nep-reg New Economics Papers
on Regulation
Issue of 2022‒06‒27
nineteen papers chosen by
Christopher Decker
Oxford University

  1. The measure of monopsony By Monica Langella; Alan Manning
  2. Public procurement in law and practice By Bosio, Erica; Djankov, Simeon; Glaeser, Edward; Shleifer, Andrei
  3. Probabilistic forecasting of German electricity imbalance prices By Micha{\l} Narajewski
  4. Personalizing Prices to Redistribute Wealth in Antitrust and Public Utility Rate Regulation By Woodcock, Ramsi
  5. Long-term Contracts for Network-supportive Flexibility in Local Flexibility Markets By Erik Heilmann; Nikolai Klempp; Kai Hufendiek; Heike Wetzel
  6. Incentives of a Monopolist for Innovation under Regulatory Threat By Saglam, Ismail
  7. Bargaining and International Reference Pricing in the Pharmaceutical Industry By Pierre Dubois; Ashvin Gandhi; Shoshana Vasserman
  8. A Two-Stage Mechanism for Demand Response Markets By Bharadwaj Satchidanandan; Mardavij Roozbehani; Munther A. Dahleh
  9. More Money or Better Procedures? Evidence from an Energy Efficiency Assistance Program By Bettina Chlond; Timo Goeschl; Martin Kesternich
  10. Deceptive Features on Platforms By Johnen, Johannes; Somogyi, Robert
  11. A review of nudges: definitions, justifications, effectiveness By Congiu, Luca; Moscati, Ivan
  12. Embedded Supervision: How to Build Regulation into Decentralised Finance By Raphael A. Auer
  13. Costs of very high capacity networks and geographic heterogeneity – a statistical assessment for Germany By Zoz, Konrad; Zuloaga, Gonzalo; Kulenkampff, Gabriele; Plückebaum, Thomas; Ockenfels, Martin
  14. A new hydrogen world: Geotechnological, economic, and political implications for Europe By Grinschgl, Julian; Pepe, Jacopo Maria; Westphal, Kirsten
  15. Anticompetitive practices on public procurement: Evidence from Brazilian electronic biddings By Adilson Sampaio; Paulo Figueiredo; Klarizze Puzon
  16. Outsourcing the last mile: Should regulation be strictly focused on the urban segment? By Pétronille Reme-Harnay
  17. Two-sided matching with firms' complementary preferences By Chao Huang
  18. How Communication Makes the Difference between a Cartel and Tacit Collusion: A Machine Learning Approach By Maximilian Andres; Lisa Bruttel; Jana Friedrichsen
  19. Assessing Regulatory Responses to Banking Crises By Padma Sharma

  1. By: Monica Langella; Alan Manning
    Abstract: There has been increasing interest in recent years in monopsony in labour market. This paper discusses how we can measure monopsony power combining insights from models based on both frictions and idiosyncrasies. It presents some evidence from the UK and the US about how monopsony power varies across the wage distribution within markets, over the business cycle and over time.
    Keywords: monopsony, labour market competition
    Date: 2021–06–30
  2. By: Bosio, Erica; Djankov, Simeon; Glaeser, Edward; Shleifer, Andrei
    Abstract: We examine a new dataset of public procurement laws, practice, and outcomes in 187 countries. We measure regulation as restrictions on the discretion of the procuring entities. We find that laws and practice are highly correlated with each other across countries, and better practice is correlated with better outcomes, but laws themselves are not correlated with outcomes. A closer look shows that stricter laws correlate with improved outcomes, but only in countries with low public sector capacity. We present a model of procurement in which both regulatory rules and public sector capacity determine procurement outcomes. In the model, regulation is effective in countries with low public sector capacity, but not in countries with high capacity because it inhibits the socially optimal exercise of discretion to exclude low quality bidders.w dataset of public procurement laws, practice, and outcomes in 187 countries. We measure regulation as restrictions on the discretion of the procuring entities. We find that laws and practice are highly correlated with each other across countries, and better practice is correlated with better outcomes, but laws themselves are not correlated with outcomes. A closer look shows that stricter laws correlate with improved outcomes, but only in countries with low public sector capacity. We present a model of procurement in which both regulatory rules and public sector capacity determine procurement outcomes. In the model, regulation is effective in countries with low public sector capacity, but not in countries with high capacity because it inhibits the socially optimal exercise of discretion to exclude low quality bidders. (JEL D73, H11, H57, K12, K42, O17)
    JEL: D73 H11 H57 K12 K42 O17
    Date: 2022–04
  3. By: Micha{\l} Narajewski
    Abstract: The exponential growth of renewable energy capacity has brought much uncertainty to electricity prices and to electricity generation. To address this challenge, the energy exchanges have been developing further trading possibilities, especially the intraday and balancing markets. For an energy trader participating in both markets, the forecasting of imbalance prices is of particular interest. Therefore, in this manuscript we conduct a very short-term probabilistic forecasting of imbalance prices, contributing to the scarce literature in this novel subject. The forecasting is performed 30 minutes before the delivery, so that the trader might still choose the trading place. The distribution of the imbalance prices is modelled and forecasted using methods well-known in the electricity price forecasting literature: lasso with bootstrap, gamlss, and probabilistic neural networks. The methods are compared with a naive benchmark in a meaningful rolling window study. The results provide evidence of the efficiency between the intraday and balancing markets as the sophisticated methods do not substantially overperform the intraday continuous price index. On the other hand, they significantly improve the empirical coverage. The analysis was conducted on the German market, however it could be easily applied to any other market of similar structure.
