nep-reg New Economics Papers
on Regulation
Issue of 2014‒06‒02
twenty-two papers chosen by
Natalia Fabra
Universidad Carlos III de Madrid

  1. Transmission and Generation Investment in Electricity Markets: The Effects of Market Splitting and Network Fee Regimes By Grimm, Veronika; Martin, Alexander; Weibelzahl, Martin; Zöttl, Gregor
  2. The Implicit Carbon Price of Renewable Energy. Incentives in Germany By Claudio Marcantonini; A. Denny Ellerman
  3. Mergers between regulated firms with unknown efficiency gains By Fiocco, Raffaele; Guo, Gongyu
  4. Gas network and market diversity in the US, the EU and Australia: A story of network access rights By Jean-Michel Glachant; Michelle Hallack; Miguel Vazquez
  5. Consumer Standards as a Strategic Device to Mitigate Ratchet Effects in Dynamic Regulation By Fiocco, Raffaele; Strausz, Roland
  6. The Optimal Energy Mix in Power Generation and the Contribution from Natural Gas in Reducing Carbon Emissions to 2030 and Beyond By Carraro, Carlo; Longden, Thomas; Marangoni, Giacomo; Tavoni, Massimo
  7. Macroprudential Regulation and Macroeconomic Activity By Sudipto Karmakar
  8. Import Competition, Domestic Regulation and Firm-Level Productivity Growth in the OECD By Sarah Ben Yahmed; Sean Dougherty
  9. Regulating Deferred Incentive Pay By Hoffmann, Florian; Inderst, Roman; Opp, Marcus
  10. Market Deregulation and Optimal Monetary Policy in a Monetary Union By Cacciatore, Matteo; Fiori, Giuseppe; Ghironi, Fabio
  11. Optimal Prudential Regulation of Banks and the Political Economy of Supervision By Tressel, Thierry; Verdier, Thierry
  12. Business Groups in the United States: A Revised History of Corporate Ownership, Pyramids and Regulation, 1930-1950 By Kandel, Eugene; Kosenko, Konstantin; Morck, Randall; Yafeh, Yishay
  13. Competition, firm size and returns to skills : evidence from currency shocks and market liberalizations By Michele Raitano; Francesco Vona
  14. Labor Market Deregulation and Female Employment: Evidence from a Natural Experiment in Japan By Kato, Takao; Kodama, Naomi
  15. Bank capital regulation (BCR) model By Hyejin Cho
  16. Firm Dynamics and Residual Inequality in Open Economies By Felbermayr, Gabriel; Impullitti, Giammario; Prat, Julien
  17. Never Say Never: Commentary on a Policymaker’s Reflections By Obstfeld, Maurice
  18. Good Monitoring, Bad Monitoring By Grinstein, Yaniv; Rossi, Stefano
  19. "Shadow Banking: Policy Challenges for Central Banks" By Thorvald Grung-Moe
  20. Institutional quality and bank instability: cross-countries evidence in emerging countries By ESSID, ZINA; BOUJELBENE, YOUNES; PLIHON, DOMINIQUE
  21. Testing Macroprudential Stress Tests: The Risk of Regulatory Risk Weights By Acharya, Viral V; Engle III, Robert F; Pierret, Diane
  22. A Century of Firm – Bank Relationships: Did Banking Sector Deregulation Spur Firms to Add Banks and Borrow More? By Braggion, Fabio; Ongena, Steven

  1. By: Grimm, Veronika; Martin, Alexander; Weibelzahl, Martin; Zöttl, Gregor
    Abstract: In this paper we propose a three–level computational equilibrium model that allows to analyze the impact of the regulatory environment on transmission line expansion (by the regulator) and investment in generation capacity (by private firms) in liberalized electricity markets. The basic model analyzes investment decisions of the transmission operator (TO) and private firms in expectation of an energy only market and cost-based redispatch. In different specifications we consider the cases of one versus two price zones (market splitting) and analyze different approaches to recover network cost, in particular lump sum, capacity based, and energy based fees. In order to compare the outcomes of our multi–stage market model with the first best benchmark, we also solve the corresponding integrated planer problem. In two simple test networks we illustrate that energy only markets can lead to suboptimal locational decisions for generation capacity and thus, imply excessive network expansion. Market splitting heals those problems only partially. Those results obtain for both, capacity and energy based network tariffs, although investment slightly differs across those regimes.
