|
on Regulation |
| By: | Johnson, Noel D; Matthew, Mitchell; Yamarik, Steven |
| Abstract: | We investigate whether laws restricting fiscal policies across U.S. states lead politicians to adopt more partisan regulatory policy instead. We first show that partisan policy outcomes do exist across U.S. states, with Republicans cutting taxes and spending and Democrats raising them. We then demonstrate that these partisan policy outcomes are moderated in states with no-carry restrictions on public deficits. Lastly, we test whether unified Republican or Democratic state governments regulate more when constrained by no-carry restrictions. We find no-carry laws restrict partisan fiscal outcomes but tend to lead to more partisan regulatory outcomes. |
| Keywords: | Regulation; Taxation; Local Public Finance; U.S. States; Balanced Budget Rules |
| JEL: | L51 H11 D02 |
| Date: | 2012–02 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:37430&r=reg |
| By: | M. Sahoo; Renuka Sane (Indira Gandhi Institute of Development Research); Susan Thomas (Indira Gandhi Institute of Development Research) |
| Abstract: | What is the role of financial regulation in the field of micro-finance? This paper identiles two features of micro-finance which call for unique treatment in policy considerations as compared to policy thinking in the mainstream body of financial law. These features are credit recovery and the credit risk of the MFI, when credit access is enabled through the structure of the joint liability group. The paper goes on to offer draft law which embeds a regulatory treatment of micro-finance that flows from this analysis. |
| Date: | 2012–01 |
| URL: | http://d.repec.org/n?u=RePEc:ind:igiwpp:2012-005&r=reg |
| 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 |
| URL: | http://d.repec.org/n?u=RePEc:cdl:indrel:qt2k3219pt&r=reg |
| By: | Besley, Timothy J.; Leight, Jessica; Pande, Rohini; Rao, Vijayendra |
| Abstract: | While the regulation of tenancy arrangements is widespread in the developing world, evidence on how such regulation influences the long-run allocation of land and labor remains limited. To provide such evidence, this paper exploits quasi-random assignment of linguistically similar areas to different South Indian states and historical variation in landownership across social groups. Roughly thirty years after the bulk of tenancy reform occurred, areas that witnessed greater regulation of tenancy have lower land inequality and higher wages and agricultural labor supply. We argue that stricter regulations reduced the rents landowners can extract from tenants and thus increased land sales to relatively richer and more productive middle caste tenants; this is reflected in aggregate productivity gains. At the same time, tenancy regulations reduced landowner willingness to rent, adversely impacting low caste households who lacked access to credit markets. These groups experience greater landlessness, and are more likely to work as agricultural labor. |
| Keywords: | India; land markets; land reform; tenancy |
| JEL: | O12 Q12 |
| Date: | 2012–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:8736&r=reg |
| By: | Alexandersson , Gunnar (Stockholm School of Economics); Hultén, Staffan (Stockholm School of Economics); Nilsson, Jan-Eric (VTI); Pyddoke, Roger (VTI) |
| Abstract: | The purpose of this paper is to describe Sweden’s recent reforms to open the railway passenger markets to entry, and to addresses four critical issues for the success of the reforms; the allocation of infrastructure capacity, the provision of maintenance and terminal facilities, the access to rolling stock and the provision of information and ticketing to travelers. The analysis shows that the legislation and regulatory tools that are needed to handle these challenges to a large extent remain to be developed. |
| Keywords: | Railway; regulation; infrastructure capacity; rolling stock; terminal facility; ticketing |
| JEL: | L43 L51 L92 |
| Date: | 2012–02–02 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:ctswps:2012_005&r=reg |
| By: | Growitsch, Christian (Energiewirtschaftliches Institut an der Universitaet zu Koeln); Stronzik, Marcus (Wissenschaftliches Institut für Infrastruktur und Kommunikationsdienste GmbH); Nepal, Rabindra (Heriot-Watt University, Department of Economics) |