    Date: 2022–05
  4. By: Woodcock, Ramsi
    Abstract: The information age is enabling firms with even small amounts of market power to personalize the prices they charge to each consumer in the market. Left to their own devices, firms will use this new power to increase profits by charging prices personalized to the maximum that each consumer is willing to pay. But government can also use the new power to personalize prices to equalize wealth—by insisting that firms personalize high prices to the rich and low prices to the poor—and most of the legal rules needed to do so are already in place. Both the antitrust laws and state and federal rate regulatory regimes already require enforcers to take the distribution of wealth into account in condemning anticompetitive practices or approving prices. Before the information age made personalized pricing possible, enforcers hesitated aggressively to use their powers to achieve wealth-equalizing prices because they worried that doing so would harm efficiency. But personalized prices are always efficient, whether set high by firms or adjusted by regulators to equalize wealth, creating an unprecedented opportunity for government to do distributive justice.
    Date: 2022–05–18
  5. By: Erik Heilmann (University of Kassel); Nikolai Klempp (University of Stuttgart); Kai Hufendiek (University of Stuttgart); Heike Wetzel (University of Kassel)
    Abstract: With an ongoing energy transition, the electric network is increasingly challenged. Handling congestion is a major responsibility of network operators. In recent years, market-based approaches to utilize network-supportive flexibility, especially local flexibility markets (LFMs), have been discussed as possible future development of congestion management processes. LFMs are a promising opportunity for the effcient, transparent and non-discriminatory integration of new flexibility options, in particular demand-side flexibility. Despite a wide body of supporting literature and several pilot implementations, there is still no common commitment to the concept of LFMs in the European Union. Here we address decision makers in the European energy economy, especially network operators, and discuss a possible flexibility product design using a methodological approach with four steps. First, we review the theoretical background of LFMs, considering both network operators' views and the possibility of demand response as a flexibility provider. Based on this review, we formulate an interim conclusion regarding requirements for flexibility product design in general. Second, using an existing framework, we propose a concrete, capacity-based, long-term flexibility product specification. Third, we discuss compliance between the defined requirements and the proposed product design to highlight the relevance of key design parameters and identify further research needs. Finally, we derive policy implications for network operators' decision makers regarding the implementation of LFMs.
    Keywords: demand side flexibility, local flexibility market, congestion management, flexibility product design
    JEL: D47 L94 Q41
    Date: 2022
  6. By: Saglam, Ismail
    Abstract: In this paper, we investigate whether a natural monopoly with private cost information can reduce the likelihood of regulatory threat by investing, in the ex-ante stage, in cost-reducing R&D to generate process innovations and whether such an investment can yield Pareto gains in welfare. We model the regulatory process using a sequential game where a benevolent regulator makes the first move by announcing the probability that the monopolist will be optimally regulated. The monopolist, hearing this announcement, chooses the optimal level of its R&D investment. We numerically compute the subgame-perfect Nash equilibrium of this game for a wide range of model parameters. Our results show that the monopolist invests more in R&D if the regulatory threat is less certain. Anticipating this response, the regulator makes her threat less certain if she puts more weight on the monopolist's welfare. Moreover, we find that regulation with uncertainty can be Pareto superior to regulation with certainty if the welfare weight of the monopolist is sufficiently, but not extremely, high or if the cost of R&D is sufficiently small.