    Keywords: Electricity markets; Network Expansion; Generation Expansion; Investment Incentives; Computational Equilibrium Models; Transmission Management
    Date: 2014–03–31
  2. By: Claudio Marcantonini; A. Denny Ellerman
    Abstract: Incentives for the development of renewable energy have increasingly become an instrument of climate policy, that is, as a means to reduce GHG emissions. This research analyzes the German experience in promoting renewable energy over the past decade to identify the ex-post cost of reducing CO2 emissions in the power sector through the promotion of renewable energy, specifically, wind and solar. A carbon surcharge and an implicit carbon price due to the renewable energy incentives for the years 2006-2010 are calculated. The carbon surcharge is the ratio of the net cost of the renewable energy over the CO2 emission reductions resulting from actual renewable energy injections. The net cost is the sum of the costs and cost savings due to these injections into the electric power system. The implicit carbon price is the sum of the carbon surcharge and the EUA price and it can be seen as a measure of the CO2 abatement efficiency of the renewable energy incentives. Results show that both the carbon surcharge and he implicit carbon price of wind are relatively low, on the order of tens of euro per tonne of O2, while the same measures for solar are very high, on the order of hundreds of euro per tonne of CO2.
    Keywords: Renewables incentives, wind energy, solar energy, abatement cost, EU ETS
    Date: 2014–03
  3. By: Fiocco, Raffaele; Guo, Gongyu
    Abstract: In an industry where regulated firms interact with unregulated suppliers, we investigate the welfare effects of a merger between regulated firms when cost synergies are uncertain before the merger and their realization becomes private information of the merged firm. The optimal merger policy trades off potential cost savings against regulatory distortions from informational problems. We show that, as a consequence of this trade-off, more intense competition in unregulated segments of the market induces a more lenient merger policy. The regulated firms' diversification into a competitive segment of the market can lead to a softer merger policy when competition is weaker.
    Keywords: asymmetric information; competition; efficiency gains; mergers; regulation.
    JEL: D82 L43 L51
    Date: 2014
  4. By: Jean-Michel Glachant; Michelle Hallack; Miguel Vazquez
    Abstract: The institutional setting of open gas networks and markets is revealing considerably diverse and diverging roads taken by the US, the EU and Australia. We will show that this is explained by key choices made in the primary liberalization process. This primary liberalization is based on a definition of network access rights, which leads to different regimes for the transmission services, as well as for the gas commodity trade, as commodity trade depends on the network services to get any market deal actually implemented. Not only do those choices depend on the physical architecture of the network, but also the perceived difficulties and institutional costs of coordinating the actual transmission services through certain market arrangements.
    Keywords: Network regulation, gas market, property rights, open access, gas carriage systems
    Date: 2014–03
  5. By: Fiocco, Raffaele; Strausz, Roland
    Abstract: Strategic delegation to an independent regulator with a pure consumer standard improves dynamic regulation by mitigating ratchet effects associated with short term contracting. A pure consumer standard alleviates the regulator's myopic temptation to raise output after learning the firm is inefficient. Anticipating this tougher regulatory behavior, efficient firms find it less attractive to exaggerate costs. This reduces the need for long term rents and mitigates ratchet effects. A welfare standard biased towards consumers entails, however, allocative costs arising from partial separation of the firms' cost types. A trade-off results which favors strategic delegation when efficient firms are relatively likely.
