nep-reg New Economics Papers
on Regulation
Issue of 2023‒03‒27
twenty-one papers chosen by
Christopher Decker
Oxford University

  1. The Economics of Digital Privacy By Avi Goldfarb; Verina F. Que
  2. A Principal-Agent Framework for Optimal Incentives in Renewable Investments By Ren\'e A\"id; Annika Kemper; Nizar Touzi
  3. The production Inefficiency of the U.S. Electricity Industry in the Face of Restructuring and Emission Reduction By Manh-Hung Nguyen; Chon van Le; Scott Atkinson
  4. Intermittency and electricity retailing: An incomplete market approach By Jean-Henry Ferrasse; Nandeeta Neerunjun; Hubert Stahn
  5. Dynamic Pricing Regulation and Welfare in Insurance Markets By Naoki Aizawa; Ami Ko
  6. State and federal nuclear support schemes in dynamic electricity market conditions: Insights from NYISO and PJM By Bah, Muhammad Maladoh
  7. Optimal transmission expansion planning in the context of renewable energy integration policies By Nikita Belyak; Steven A. Gabriel; Nikolay Khabarov; Fabricio Oliveira
  8. Private production or public project ownership to scale up the construction of photovoltaic power plants in Africa? By Nicolas Guichard,; Christian de Gromard,; Jérémy Gasc,; Étienne Espagne,; Martin Buchsenschutz,; Benoît Gars,; Laetitia Labaute.
  9. Global temporal power data collection: electricity load and power generation from solar and wind By SCHMITZ Andreas; DESPRÉS Jacques
  10. Signalling for Electricity Demand Response: When is Truth Telling Optimal? By Rene Aid; Anupama Kowli; Ankur A. Kulkarni
  11. Competitive Model Selection in Algorithmic Targeting By Ganesh Iyer; T. Tony Ke
  12. Content Moderation and Advertising in Social Media Platforms By Leonardo Madio
  13. Preferences for Firearms and Their Implications for Regulation By Sarah Moshary; Bradley Shapiro; Sara Drango
  14. Restrict the Middleman? Quantitative Models of PBM Regulations and Their Consequences By Casey B. Mulligan
  15. What Will Be the Impact of Fintech on the Payment System? A Perspective from Money Creation By Hajime Tomura
  16. Automating Automaticity: How the Context of Human Choice Affects the Extent of Algorithmic Bias By Amanda Y. Agan; Diag Davenport; Jens Ludwig; Sendhil Mullainathan
  17. Hybrids: where are we? By Claude Ménard
  18. Recommending to Strategic Users By Andreas Haupt; Dylan Hadfield-Menell; Chara Podimata
  19. Commission bans and consumer financial protection By Albert Erasmus Grafe
  20. New Institutional Economics and Cliometrics By Eric C. Alston; Lee J. Alston; Bernardo Mueller
  21. Disentangling institutions: a challenge By Claude Ménard

  1. By: Avi Goldfarb; Verina F. Que
    Abstract: There has been increasing attention to privacy in the media and in regulatory discussions. This is a consequence of the increased usefulness of digital data. The literature has emphasized the benefits and costs of digital data flows to consumers and firms. The benefits arise in the form of data-driven innovation, higher quality products and services that match consumer needs, and increased profits. The costs relate to intrinsic and instrumental values of privacy. Under standard economic assumptions, this framing of a cost-benefit tradeoff might suggest little role for regulation beyond ensuring consumers are appropriately informed in a robust competitive environment. The empirical literature thus far has focused on this direct cost-benefit assessment, examining how privacy regulations have affected various market outcomes. However, an increasing body of theory work emphasizes externalities related to data flows. These externalities, both positive and negative, suggest benefits to the targeted regulation of digital privacy.