    Keywords: Monopoly; regulatory threat, R&D investment.
    JEL: D42 D82 L51 O30
    Date: 2022–05–21
  7. By: Pierre Dubois; Ashvin Gandhi; Shoshana Vasserman
    Abstract: The United States spends twice as much per person on pharmaceuticals as European countries, in large part because prices are much higher in the US. This fact has led policymakers to consider legislation for price controls. This paper assesses the effects of a US international reference pricing policy that would cap prices in US markets by those offered in reference countries. We estimate a structural model of demand and supply for pharmaceuticals in the US and reference countries like Canada where prices are set through a negotiation process between pharmaceutical companies and the government. We then simulate the counterfactual equilibrium under such international reference pricing rules, allowing firms to internalize the cross-country externalities introduced by these policies. We find that in general, these policies would result in much smaller price decreases in the US than price increases in reference countries. The magnitude of these effects depends on the number, size and market structure of references countries. We compare these policies with a direct bargaining on prices in the US.
    JEL: C51 C57 I11 I18 L11 L13 L22
    Date: 2022–05
  8. By: Bharadwaj Satchidanandan; Mardavij Roozbehani; Munther A. Dahleh
    Abstract: We present a two-stage mechanism for creating markets for demand response. Demand response involves system operators using incentives to modulate electricity consumption around peak hours or when faced with an incidental supply shortage. However, system operators typically have imperfect information about their customers' counterfactual consumption, that is, their consumption had the incentive been absent. The standard approach to estimate the reduction in a customer's electricity consumption then is to estimate their counterfactual baseline. However, this approach is not robust to estimation errors or strategic exploitation by the consumers and can potentially lead to overpayments to customers who do not reduce their consumption and underpayments to those who do. In addition, the incentive payments are often designed based on models of consumer behavior or other ad-hoc rules that are only partially accurate at best. The two-stage mechanism proposed in this paper circumvents the aforementioned issues. In the day-ahead market, the participating loads submit the probability distribution of their next-day consumption. In real-time, if and when called upon for demand response, the loads report the realization of their baseline demand and receive credit for reductions below their reported baseline. The mechanism guarantees ex post incentive compatibility of truthful reporting of the probability distribution in the day-ahead market and truthful reporting of the realized baseline demand in real-time. The mechanism can be viewed as an extension of the celebrated Vickrey-Clarke-Groves mechanism augmented with a carefully crafted second-stage penalty for deviations from the day-ahead bids.
    Date: 2022–05
  9. By: Bettina Chlond (University of Heidelberg); Timo Goeschl (University of Heidelberg); Martin Kesternich (University of Kassel)
    Abstract: We contribute to the literature on how program design affects program performance among vulnerable groups by studying the effects of varying the subsidy level and program procedures in an energy effciency assistance program targeting low-income households in Germany. Eligible households receive, upon enrolment, a voucher to subsidize refrigerator replacement. The voucher is redeemed against cash following replacement. Observing the decisions of 77,305 eligible households, our RDD design exploits two quasi-exogenous temporal discontinuities in voucher value and program procedures. We find that a switch from automatic to elective enrolment and more rigid voucher terms reduces the number of vouchers in circulation, but raises the replacement rate among eligible households, the key performance metric, by 4 to 10 percentage points, consistent with psychological theories of goal setting and time management. A subsidy increase of €50 raises replacement rates by 9 to 16 percentage points. The effect of procedural changes is equivalent to an additional €34 in subsidy. Back-of-the-envelope calculations highlight that low-cost changes in procedures that target the behavioral responses of low-income households represent plausible areas of unexploited economies in program design and merit systematic investigation.
    Keywords: Public behavioral economics, energy efficiency, low-income households, durable replacement, energy poverty, technology adoption.