    Keywords: consumer standard; Dynamic regulation; limited commitment; ratchet effects; strategic delegation
    JEL: D82 L51
    Date: 2014–04
  6. By: Carraro, Carlo; Longden, Thomas; Marangoni, Giacomo; Tavoni, Massimo
    Abstract: This paper analyses a set of new scenarios for energy markets in Europe to evaluate the consistency of economic incentives and climate objectives. It focuses in particular on the role of natural gas across a range of climate policy scenarios (including the Copenhagen Pledges and the EU Roadmap) to identify whether current trend and policies are leading to an economically efficient and, at the same time, climate friendly, energy mix. Economic costs and environmental objectives are balanced to identify the welfare-maximising development path, the related investment strategies in the energy sector, and the resulting optimal energy mix. Policy measures to support this balanced economic development are identified. A specific sensitivity analysis upon the role of the 2020 renewable targets and increased energy efficiency improvements is also carried out. We conclude that a suitable and sustained carbon price needs to be implemented to move energy markets in Europe closer to the optimal energy mix. We also highlight that an appropriate carbon pricing is sufficient to achieve both the emission target and the renewable target, without incurring in high economic costs if climate policy is not too ambitious and/or it is internationally coordinated. Finally, our results show that natural gas is the key transitional fuel within the cost-effective achievement of a range of climate policy targets.
    Keywords: Carbon Pricing; Energy Markets; EU Climate Policy; Gas Share; Renewables Target
    JEL: O33 O41 Q43 Q48 Q54
    Date: 2013–11
  7. By: Sudipto Karmakar
    Abstract: This paper develops a dynamic stochastic general equilibrium model to examine the impact of macroprudential regulation on bank’s financial decisions and the implications for the real sector. I explicitly incorporate costs and benefits of capital requirements. I model an occasionally binding capital constraint and approximate it using an asymmetric non linear penalty function. This friction means that the banks refrain from valuable lending. At the same time, countercyclical buffers provide structural stability to the financial system. I show that higher capital requirements can dampen the business cycle fluctuations. I also show that stronger regulation can induce banks to hold buffers and hence mitigate an economic downturn as well. Increasing the capital requirements do not seem to have an adverse effect on the welfare. Lastly, I also show that switching to a countercyclical capital requirement regime can help reduce fluctuations and raise welfare.
    JEL: G01 G21 G28
    Date: 2013
  8. By: Sarah Ben Yahmed (IEP Aix-en-Provence - Sciences Po Aix - Institut d'études politiques d'Aix-en-Provence - Institut d'Études Politiques [IEP] - Aix-en-Provence - Aix Marseille Université - Fondation Nationale des Sciences Politiques [FNSP], GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille - Université de la Méditerranée - Aix-Marseille II - Université Paul Cézanne - Aix-Marseille III - École des Hautes Études en Sciences Sociales (EHESS) - CNRS : UMR7316); Sean Dougherty (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon-Sorbonne, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris, OCDE - Organisation de coopération et de développement économiques - OCDE)
    Abstract: This paper examines how import penetration affects firms' productivity growth taking into account the heterogeneity in firms' distance to the efficiency frontier and country differences in product market regulation.
    Keywords: Firm productivity growth ; Behind-the-border regulatory barriers ; Product market regulation ; Import competition, international trade
    Date: 2014–03–14
  9. By: Hoffmann, Florian; Inderst, Roman; Opp, Marcus
    Abstract: Our paper examines the effect of recent regulatory proposals mandating the deferral of bonus payments and claw-back clauses for compensation contracts in the financial sector. We study a multi-task setting in which a bank employee, the agent, privately chooses (deal or customer) acquisition effort and diligence, which stochastically reduces the occurrence of negative events over time (such as loan defaults or customer cancellations). The key ingredient of the compensation contract is the endogenous timing of a long-term bonus that trades off the cost and benefit of delay resulting from agent impatience and the informational gain, respectively. Our main finding is that government interference with this privately optimal choice may
    Keywords: Compensation design; Financial regulation; Principal-agent models
    JEL: D86 G21 G28
    Date: 2014–03
  10. By: Cacciatore, Matteo; Fiori, Giuseppe; Ghironi, Fabio
    Abstract: The wave of crises that began in 2008 reheated the debate on market deregulation as a tool to improve economic performance. This paper addresses the consequences of increased flexibility in goods and labor markets for the conduct of monetary policy in a monetary union. We model a two-country monetary union with endogenous product creation, labor market frictions, and price and wage rigidities. Regulation affects producer entry costs, employment protection, and unemployment benefits. We first characterize optimal monetary policy when regulation is high in both countries and show that the Ramsey allocation requires significant departures from price stability both in the long run and over the business cycle. Welfare gains from the Ramsey-optimal policy are sizable. Second, we show that the adjustment to market reform requires expansionary policy to reduce transition costs. Third, deregulation reduces static and dynamic inefficiencies, making price stability more desirable. International synchronization of reforms can eliminate policy tradeoffs generated by asymmetric deregulation.