    JEL: L51 L86
    Date: 2023–02
  2. By: Ren\'e A\"id; Annika Kemper; Nizar Touzi
    Abstract: We investigate the optimal regulation of energy production reflecting the long-term goals of the Paris Climate Agreement. We analyze the optimal regulatory incentives to foster the development of non-emissive electricity generation when the demand for power is served either by a monopoly or by two competing agents. The regulator wishes to encourage green investments to limit carbon emissions, while simultaneously reducing intermittency of the total energy production. We find that the regulation of a competitive market is more efficient than the one of the monopoly as measured with the certainty equivalent of the Principal's value function. This higher efficiency is achieved thanks to a higher degree of freedom of the incentive mechanisms which involves cross-subsidies between firms. A numerical study quantifies the impact of the designed second-best contract in both market structures compared to the business-as-usual scenario. In addition, we expand the monopolistic and competitive setup to a more general class of tractable Principal-Multi-Agent incentives problems when both the drift and the volatility of a multi-dimensional diffusion process can be controlled by the Agents. We follow the resolution methodology of Cvitani\'c et al. (2018) in an extended linear quadratic setting with exponential utilities and a multi-dimensional state process of Ornstein-Uhlenbeck type. We provide closed-form expression of the second-best contracts. In particular, we show that they are in rebate form involving time-dependent prices of each state-variable.
    Date: 2023–02
  3. By: Manh-Hung Nguyen (TSE-R - Toulouse School of Economics - UT1 - Université Toulouse 1 Capitole - Université Fédérale Toulouse Midi-Pyrénées - EHESS - École des hautes études en sciences sociales - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement, INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement); Chon van Le (VNU-HCM - Vietnam National University - Ho Chi Minh City); Scott Atkinson (University of Georgia [USA])
    Abstract: The paper investigates the production inefficiency of the US electricity industry in the wake of restructuring and emission reduction regulations.
    Keywords: Technical inefficiency, Electricity industry, Restructuring, Emissions
    Date: 2022–11–24
  4. By: Jean-Henry Ferrasse (M2P2 - Laboratoire de Mécanique, Modélisation et Procédés Propres - AMU - Aix Marseille Université - ECM - École Centrale de Marseille - CNRS - Centre National de la Recherche Scientifique); Nandeeta Neerunjun (AMSE - Aix-Marseille Sciences Economiques - EHESS - École des hautes études en sciences sociales - AMU - Aix Marseille Université - ECM - École Centrale de Marseille - CNRS - Centre National de la Recherche Scientifique, M2P2 - Laboratoire de Mécanique, Modélisation et Procédés Propres - AMU - Aix Marseille Université - ECM - École Centrale de Marseille - CNRS - Centre National de la Recherche Scientifique); Hubert Stahn (AMSE - Aix-Marseille Sciences Economiques - EHESS - École des hautes études en sciences sociales - AMU - Aix Marseille Université - ECM - École Centrale de Marseille - CNRS - Centre National de la Recherche Scientifique)
    Abstract: We analyze the integration of intermittent renewables-based technologies into an electricity mix comprising of conventional energy. Intermittency is modeled by a contingent electricity market and we introduce demand-side flexibility through the retailing structure. Retailers propose diversified electricity contracts at different prices, but in an insufficient number to cover intermittent production. These delivery contracts are modeled similarly to numeraire assets. We study the competitive equilibrium of the state-contingent wholesale electricity markets and the delivery contract markets. We also provide an analysis linking the delivery contracts to social welfare. Finally, we discuss the conditions under which changing the delivery contracts improve penetration of renewables and increases welfare. These provide useful insights for managing intermittency and achieving renewable capacity objectives.
    Keywords: Electricity markets, Renewables, Intermittency, Incomplete markets
    Date: 2022–11
  5. By: Naoki Aizawa; Ami Ko
    Abstract: While the traditional role of insurers is to provide protection against idiosyncratic risks of individuals, insurers themselves face substantial uncertainties due to aggregate shocks. To prevent insurers from passing through aggregate risks to consumers, governments have increasingly adopted dynamic pricing regulations that limit insurers' ability to change premiums over time. This paper develops and estimates an equilibrium model with dynamic pricing and firm entry and uses it to evaluate the design of dynamic pricing regulations in the U.S. long-term care insurance (LTCI) market. We find that stricter dynamic pricing regulation lowers social welfare as the benefit from improved premium stability is outweighed by the cost of reduced insurer participation. The welfare loss from stricter dynamic pricing regulation could be mitigated if the government also expands public LTCI through Medicaid.