    JEL: C25 D15 H23 O33 Q20
    Date: 2022
  10. By: Johnen, Johannes (Université catholique de Louvain, LIDAM/CORE, Belgium); Somogyi, Robert (Université catholique de Louvain, LIDAM/CORE, Belgium)
    Abstract: Many products sold on online platforms have additional features. Platforms can deliberately shroud these features from consumers, e.g. by revealing them only late in the purchase process. For example, platforms often reveal fees for shipping, handling, extra luggage or hotel services only late in the purchase process. We study when a two-sided platform discloses (a.k.a unshrouds) additional fees when some buyers naively ignore shrouded fees. We uncover a novel mechanism to explain why platforms shroud: platforms shroud or unshroud to manipulate cross-group externalities between buyers and sellers. Exploring this mechanism, we highlight two results suggesting online marketplaces lead to more shrouded features. First, we ask when a platform shrouds seller fees on its marketplace. Driven by cross-group network externalities to attract buyers and appear cheap, the platform has stronger incentives to shroud seller fees than sellers themselves. Second, we investigate when the platform shrouds its own additional fees and uncover a perverse effect of seller competition: fiercer competition between sellers encourages the platform to shroud its own fees. Both results hold even though the platform earns no commission to shroud seller fees and does not sell its own brands, so banning these practices will not induce a transparent marketplace. We discuss further policy implications and connect to common practices like drip pricing, steering, and rebate design.
    Date: 2022–04–13
  11. By: Congiu, Luca; Moscati, Ivan
    Abstract: In 2008, the behavioral economist Richard Thaler and the legal scholar Cass Sunstein published a book in which they advocated a novel approach to public policy based on the notion of a “nudge.” Roughly speaking, a nudge is an intervention in the decisional context that steers people's decisions by acting on their cognitive biases. The notion of a nudge generated an intense debate across different disciplines and proved popular with many policy makers around the world. The present article reviews the debate and research on nudges by focusing on three main dimensions: (1) the exact definition of nudges; (2) the justification of nudge policies, with a focus on “libertarian paternalism”; and (3) the effectiveness of nudges, both over time and in comparison with standard policies.
    Keywords: behavioral welfare economics; boosts; bounded rationality; libertarian paternalism; nudge
    JEL: D01 D90 M31
    Date: 2022–02–01
  12. By: Raphael A. Auer
    Abstract: The emergence of so-called “decentralised finance” (DeFi) and a shadow financial system of cryptocurrency exchanges and stablecoin issuers raises the challenge of how to apply technology-neutral regulation so that similar risks are subject to the same rules. This paper makes the case for embedded supervision, ie a regulatory framework that provides for compliance in decentralised markets to be automatically monitored by reading the market’s ledger. This reduces the need for firms to actively collect, verify and deliver data. The paper explores the conditions under which distributed ledger data may be used to monitor compliance. To this end, a decentralised market is modelled that replaces today’s intermediary-based verification of legal data with blockchain-enabled credibility based on economic consensus. The key results set out the conditions under which the market’s economic consensus would be strong enough to guarantee that transactions are economically final, so that supervisors can trust the distributed ledger’s data. The paper concludes with a discussion of the legislative and operational requirements that would promote low-cost supervision and a level playing field for small and large firms.
    Keywords: decentralised finance, DeFi, tokenisation, asset-backed tokens, stablecoins, crypto-assets, cryptocurrencies, CBDC, regtech, suptech, regulation, supervision, Basel III, proportionality, blockchain, distributed ledger technology, digital currencies, proof
    JEL: D40 D20 E42 E51 F31 G12 G18 G28 G32 G38 K22 K24 L10 L50 M40
    Date: 2022
  13. By: Zoz, Konrad; Zuloaga, Gonzalo; Kulenkampff, Gabriele; Plückebaum, Thomas; Ockenfels, Martin
    Abstract: In this study, we analyse regional cost differences of fibre-based access networks. Our data base comprises a complete sample of Very High Capacity Network (VHCN) investment figures. By matching this data with the internationally standardised EUROSTAT and BBSR urban/rural typology classification, we show that such classification criteria do not sufficiently account for a large share of geographical differences in fibre-based access network costs. In order to better explain and/or identify regional differences in VHCN investment, we turn to spatial regression models to identify alternative influencing factors solely on the basis of publicly available data. We show that a handful of geographical factors are capable of explaining 95% of the differences in fibre investment requirements; the most relevant being (1) the size of demand (as number of access lines), (2) the street-based household density (defined as the number of households per kilometre of road in built-up areas), (3) a dispersion measure (approximated by the main road length per built-up area) and (4) the degree of urbanisation (measured by the share of built-up area in relation to the overall area). These results are consistent at different levels of spatial aggregation (e.g. from access areas to NUTS-3 level) and even after controlling for neighbouring effects. Thus, it is capable of predicting costs more precisely and at the level of the territorial unit, at which funds are bounded to be allocated. From a public policy perspective, the proper identification of areas, where the commercial roll-out is unlikely to occur, is key in preventing the widening of a digital gap without having a wasteful use of public funds.