    Keywords: Market deregulation; Monetary union; Optimal monetary policy
    JEL: E24 E32 E52 F41 J64 L51
    Date: 2013–11
  11. By: Tressel, Thierry; Verdier, Thierry
    Abstract: We consider a moral hazard economy with the potential for collusion between bankers and borrowers to study how incentives for risk taking are affected by the quality of supervision. We show that low interest rates or a low return on investment may generate excessive risk taking. Because of a pecuniary externality, the market equilibrium is not optimal and there is a need for prudential regulation. We show that the optimal capital ratio depends on the state of the macro-financial cycle, and that,in presence of production externalities, the capital ratio should be complemented by a constraint on asset allocation. We study the political economy of supervision. We show that the political process tends to exacerbate excessive risk taking and credit cycles by weakening the quality of banking supervision when instead it should be strengthened.
    Keywords: banking regulation; political economy; regulatory forbearance
    JEL: D8 E44 G2
    Date: 2014–03
  12. By: Kandel, Eugene; Kosenko, Konstantin; Morck, Randall; Yafeh, Yishay
    Abstract: The extent to which business groups ever existed in the United States and, if they did exist, the reasons for their disappearance are poorly understood. In this paper we use hitherto unexplored historical sources to construct a comprehensive data set to address this issue. We find that (1) business groups, often organized as pyramids, existed at least as early as the turn of the twentieth century and became a common corporate form in the 1930s and 1940s, mostly in public utilities (e.g., electricity, gas and transportation) but also in manufacturing; (2) In contrast with modern business groups in emerging markets that are typically diversified and tightly controlled, many US groups were focused in a single sector and controlled by apex firms with dispersed ownership; (3) The disappearance of US business groups was largely complete only in 1950, about 15 years after the major anti-group policy measures of the mid-1930s; (4) Chronologically, the demise of business groups preceded the emergence of conglomerates in the United States by about two decades and the sharp increase in stock market valuation by about a decade, so that a causal link between these events is hard to establish, although there may well be a connection between them. We conclude that the prevalence of business groups is not inconsistent with high levels of investor protection; that US corporate ownership as we know it today evolved gradually over several decades; and that policy makers should not expect policies that restrict business groups to have an immediate effect on corporate ownership.
    Keywords: Business Groups; Corporate Ownership; Financial Market Regulation; Pyramids
    JEL: G30 G34 G38
    Date: 2013–11
  13. By: Michele Raitano (Sapienza University of Rome, Department of Economics and Law); Francesco Vona (Ofce sciences-po,Skema Business school)
    Abstract: The authors investigate the impact of exogenous product market competition shocks on returns to skills in Italy using a new longitudinal dataset on individual working histories. This impact is identified using three exogenous shocks affecting competition: the unforeseen devaluation of the Lira in 1992, its return to a fixed exchange regime in 1996 and the market liberalisation in the utility and transport sectors in the late 1990s-early 2000s. This paper extends the analysis of Guadalupe (2007) by investigating how firm heterogeneity and shocks of different types and signs affect the impact of competition on skill premia. The authors find that opposite shocks have opposite effects: an increase (resp. decrease) in international competition increases (resp. decreases) returns to skills. Moreover, international shocks have greater effects on medium-sized firms, while domestic liberalisation shocks have greater effects on large incumbents previously sheltered from any entry threat.