    JEL: D14 G22 I13 L11 L51
    Date: 2023–02
  6. By: Bah, Muhammad Maladoh (University of Basel)
    Abstract: Since 2017, several U.S. states have put in place out-of-market financial support schemes for nuclear power plants operating in deregulated electricity markets. In late 2021, the federal government announced the introduction of two new support schemes to secure the continued operation of nuclear power plants. This policy paper evaluates the profitability of state subsidized nuclear plants in the NYISO and PJM markets over a five-year period between 2017 and 2021. Results indicate that apart from 2019, nuclear power plants were financially robust, relying solely on market revenues without the need for state support schemes. More importantly, the recent upswing in competitive electricity market prices suggests that additional federal-level support schemes are not economically justified in the current market conditions. I provide several suggestions to reconfigure the support schemes to reflect dynamic market conditions and ensure only vulnerable plants are granted out-of-market support.
    Keywords: nuclear support schemes, electricity market, excess profit, NYISO, PJM
    JEL: H71 Q41 Q48
    Date: 2023–02–28
  7. By: Nikita Belyak; Steven A. Gabriel; Nikolay Khabarov; Fabricio Oliveira
    Abstract: In light of increasing pressure to curb greenhouse gas emissions, many countries have focused on the development of strategies that encourage renewable generation in liberalised energy markets. This paper presents a modelling assessment of a renewable-driven expansion of the transmission system infrastructure that accounts for decentralized energy market settings. The mathematical optimisation problem formulation involves a bi-level model in which a welfare-maximizing transmission system operator makes investments in transmission lines at the upper level while considering power market dynamics at the lower level. To account for deregulated energy market structure, we assume that the generation companies at the lower level make generation capacity investment decisions as price-takers in perfect competition. Considering alternative levels for a transmission infrastructure expansion budget, carbon emission taxes and monetary incentives for renewable generation capacity expansion, we study how alternative compositions of these three factors affect the share of renewable generation in the total generation mix. We apply the proposed modelling assessment to an illustrative three-node instance and a case study considering a simplified representation of the energy system of the Nordic and Baltic countries. The results suggest the limited efficiency of three renewable-driven measures when applied individually. Nevertheless, applied in composition, these three measures demonstrated a positive impact on Nordics' and Baltics' energy system welfare, VRE share and total generation amount. However, the amplitude of this impact differs depending on the composition of values used for three renewable-driven measures.
    Date: 2023–02
  8. By: Nicolas Guichard,; Christian de Gromard,; Jérémy Gasc,; Étienne Espagne,; Martin Buchsenschutz,; Benoît Gars,; Laetitia Labaute.
    Abstract: Despite its abundant solar resources, Africa currently has low solar photovoltaic (PV) power generation capacities compared to other continents. Yet, the International Renewable Energy Agency (IRENA) projects a scale-up in coming years, with a sharp increase in the rate of construction of grid-connected PV power plants to align with the Paris Agreement pathways and the Sustainable Development Goals (SDGs).
    Keywords: Afrique
    JEL: Q
    Date: 2023–02–28
  9. By: SCHMITZ Andreas (European Commission - JRC); DESPRÉS Jacques
    Abstract: This technical report provides a global collection of temporal data of the power sector covering about 60 countries and regions worldwide. This global collection makes available temporal data of electricity load as well as power generation from wind and solar. The temporal data consists of hourly time series and representative daily profiles. This wealth of data can be visualised in interactive data viewers publicly accessible online. The time series for electricity load cover at least a period of one year and up to 10 years. The time series for wind and solar generation span from 2004 to 2018 and are derived from meteorological data provided by satellite reanalysis data. The wind and solar time series are provided for different spatial distributions of generator locations in order to examine the effect of spatial capacity distributions on the time series. The representative daily profiles are calculated based on five different clustering methods. Different shares of wind and solar in the power mix are taken into account according to the 2°C scenario of Global Energy and Climate Outlook 2018 for scenario years 2010 to 2100. As a result, representative daily profiles (electricity load, wind & solar, net load) for almost any country or region of the world are made available for a range of spatial capacity distributions, clustering methods, wind & solar shares and number of representative daily profiles.