    Keywords: Very high capacity networks (VHCN),bottom-up cost models,statistical estimations,spatial analysis,NUTS-3,state aid
    Date: 2022
  14. By: Grinschgl, Julian; Pepe, Jacopo Maria; Westphal, Kirsten
    Abstract: The global implications of a switch to hydrogen (H2) are far-reaching, as hydrogen will, at least in part, gradually replace the oil and gas trade, and new international trade flows will emerge. In addition, hydrogen will transform the industry, and its use will have disruptive effects that reshape the economic geography. Policymakers are being called upon to make far-reaching, fundamental decisions that will decisively shape the contours of the hydrogen world. Germany and the European Union (EU) should consider the geo-economic and political consequences when setting the course.
    Date: 2021
  15. By: Adilson Sampaio; Paulo Figueiredo; Klarizze Puzon
    Abstract: Using big data from the Brazilian public procurement system, this research aims to investigate what factors are associated with the occurrence of anticompetitive practices in electronic bidding. Our analysis considers all services contracted between 2014 and 2017.
    Keywords: Competition, Procurement, Fraud, Brazil
    Date: 2022
  16. By: Pétronille Reme-Harnay (AME-SPLOTT - Systèmes Productifs, Logistique, Organisation des Transports et Travail - Université Gustave Eiffel)
    Abstract: Because of the development of e-commerce and the reduction of the shipments'size, the parcel delivery sector is growing rapidly. However, faced with their clients demands and constraints of urban cities (parking, congestion, delivery density), the parcel delivery groups have chosen to outsource their urban deliveries. This enables them to reduce payroll costs but also implies consequences for urban subcontractors such as economic dependence. However, outside the city, when urban constraints no longer apply, subcontractors who work in long-distance inter-urban freight transport seem less affected. The article questions the pertinence of the scale of subcontracting regulation. Should it be strictly urban as suggested by the difference of consequences for urban and inter-urban subcontractors? The paper highlights the large number of variables that could affect subcontractors' dependence and the complexity of public decision making in the urban transport sector.
    Date: 2022
  17. By: Chao Huang
    Abstract: This paper studies two-sided many-to-one matching in which firms have complementary preferences. We show that stable matchings exist under a balancedness condition that rules out a specific type of odd-length cycles formed by firms' acceptable sets. We also provide a class of preference profiles that satisfy this condition. Our results indicate that stable matching is compatible with a wide range of firms' complementary preferences.
    Date: 2022–05
  18. By: Maximilian Andres; Lisa Bruttel; Jana Friedrichsen
    Abstract: This paper sheds new light on the role of communication for cartel formation. Using machine learning to evaluate free-form chat communication among firms in a laboratory experiment, we identify typical communication patterns for both explicit cartel formation and indirect attempts to collude tacitly. We document that firms are less likely to communicate explicitly about price fixing and more likely to use indirect messages when sanctioning institutions are present. This effect of sanctions on communication reinforces the direct cartel-deterring effect of sanctions as collusion is more difficult to reach and sustain without an explicit agreement. Indirect messages have no, or even a negative, effect on prices.
    Keywords: cartel, collusion, communication, machine learning, experiment
    JEL: C92 D43 L41
    Date: 2022
  19. By: Padma Sharma
    Abstract: During banking crises, regulators must decide between bailouts or liquidations, neither of which are publicly popular. However, making a comprehensive assessment of regulators requires examining all their decisions against their dual objectives of preserving financial stability and discouraging moral hazard. I develop a Bayesian latent class model to assess regulators on these competing objectives and evaluate banking and savings and loan (S&L) regulators during the 1980s crises. I find that the banking authority (FDIC) conformed to these objectives whereas the S&L regulator (FSLIC), which subsequently became insolvent, deviated from them. Timely interventions based on this evaluation could have redressed the FSLIC’s decision structure and prevented losses to taxpayers.
    Keywords: Bank failures; Bank resolution; Bailout; Liquidation; Savings and loans crisis; Markov Chain Monte Carlo (MCMC); Federal Deposit Insurance Corporation; Federal Savings and Loans Insurance Corporation (FSLIC); Bayesian inference; Discrete data analysis; Latent class models
    JEL: C11 C38 G21 G33 G38
    Date: 2022–05–10

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