    Keywords: Skill premia, competition, currency shocks,product market regulation,firm size
    JEL: J31 L11 D41
    Date: 2014–04
  14. By: Kato, Takao (Colgate University); Kodama, Naomi (Hitotsubashi University)
    Abstract: This paper provides novel evidence on the causal effect on female employment of labor market deregulation by using the 1985 amendments to the Labor Standards Law (LSL) in Japan as a natural experiment. The original LSL of 1947 prohibited women from working overtime exceeding two hours a day; six hours a week; and 150 hours a year. The 1985 amendments exempted a variety of occupations and industries from such overtime restriction on women. We first define "jobs" using an industry by occupation matrix. For each job (close to 5,000 jobs in total), we carefully identify whether or not it was made exempt from the overtime restriction on women by the 1985 amendments. Applying a difference-in-difference model to census data, we find a statistically significant and economically meaningful impact on female employment of this particular piece of labor market deregulation. Furthermore the 1985 treatment is found to have a lasting and growing impact on female employment. Our finding is consistent with the recent literature that points to the importance of paying particular attention to the issues surrounding working hours when policymakers design public policy to promote female employment.
    Keywords: female employment, labor market deregulation, natural experiment, overtime restriction on women, Labor Standards Law
    JEL: J16 J78 J81 J82 J88
    Date: 2014–05
  15. By: Hyejin Cho (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon-Sorbonne)
    Abstract: The motivation of this article is to induce the bank capital management solution for banks and regulation bodies on commercial bank. The goal of the paper is intended to mitigate the risk of banking area and also provide the right incentive for banks to support the real economy.
    Keywords: Demand Deposit; Risks of on-the-balancesheet and off-the-balancesheet; Portfolio composition; minimum equity capital regulation
    Date: 2014–03–12
  16. By: Felbermayr, Gabriel; Impullitti, Giammario; Prat, Julien
    Abstract: Increasing wage inequality between similar workers plays an important role for overall inequality trends in industrialized societies. To analyze this pattern, we incorporate directed labor market search into a dynamic model of international trade with heterogeneous firms and homogeneous workers. Wage inequality across and within firms results from their different hiring needs along their life cycles and the convexity of their adjustment costs. The interaction between wage posting and firm growth explains some recent empirical regularities on firm and labor market dynamics. Fitting the model to capture key features obtained from German linked employer-employee data, we investigate how falling trade costs and institutional reforms interact in shaping labor market outcomes. Focusing on the period 1996-2007, we find that neither trade nor key features of the Hartz labor market reforms account for the sharp increase in residual inequality observed in the data. By contrast, inequality is highly responsive to the increase in product market competition triggered by domestic regulatory reform.
    Keywords: Directed Search; Firm Dynamics; International Trade; Product and Labor Market Regulation; Wage Inequality
    JEL: E24 F12 F16
    Date: 2014–03
  17. By: Obstfeld, Maurice
    Abstract: Stanley Fischer is a rarity among economic policymakers. He came to the policy world as an internationally recognized intellectual leader on macroeconomic theory and policy. He confronted numerous emerging market crises, including the globally systemic Asian crisis, as the IMF’s First Deputy Managing Director from September 1994 to August 2001. And then, as governor of an emerging economy’s central bank starting in May 2005, he decided the monetary responses to the worldwide crisis of 2008-09 and its aftershocks. Fischer’s unpublished Robbins Lectures, delivered at the LSE late in 2001, drew lessons from his service at the IMF. Did emerging markets follow up on those lessons, and did their preparations help them weather the storm of 2008-09? How have economists’ views, and Fischer’s, changed as a result of the global financial crisis? In this paper I propose answers to these questions, focusing on the experiences of three Asian crisis countries, Indonesia, Korea, and Thailand.
    Keywords: Asian crisis; capital controls; exchange rate regime; financial crises; foreign exchange intervention; macro-prudential regulation; Stanley Fischer; transparency
    JEL: E44 E63 F32 F34 F36 G01 G15
    Date: 2014–02
  18. By: Grinstein, Yaniv; Rossi, Stefano
    Abstract: Are courts effective monitors of corporate decisions? In a controversial landmark case, the Delaware Supreme Court held directors personally liable for breaching their fiduciary duties, signaling a sharp increase in Delaware’s scrutiny over corporate decisions. In our event study, low-growth Delaware firms outperformed matched non-Delaware firms by 1% in the three day event window. In contrast, high-growth Delaware firms under-performed by 1%. Contrary to previous literature, we conclude that court decisions can have large, significant and heterogeneous effects on firm value, and that rules insulating directors from court scrutiny benefit the fastest growing sectors of the economy.