| Abstract: | In 2007, Germany changed network access regulation in the natural gas sector and introduced a so-called entry-exit system. The re-regulation’s spot market effects remain to be examined. <p> We use cointegration analysis and a state space model with time-varying coefficients to study the development of natural gas spot prices in the two major trading hubs in Germany and the interlinked Dutch spot market. To analyse information efficiency in more detail, the state space model is extended to an error correction model. <p> Overall, our results suggest a reasonable degree of price convergence between the corresponding hubs. However, allowing for time-variant adjustment processes, the remaining price differentials are only partly explained by transportation costs, indicating capacity constraints. Nonetheless, market efficiency in terms of information processing has increased considerably among Germany and The Netherlands. |
| Keywords: | natural gas market; regulation; cointegration; price convergence; time-varying coefficient |
| JEL: | C32 G14 L95 |
| Date: | 2012–03–19 |
| URL: | http://d.repec.org/n?u=RePEc:ris:ewikln:2012_005&r=reg |
| By: | Acharya, Viral V; Mehran, Hamid; Schuermann, Til; Thakor, Anjan |
| Abstract: | We address the following questions concerning bank capital: why are banks so highly levered, what are the consequences of this leverage for the economy as a whole, and how can robust capital regulation be designed to restrict bank leverage to levels that do not generate excessive systemic risk? Bank leverage choices are a delicate balancing act: credit discipline argues for more leverage so that creditors have adequate skin in the game, while balance-sheet opacity and ease of asset substitution by bank managers and shareholders argue for less. Disturbing this balance are regulatory safety nets that promote ex post financial stability but also create perverse incentives for banks to engage in correlated asset choices ex ante and thus hold little equity capital. We discuss how a two-tier capital requirement can cope with these distortions: a core capital requirement like existing capital requirements, and a special capital account that must be invested in Treasuries, accrues to the bank’s shareholders as long as the bank is solvent, and accrues to the regulators (rather than the creditors) if the bank fails. The special capital account requirement ensures creditors have skin in the game and also provides the second margin of safety in the calculation of capital adequacy--a buffer for the regulator’s own "model risk" in calculations of needed capital buffers. |
| Keywords: | capital requirements; leverage; market discipline; model risk; systemic risk |
| JEL: | G12 G21 |
| Date: | 2012–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:8792&r=reg |
| By: | Farber, Daniel A |
| Abstract: | Cap and trade is controversial in part because of claims that it is unjust, an issue that was highlighted by recent litigation against California’s proposed carbon market. This essay considers an array of fairness issues relating to cap and trade. In terms of fairness to industry, the conclusion is that distributing free allowances overcompensates firms for the cost of compliance, assuming any compensation is warranted. Industry should not receive, in effect, ownership of the atmosphere at the expense of the public. Environmental justice advocates argue that cap-and-trade systems promote hotspots and encourage dirtier, older plants to continue operating to the detriment of some communities. Designers of cap-and-trade systems should be alert to possible hotspots, particularly in disadvantaged communities. Little reason exists, however, to believe that any such hotspots are systematically linked with disadvantage. Finally, any regulation of emissions raises costs, with a disproportionate impact on low-income consumers. This effect can be greatly ameliorated through adroit use of revenue from auctions. The bottom line is that fairness issues are not a deal-breaker for cap and trade, but do deserve thoughtful consideration in designing a system. |
| Keywords: | Administrative Law, Economics, Energy and Utilities Law, Environmental Law, Social Welfare, Administrative Law, Energy Law, Environmental Law, Law and Economics, Social Welfare Law |
| Date: | 2011–09–20 |
| URL: | http://d.repec.org/n?u=RePEc:cdl:oplwec:qt9z66c05g&r=reg |
| By: | Keisuke Hattori (Faculty of Economics, Osaka University of Economics); Keisaku Higashida (School of Economics, Kwansei Gakuin University) |