    Keywords: time series, hourly, solar, wind, electricity load, representative daily profiles, representative days, power generation, power system, residual load, net load, POLES, energy model, energy scenario, GECO, Global Energy and Climate Outlook
    Date: 2022–12
  10. By: Rene Aid; Anupama Kowli; Ankur A. Kulkarni
    Abstract: Utilities and transmission system operators (TSO) around the world implement demand response programs for reducing electricity consumption by sending information on the state of balance between supply demand to end-use consumers. We construct a Bayesian persuasion model to analyse such demand response programs. Using a simple model consisting of two time steps for contract signing and invoking, and two states of the state of generation, we analyse the relation between the pricing of electricity and the incentives of the TSO to garble information about the true state of the generation. We show that if the electricity is priced at its marginal cost of production, the TSO has no incentive to lie and always tells the truth. On the other hand, we provide conditions where overpricing of electricity leads the TSO to provide no information to the consumer.
    Date: 2023–02
  11. By: Ganesh Iyer; T. Tony Ke
    Abstract: This paper studies how market competition influences the algorithmic design choices of firms in the context of targeting. Firms face the general trade-off between bias and variance when choosing the design of a supervised learning algorithm in terms of model complexity or the number of predictors to accommodate. Each firm then appoints a data analyst that uses the chosen algorithm to estimate demand for multiple consumer segments, based on which, it devises a targeting policy to maximize estimated profit. We show that competition may induce firms to strategically choose simpler algorithms which involve more bias. This implies that more complex/flexible algorithms tend to have higher value for firms with greater monopoly power.
    JEL: D43 L13 M37
    Date: 2023–03
  12. By: Leonardo Madio (University of Padova Author-Name: Martin Quinn; Rotterdam School of Management)
    Abstract: On social media platforms, advertisers can be exposed to brand safety issues if they are associated with unsafe content. In this paper, we study the incentive of an ad-funded platform to curb the presence of unsafe content. Moderating unsafe content reduces the risk of advertiser presence on social media platforms, but it can change users’ participation on the platform and, in turn, affect advertisers’ monetization. This indirect “eyeball effect†can be either positive or negative and is key for the platform’s design of its content moderation policy. We identify conditions for the platform not to moderate unsafe content and demonstrate how the optimal moderation policy depends on the risk the advertisers face. We also study the intended and unintended effects of a policy that mandates social media platforms to moderate (more) unsafe content. We show that although it can benefit advertisers, users may be worse off because of the greater number of ads they are exposed to. Finally, we study how social media platform competition and the introduction of taxes on social media activity can distort the platform’s moderation strategies.
    Keywords: Advertising; Content moderation; Social media platforms; Platforms.
    Date: 2023–03
  13. By: Sarah Moshary; Bradley Shapiro; Sara Drango
    Abstract: This paper estimates consumer demand for firearms with the aim of predicting the likely impacts of firearm regulations on the number and types of guns in circulation. We first conduct a stated-choice-based conjoint analysis and estimate an individual-level demand model for firearms. We validate our estimates using aggregate moments from observational data. Next, we use our estimates to simulate changes in the number and types of guns in circulation under alternative regulations. Importantly, we find that bans or restrictions that specifically target “assault weapons” increase demand for handguns, which are associated with the vast majority of firearm-related violence. We provide distributions of consumer surplus under counterfactuals and discuss how those distributions could be useful for crafting policy.
    JEL: C11 C83 H23 I18 L50 L51 M31 M38
    Date: 2023–02
  14. By: Casey B. Mulligan
    Abstract: This paper provides the first quantitative economic models of pharmacy benefit management regulation. The price-theoretic models allow for various market frictions and imperfections including market power, coordination costs, tax distortions, and incomplete innovation incentives. A rigorous economic interpretation is provided for what are sometimes called “rebate walls” or “rebate traps.” Applicable types of regulation include rebate rules, such as the HHS rebate rule and the Insulin Act; disclosure requirements such as the PBM Transparency Act of 2023; and pharmacy contract restrictions such as the CMS Medicare rule to take effect in 2024. Utilization of brands and generics, plan spending, cost sharing, spillovers to nonpharmacy medical spending, government budgets, and the pace of drug innovation are among the outcomes tracked by the open-source model.
