nep-reg New Economics Papers
on Regulation
Issue of 2012‒04‒03
six papers chosen by
Oleg Eismont
Russian Academy of Sciences

  1. Regulation, credit risk transfer with CDS, and bank lending By Pausch, Thilo; Welzel, Peter
  2. Financial crises and financial market regulation: the long record of an ‘emerger’ By Sophia Lazaretou
  3. Effects of deregulation and vertical unbundling on the performance of China's electricity generation sector By Hang GAO; Jo VAN BIESEBROECK
  4. The Shadow Economy and Work in the Shadow: What Do We (Not) Know? By Schneider, Friedrich
  5. La privatisation-globalisation de la régulation By Hervé Dumez
  6. Prices, Markups and Trade Reform By Jan De Loecker; Pinelopi K. Goldberg; Amit K. Khandelwal; Nina Pavcnik

  1. By: Pausch, Thilo; Welzel, Peter
    Abstract: We integrate Basel II (and III) regulations into the industrial organization approach to banking and analyze the interaction between capital adequacy regulation and credit risk transfer with credit default swaps (CDS) including its effect on lending behavior and risk sensitivity of a risk-neutral bank. CDS contracts may be used to hedge a bank's credit risk exposure at a certain (potentially distorted) price. Regulation is found to induce the risk-neutral bank to behave in a more risk-sensitive way: Compared to a situation without regulation the optimal volume of loans decreases more as the riskiness of loansincreases. CDS trading is found to interact with the former effect when regulation accepts CDS as an instrument to mitigate credit risk. Under the substitution approach in Basel II (and III) a risk-neutral bank will over-, fully or under-hedge its total exposure to credit risk conditional on the CDS price being downward biased, unbiased or upward biased. However, the substitution approach weakens the tendency to over-hedge or under-hedge when CDS markets are biased. This promotes the intention of the Basel II (and III) regulations to 'strengthen the soundness and stability of banks'. --
    Keywords: Banking,regulation,credit risk
    JEL: G21 G28
    Date: 2012
  2. By: Sophia Lazaretou (Bank of Greece)
    Abstract: The main goal of this paper is to trace the long record of financial crises and financial market regulation from the perspective of an emerging economy. Two questions are addressed: first, what explains the incidence and severity of financial crises in an emerging market economy? And, second, what is the role of learning: how does the country learn from its past experience in financial crises to improve institutions and develop better techniques so as to successfully manage successive crisis events? To answer the above questions, I first present evidence on financial crises in Greece over a long time span. Greece has been chosen as an appropriate case-study since it is a country with a rich history in financial crises. I try to identify a variety of crisis events, thus providing a chronology. Moreover, I present a number of facts about the incidence, frequency and severity of crises events. Second, I discuss the key determinants of the crises, which are closely related to country-specific factors, such as credit expansion, fiscal imbalances, and the limited reserve coverage of the monetary base. And third, I deal with the evolution of the regulation. I place emphasis on the post-crisis regulatory responses that changed the country’s institutional developments.
    Keywords: financial crises; emerging economies; sudden stops; financial market regulation.
    JEL: E5 N2
    Date: 2011–10
    Abstract: We study whether the 2002 deregulation and vertical unbundling of the Chinese electricity sector has boosted productivity in the generation segment of the industry. Controlling explicitly for sources of price-heterogeneity across firms and for firm-fixed effects, we find deregulation to be associated with a reduction in labor input and material use of 6 and 4 percent, respectively. This effect only appears two years after the reforms, is robust to alternative ways of identifying restructured firms, and to the nonrandom selection of restructured firms using a matching estimator. Input use of new state-owned firms that start operations two years into the reform period does not differ significantly anymore from input use of private sector entrants.
    Date: 2011–11
  4. By: Schneider, Friedrich (University of Linz)
    Abstract: In this paper the main focus lies on the shadow economy and on work in the shadow in OECD, developing and transition countries. Besides informal employment in the rural and non-rural sector also other measures of informal employment like the share of employees not covered by social security, own account workers or unpaid family workers are shown. The most influential factors on the shadow economy and/or shadow labor force are tax policies and state regulation, which, if they rise, increase both. Furthermore the discussion of the recent micro studies underline that economic opportunities, the overall burden of the state (taxes and regulations), the general situation on the labor market, and unemployment are crucial for an understanding of the dynamics of the shadow economy and especially the shadow labor force.
    Keywords: shadow economy, undeclared work, shadow labor force, tax morale, tax pressure, state regulation, labor market
    JEL: K42 H26 D78
    Date: 2012–03
  5. By: Hervé Dumez (CRG - Centre de recherche en gestion - CNRS : UMR7655 - Polytechnique - X)
    Abstract: Le 28 août 2008, la Securities and Exchange Commission (S.E.C.), le plus puissant régulateur américain des marchés financiers, annonce qu'il met sur pied un calendrier de passage des normes américaines GAAP (Generally Accepted Accounting Principles) à celles de l'International Financial Reporting Standards (IFRS), un régulateur privé basé à Londres. Les conséquences de cette décision sont considérables : les firmes américaines vont devoir dépenser des millions de dollars pour passer au nouveau système d'information financière. Quelques années plus tôt, une telle décision aurait été proprement impensable. D'une part, les normes comptables étaient nationales, d'autre part on pensait que les États-Unis comme première puissance financière du monde allaient imposer leurs propres normes à la planète : nous assistons à une internationalisation, une globalisation, en même temps qu'à une privatisation, de la régulation. C'est ce phénomène que Büthe & Mattli (2011) analysent dans leur ouvrage, The New Global Rulers. The privatization of Regulation in the World Economy.
    Keywords: privatisation de la régulation; globalisation des marchés; régulation globale; Büthe & Mattli; Internationalisation des marchés de produits et services.
    Date: 2012
  6. By: Jan De Loecker; Pinelopi K. Goldberg; Amit K. Khandelwal; Nina Pavcnik
    Abstract: This paper examines how prices, markups and marginal costs respond to trade liberalization. We develop a framework to estimate markups from production data with multi-product firms. This approach does not require assumptions on the market structure or demand curves faced by firms, nor assumptions on how firms allocate their inputs across products. We exploit quantity and price information to disentangle markups from quantity-based productivity, and then compute marginal costs by dividing observed prices by the estimated markups. We use India’s trade liberalization episode to examine how firms adjust these performance measures. Not surprisingly, we find that trade liberalization lowers factory-gate prices. However, the price declines are small relative to the declines in marginal costs, which fall predominantly because of the input tariff liberalization. The reason is that firms offset their reductions in marginal costs by raising markups. This limited pass-through of cost reductions attenuates the reform’s impact on prices. Our results demonstrate substantial heterogeneity and variability in markups across firms and time and suggest that producers benefited relative to consumers, at least immediately after the reforms. To the extent that higher firm profits lead to the new product introductions and growth, long-term gains to consumers may be substantially higher.
    JEL: F1 L1
    Date: 2012–03

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