| Abstract: | We develop a Hotelling model of horizontally and vertically differentiated brands with misleading advertising competition. We investigate the question of who benefits or loses from the misinformation created by advertising competition and related regulatory policies. We show that the quality gaps between two brands are crucial for determining the effect of misinformation on the firms’ profits, aggregate or individual consumer surplus, and national welfare. Although the misinformation tricks consumers into buying products that they would not have purchased otherwise, it may improve welfare even if the advertising does not expand the overall demand for the brands. We also show that, although endogenous advertising competition may lead to a prisoner’s dilemma for firms, it makes some consumers better off. We also consider the effects of several regulatory policies, such as advertising taxes, ad valorem and unit taxes on production, comprehensive and partial prohibitions of misleading advertising, government provisions of quality certification or counter-information, and the education of consumers. |
| Keywords: | Misinformation, Advertising Competition, Regulation, Product Differentiation |
| Date: | 2012–03 |
| URL: | http://d.repec.org/n?u=RePEc:kgu:wpaper:85&r=reg |
| By: | Acharya, Viral V; Mehran, Hamid; Thakor, Anjan |
| Abstract: | We consider a model in which banks face two moral hazard problems: 1) asset substitution by shareholders, which can occur when banks make socially-inefficient, risky loans; and 2) managerial under-provision of effort in loan monitoring. The privately-optimal level of bank leverage is neither too low nor too high: It efficiently balances the market discipline that owners of risky debt impose on managerial shirking in monitoring loans against the asset substitution induced at high levels of leverage. However, when correlated bank failures can impose significant social costs, regulators may bail out bank creditors. Anticipation of this action generates an equilibrium featuring systemic risk, in which all banks choose inefficiently high leverage to fund correlated, excessively risky assets. That is, regulatory forbearance itself becomes a source of systemic risk. Leverage can be reduced via a minimum equity capital requirement, which can rule out asset substitution. But this also compromises market discipline by making bank debt too safe. Optimal capital regulation requires that a part of bank capital be invested in safe assets and be attached with contingent distribution rights, in particular, be unavailable to creditors upon failure so as to retain market discipline and be made available to shareholders only contingent on good performance in order to contain risk-taking. |
| Keywords: | asset substitution; bailout; market discipline; systemic risk |
| JEL: | G21 G28 G32 G35 G38 |
| Date: | 2012–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:8822&r=reg |
| By: | Repullo, Rafael; Suarez, Javier |
| Abstract: | We develop and calibrate a dynamic equilibrium model of relationship lending in which banks are unable to access the equity markets every period and the business cycle is a Markov process that determines loans' probabilities of default. Banks anticipate that shocks to their earnings and the possible variation of capital requirements over the cycle can impair their future lending capacity and, as a precaution, hold capital buffers. We compare the relative performance of several capital regulation regimes, including one that maximizes a measure of social welfare. We show that Basel II is significantly more procyclical than Basel I, but makes banks safer. For this reason, it dominates Basel I in terms of welfare except for small social costs of bank failure. We also show that for high values of this cost, Basel III points in the right direction, with higher but less cyclically-varying capital requirements. |
| Keywords: | Banking regulation; Basel capital requirements; Capital market frictions; Credit rationing; Loan defaults; Relationship banking; Social cost of bank failure |
| JEL: | E44 G21 G28 |
| Date: | 2012–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:8897&r=reg |
| By: | Pagnotta, Emiliano; Philippon, Thomas |
| Abstract: | Two forces have reshaped global securities markets in the last decade: Exchanges operate at much faster speeds and the trading landscape has become more fragmented. In order to analyze the positive and normative implications of these evolutions, we study a framework that captures (i) exchanges’ incentives to invest in faster trading technologies and (ii) investors’ trading and participation decisions. Our model predicts that regulations that protect prices will lead to fragmentation and faster trading speed. Asset prices decrease when there is intermediation competition and are further depressed by price protection. Endogenizing speed can also change the slope of asset demand curves. On normative side, we find that for a given number of exchanges, faster trading is in general socially desirable. Similarly, for a given trading speed, competition among exchange increases participation and welfare. However, when speed is endogenous, competition between exchanges is not necessarily desirable. In particular, speed can be inefficiently high. Our model sheds light on important features of the experience of European and U.S. markets since the implementation of MiFID and Reg. NMS, and provides some guidance for optimal regulations. |