    JEL: D43 D71 I11 I13 L14 L51
    Date: 2023–03
  15. By: Hajime Tomura (Waseda University)
    Abstract: The efficiency of thecurrentpayment systemrestsnot only onengineering technology but also on the legal tender and central bank system enacted by each country’s law.This essay compares the current paymentsystem with an alternative payment system that uses electronic records, such as cryptocurrencies and security tokens, assubstitutesfor conventionalcurrencies. The alternative payment system has an advantage in designing the integration of electronic payments into non-bank businesses from scratch without being bound by the technical specifications of existing bank deposit account systems. On the other hand, it cannot benefit from the supply of legal tender issued bythe central bank. Given this disadvantage, this essay argues that electronic records such as cryptocurrencies and security tokens will not substitute conventional currencies aspontaneously. Rather than changing the internal structure of the banking system, fintech will facilitate connections between bank deposit account systems and non-banking systems. Given this outlook, this essay predicts that central-bank digital currency (CBDC) will be a kind of enabler service if implemented in acountry with a developed banking system.
    Keywords: paymentsystems, security tokens, cryptocurrencies, electronic money, legal tender, central-bank digital currency.
    Date: 2022–10
  16. By: Amanda Y. Agan; Diag Davenport; Jens Ludwig; Sendhil Mullainathan
    Abstract: Consumer choices are increasingly mediated by algorithms, which use data on those past choices to infer consumer preferences and then curate future choice sets. Behavioral economics suggests one reason these algorithms so often fail: choices can systematically deviate from preferences. For example, research shows that prejudice can arise not just from preferences and beliefs, but also from the context in which people choose. When people behave automatically, biases creep in; snap decisions are typically more prejudiced than slow, deliberate ones, and can lead to behaviors that users themselves do not consciously want or intend. As a result, algorithms trained on automatic behaviors can misunderstand the prejudice of users: the more automatic the behavior, the greater the error. We empirically test these ideas in a lab experiment, and find that more automatic behavior does indeed seem to lead to more biased algorithms. We then explore the large-scale consequences of this idea by carrying out algorithmic audits of Facebook in its two biggest markets, the US and India, focusing on two algorithms that differ in how users engage with them: News Feed (people interact with friends' posts fairly automatically) and People You May Know (people choose friends fairly deliberately). We find significant out-group bias in the News Feed algorithm (e.g., whites are less likely to be shown Black friends' posts, and Muslims less likely to be shown Hindu friends' posts), but no detectable bias in the PYMK algorithm. Together, these results suggest a need to rethink how large-scale algorithms use data on human behavior, especially in online contexts where so much of the measured behavior might be quite automatic.
    JEL: A12 D63 D83
    Date: 2023–02
  17. By: Claude Ménard (CES - Centre d'économie de la Sorbonne - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique, UP1 UFR02 - Université Paris 1 Panthéon-Sorbonne - École d'économie de la Sorbonne - UP1 - Université Paris 1 Panthéon-Sorbonne)
    Abstract: We owe Williamson for the formal introduction of hybrid organizations as essential building blocks in ‘the institutional structure of production'. The analysis of these institutional arrangements, which culminated in The Mechanisms of Governance , provided a unified approach to the variety of setting within which transactions are embedded, opening a new perspective on a cornerstone of modern economies. This essay explores the past, present, and future of this breakthrough. First, it reviews the progressive integration of hybrids as a category of their own in the classic ‘make-or-buy' model, inserting hybrids as an ‘intermediate' form different from markets in that adaptation cannot be done unilaterally and different from ‘unified organizations' in that adaptation cannot be done by fiat. Second, it shows how this initial characterization of hybrids, besides providing a coherent approach to empirical research available at the time, gave a powerful impulse to new contributions, identifying more rigorously the fundamental features of hybrids, throwing light on why firms go hybrid, and explicating the governance structure chosen. Last, it offers insights on a research program that remains a work in progress, delineating new terrains to explore and new puzzles to solve.