    Keywords: case law; corporate governance; monitoring; regulation
    JEL: G32 G34 G38
    Date: 2014–05
  19. By: Thorvald Grung-Moe
    Abstract: Central banks responded with exceptional liquidity support during the financial crisis to prevent a systemic meltdown. They broadened their tool kit and extended liquidity support to nonbanks and key financial markets. Many want central banks to embrace this expanded role as "market maker of last resort" going forward. This would provide a liquidity backstop for systemically important markets and the shadow banking system that is deeply integrated with these markets. But how much liquidity support can central banks provide to the shadow banking system without risking their balance sheets? I discuss the expanding role of the shadow banking sector and the key drivers behind its growing importance. There are close parallels between the growth of shadow banking before the recent financial crisis and earlier financial crises, with rapid growth in near monies as a common feature. This ebb and flow of shadow-banking-type liabilities are indeed an ingrained part of our advanced financial system. We need to reflect and consider whether official sector liquidity should be mobilized to stem a future breakdown in private shadow banking markets. Central banks should be especially concerned about providing liquidity support to financial markets without any form of structural reform. It would indeed be ironic if central banks were to declare victory in the fight against too-big-to-fail institutions, just to end up bankrolling too-big-to-fail financial markets.
    Keywords: Financial Regulation; Financial Stability; Monetary Policy; Central Bank Policy
    JEL: E44 E52 E58 G28
    Date: 2014–05
    Abstract: This paper highlights the relevant role of the quality of institutions in maintaining banking stability. Poor institutions constitute the key determinants in explaining the emergence of banking crises. An empirical study of 52 emerging and / or developing countries from 1996 to 2009 finds that banking instability is widely associated with a variety of macroeconomic, financial and ,particularly, institutional factors. Our main conclusion stipulates that the strengthening of institutional quality is an essential condition to ensure banking stability. Political stability, voice and accountability, and respect for the rule and law are relevant institutional characteristics in particular.
    Keywords: quality of institutions, supervision and prudential regulation schemes, bank instability, Logit technique, emerging and / or developing countries.
    JEL: G0 G01 O1 O5
    Date: 2014–05–27
  21. By: Acharya, Viral V; Engle III, Robert F; Pierret, Diane
    Abstract: Macroprudential stress tests have been employed by regulators in the United States and Europe to assess and address the solvency condition of financial firms in adverse macroeconomic scenarios. We provide a test of these stress tests by comparing their risk assessments and outcomes to those from a simple methodology that relies on publicly available market data and forecasts the capital shortfall of financial firms in severe market-wide downturns. We find that: (i) The losses projected on financial firm balance-sheets compare well between actual stress tests and the market-data based assessments, and both relate well to actual realized losses in case of future stress to the economy; (ii) In striking contrast, the required capitalization of financial firms in stress tests is found to be inadequate ex post compared to that implied by market data; (iii) This discrepancy arises due to the reliance on regulatory risk weights in determining required levels of capital once stress-test losses are taken into account. In particular, the continued reliance on regulatory risk weights in stress tests appears to have left financial sectors under-capitalized, especially during the European sovereign debt crisis, and likely also provided perverse incentives to build up exposures to low risk-weight assets.
    Keywords: macroprudential regulation; risk-weighted assets; stress test; systemic risk
    JEL: G01 G11 G21 G28
    Date: 2014–01
  22. By: Braggion, Fabio; Ongena, Steven
    Abstract: We study how firm-bank relationships and corporate financing evolved during the Twentieth century in Britain. We document a remarkable transition from single to multiple relationships. Transparent, larger, and global companies were more likely to add a bank, especially when located in more competitive local banking markets. Deregulation and intensifying competition in the banking sector during the 1970s spurred banks to supply credit through multilateral arrangements. Firms that added a bank following deregulation borrowed more than similar firms that did not add a bank, and their bank debt expanded while their trade credit and share issuance contracted.
    Keywords: banking sector; competition; multiple banking
    JEL: G21 N23 N24
    Date: 2013–10

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