior that captures two key constraints: uncertainty about the future from the firm’s perspective and a limit on negative bank values (e.g., borrowing). We show conditions where banking provisions reduce price volatility and lower expected costs compared to quantity policies without banking. For plausible parameter values related to U.S. climate change policy, we find that bankable quantities produce behavior quite similar to price policies for about two decades and, during this period, improve welfare by about a $1 billion per year over fixed quantities.
    JEL: Q52 Q54 Q58
    Date: 2012–03
  16. By: Douglas Cooke
    Abstract: Timely and effective deployment of demand response could greatly increase power system flexibility, electricity security and market efficiency. Considerable progress has been made in recent years to harness demand response. However, most of this potential remains to be developed. The paper draws from IEA experience to identify barriers to demand response, and possible enablers that can encourage more timely and effective demand response including cost reflective pricing, retail market reform, and improved load control and metering equipment. Governments have a key role to play in developing and implementing the policy, legal, regulatory and market frameworks needed to empower customer choice and accelerate the development and deployment of cost-effective demand response.
    Date: 2011–10
  17. By: Kelly B. Maguire; Glenn Sheriff
    Abstract: Economists have long been interested in measuring distributional impacts of policy interventions. As environmental justice (EJ) emerged as an ethical issue in the 1970s, the academic literature has provided statistical analyses of the incidence and causes of various environmental outcomes as they relate to race, income and other demographic variables. In the context of regulatory impacts, however, there is a lack of consensus regarding what information is relevant for EJ analysis, and how best to present it. This paper helps frame the discussion by suggesting a set of questions fundamental to regulatory EJ analysis, reviewing past approaches to quantifying distributional equity, and discussing the potential for adapting existing tools to the regulatory context.
    Keywords: environmental justice, regulatory impact analysis, distributional analysis, equity, inequality indes
    JEL: C43 D63 Q52
    Date: 2011–04
  18. By: Jannis Bischof; Ulf Brüggemann; Holger Daske
    Abstract: At the peak of the financial crisis in October 2008, the IASB amended IAS 39 to grant companies the option of abandoning fair value recognition for selected financial assets. Using a comprehensive global sample of publicly listed IFRS banks, we find that banks use the reclassification option to forgo the recognition of fair value losses and ultimately the regulatory costs of supervisory intervention. Analyses of stock market reactions suggest that a small subset of the most troubled banks benefit from such reclassifications. However, analyses of related footnote disclosures reveal that two-thirds of reclassifying banks do not fully comply with the accompanying IFRS 7 requirements. These banks experience a significant increase in bid-ask spreads in the long run.
    Keywords: Bank Regulation, Fair Value Accounting, Financial Crisis, IAS 39, IFRS 7
    JEL: G14 G21 G28 M41 M48
    Date: 2012–02
  19. By: Juergen Jung (Department of Economics, Towson University); Michael D. Makowsky (Department of Economics, Towson University)
    Abstract: Using a dataset of over 1.6 million inspections by the Occupational Safety and Health Agency (OSHA) from 1990 through 2010, we explore the determinants of inspection and enforcement outcomes. OSHA is an institutionally split agency, with the federal agency conducting inspections in 25 states and state agencies conducting inspections in the remaining 25. The geographic variety and range over 21 years allows investigation into the institutional and political determinants of inspection outcomes, with particular attention to the fines levied by inspectors and the ability of firms to negotiate reductions in fines levied upon them. We find patterns of discretionary enforcement that are distinctly different in state and federally conducted inspections. State agencies are considerably more sensitive to local economic conditions than their federal counterparts, finding fewer standard violations and fewer serious violations as unemployment increases. Larger companies receive greater lenience on behalf of inspectors in multiple dimensions. The executive branch exerts greater influence than congress over inspection outcomes in both federal and state agencies. Inspector issued fines and final fines, after negotiated reductions, are both smaller during Republican presidencies. Quantile regression analysis reveals that the party of the president has its greatest impact on both the largest fines issues and the largest negotiated reductions in fines.
    Keywords: Regulation, Enforcement, Occupational Safety, Institutional Differences.
    JEL: K23 H73 I18
    Date: 2012–02
  20. By: Broberg, Thomas (National Institute of Economic Research); Forsfält, Tomas (National Institute of Economic Research); Östblom, Göran (National Institute of Economic Research)
    Abstract: From the perspective of climate policy, a target for energy efficiency could imply costly overlapping regulation. We estimate, using a computable general equilibrium model of the Swedish economy, the potential economic cost of attaining the national 2020 energy intensity target by means of tax policy instruments. Our analysis shows that the efforts to meet the energy intensity target will also reduce carbon dioxide emissions, but at excessive costs compared to alternative climate policy instruments. Moreover, attainment of the energy intensity target will call for policy instruments additional to those needed for fulfilling the national climate policy target. The results are sensitive to the development of the nuclear energy production as the definition of energy intensity includes conversion losses in electricity production
    Keywords: climate policy; energy efficiency; carbon tax; overlapping regulation; general equilibrium; Sweden
    Date: 2011–06–01
  21. By: Brennan, Timothy J. (Resources for the Future); Palmer, Karen (Resources for the Future)
    Abstract: Twenty states in the United States have adopted energy efficiency resource standards (EERS) that specify absolute or per¬centage reductions in energy use relative to business as usual. We examine how an EERS compares to policies oriented to meeting objectives, such as reducing greenhouse gas emissions, cor¬recting for consumer error in energy efficiency investment, or reducing peak de¬mand absent real-time prices. If reducing energy use is a policy goal, one could use energy taxes or cap-and-trade systems rather than an EERS. An EERS can be optimal under special conditions, but to achieve optimal goals following energy efficiency investments, the marginal external harm must fall with greater energy use. This could happen if inframarginal energy has greater negative externalities, particularly regarding emissions, than energy employed at the margin.
    Keywords: energy efficiency resource standards, energy efficiency, electricity, conservation
    JEL: L94 Q48 D02
    Date: 2012–02–27

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