    Keywords: Contracts, decision rights, governance, hybrids, legal regime, organization, property rights
    Date: 2022
  18. By: Andreas Haupt; Dylan Hadfield-Menell; Chara Podimata
    Abstract: Recommendation systems are pervasive in the digital economy. An important assumption in many deployed systems is that user consumption reflects user preferences in a static sense: users consume the content they like with no other considerations in mind. However, as we document in a large-scale online survey, users do choose content strategically to influence the types of content they get recommended in the future. We model this user behavior as a two-stage noisy signalling game between the recommendation system and users: the recommendation system initially commits to a recommendation policy, presents content to the users during a cold start phase which the users choose to strategically consume in order to affect the types of content they will be recommended in a recommendation phase. We show that in equilibrium, users engage in behaviors that accentuate their differences to users of different preference profiles. In addition, (statistical) minorities out of fear of losing their minority content exposition may not consume content that is liked by mainstream users. We next propose three interventions that may improve recommendation quality (both on average and for minorities) when taking into account strategic consumption: (1) Adopting a recommendation system policy that uses preferences from a prior, (2) Communicating to users that universally liked ("mainstream") content will not be used as basis of recommendation, and (3) Serving content that is personalized-enough yet expected to be liked in the beginning. Finally, we describe a methodology to inform applied theory modeling with survey results.
    Date: 2023–02
  19. By: Albert Erasmus Grafe
    Abstract: Financial literacy is seen as root cause for false household portfolio choices and thus wealth and retirement discrepancies. However, the increasing literature on financial literacy fails to recognize the fundamental caveat of financial consumer protection: commissions based financial advice. Many countries such as the UK or the Netherlands have recognized the innate conflict of interest between financial advisors and their customers that comes with a commissions-based system. In response, commission bans were introduced. To analyze the effect of commission bans on portfolio choices we conduct a difference-in-difference panel regression utilizing data from countries that have and haven’t introduced commission bans. The results indicate that commission bans - unlike many forecasts - have not negatively impacted consumers and the financial industry.
    Keywords: Commission bans; Consumer financial protection; Financial literacy; Household portfolio choices
    JEL: R3
    Date: 2022–01–01
  20. By: Eric C. Alston; Lee J. Alston; Bernardo Mueller
    Abstract: The New Institutional Economics (NIE) has its early roots in Cliometrics. Cliometrics began with a focus on using neoclassical theory to develop and test hypotheses in economic history. But empirical consideration of economic and political development within and across countries is limited, absent consideration of the institutional context. The NIE as applied in economic history first focused on the roles of transaction costs and property rights. From this micro-institutional perspective, the NIE expanded its focus to the role of institutions and norms on economic development as well as how economic forces along with political institutional variance influences outcomes both within and across countries. This involves considering both forces that impede and promote economic and political convergence across countries as well the forces that determine a transition to a new economic or political trajectory altogether. Testing for the determinants of economic and political development is plagued with omitted variables and endogeneity concerns, a constraint which has recently prompted scholars to draw on complexity theory to further supplement the NIE and Cliometrics.
    JEL: B52 F63 N01 P0 P50
    Date: 2023–02
  21. By: Claude Ménard (CES - Centre d'économie de la Sorbonne - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique, UP1 UFR02 - Université Paris 1 Panthéon-Sorbonne - École d'économie de la Sorbonne - UP1 - Université Paris 1 Panthéon-Sorbonne)
    Abstract: That "institutions matter" has become a mantra among economists. It has not always been so. For a long time, the conventional wisdom considered institutions as exogenous parameters, the study of which should be delegated to ‘soft' social sciences, mainly sociology and political sciences. And many contemporary economists still disregard the analysis of institutions in their research agenda, mainly because of the difficulty in quantifying and modeling their role
    Date: 2022

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