| Keywords: | exchanges; high frequency; speed; trading |
| JEL: | D40 D43 D61 G12 G15 G18 |
| Date: | 2012–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:8786&r=reg |
| By: | Dorothea Schäfer |
| Abstract: | We argue that a financial transaction tax complements financial market regulation. With the tax, governments have an additional instrument at hand to influence trading activity. FTT aims to reduce regulatory arbitrage, flash trading, overactive portfolio management, excessive leverage and speculative transactions of financial institutions. The focus clearly addresses these classes of activities that have contributed to the financial crisis. However, if contrary to expectations harmful transactions will not be curbed, FFT generates at least large tax revenues that can contribute to cover the costs of the financial crisis. The trend towards centralized clearing and depositaries makes tax evasion more difficult than it was in the past. Tax avoidance is, of course, never completely avoidable. Therefore the effect of the tax should be monitored closely so that governments can react quickly if tax loopholes and taxinduced geographical relocation plans of financial institutions come to light. |
| Keywords: | Financial stability, transaction tax, public good, central depository |
| JEL: | G20 G24 G28 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:diw:diwwpp:dp1198&r=reg |
| By: | Gersbach, Hans; Rochet, Jean-Charles |
| Abstract: | Evidence suggests that banks tend to lend a lot during booms, and very little during recessions. We propose a simple explanation for this phenomenon. We show that, instead of dampening productivity shocks, the banking sector tends to exacerbate them, leading to excessive fluctuations of credit, output and asset prices. Our explanation relies on three ingredients that are characteristic of modern banks' activities. The first ingredient is moral hazard: banks are supposed to monitor the small and medium sized enterprises that borrow from them, but they may shirk on their monitoring activities, unless they are given sufficient informational rents. These rents limit the amount that investors are ready to lend them, to a multiple of the banks' own capital. The second ingredient is the banks' high exposure to aggregate shocks: banks' assets have positively correlated returns. Finally the third ingredient is the ease with which modern banks can reallocate capital between different lines of business. At the competitive equilibrium, banks offer privately optimal contracts to their investors but these contracts are not socially optimal: banks' decisions of reallocating capital react too strongly to aggregate shocks. This is because banks do not internalize the impact of their decisions on asset prices. This generates excessive fluctuations of credit, output and asset prices. We examine the efficacy of several possible policy responses to these properties of credit markets, and derive a rationale for macroprudential regulation. |
| Keywords: | Bank Credit Fluctuations; Investment Externalities; Macroprudential Regulation |
| JEL: | D86 G21 G28 |
| Date: | 2012–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:8764&r=reg |
| By: | Acharya, Viral V; Gujral, Irvind; Kulkarni, Nirupama; Shin, Hyun Song |
| Abstract: | The headline numbers appear to show that even as banks and financial intermediaries suffered large credit losses in the financial crisis of 2007-09, they raised substantial amounts of new capital, both from private investors and through government-funded capital injections. However, on closer inspection the composition of bank capital shifted radically from one based on common equity to that based on debt-like hybrid claims such as preferred equity and subordinated debt. The erosion of common equity was exacerbated by large scale payments of dividends, in spite of widely anticipated credit losses. Dividend payments represent a transfer from creditors (and potentially taxpayers) to equity holders in violation of the priority of debt over equity. The dwindling pool of common equity in the banking system may have been one reason for the continued reluctance by banks to lend over this period. We draw conclusions on how capital regulation may be reformed in light of our findings. |
| Keywords: | asset substitution; crisis; regulatory capital; risk-shifting |
| JEL: | G21 G28 G32 G35 G38 |
| Date: | 2012–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:8801&r=reg |