Telecommunications Regulation and New Services: A Case Study at the State Level

This study introduces methodology to quantify the effects that regulation has on the innovation and the introduction of new products, and compares state-regulated services in Indiana under rate of return regulation (RoRR) and under alternative regulation. The econometric model comprises a count process (for innovation) followed by a duration process with selection (for regulatory delay). When the firm is released from RoRR, the rate of service creation triples and expected approval delays nearly disappear. The firm may have introduced up to 12 times as many services to consumers if the alternative regulation had been in place the entire time.     

The impact of product market regulation on productivity through firm churning: Evidence from European countries

Productivity performance in European countries has been a policy concern for several decades. This paper shows that productivity can be enhanced by product market policies which, by increasing competition and efficiency, facilitate higher rates of firms’ entry and exit (i.e. firm churning). Drawing on annual country-sector data for the period 2000–2014 across the EU countries, we find that: (i) competition-enhancing regulation is associated with a higher rate of firm churning; (ii) firm churning, in turn, appears to be positively related to higher total factor productivity at the sector level by facilitating the entry of new competitive firms and the exit of less productive ones. Overall, we conclude that stringent product market regulation can be indirectly associated, via its impact on business dynamism, with the somewhat weak productivity performance in a number of EU countries. Thus, our results point towards substantial productivity gains that could follow from the introduction of further competition-enhancing measures in product markets.     

OPTIMALITY OF PRE-EMPTING REGULATIONS ON NATURAL RESOURCE USE

Firms are often confronted with regulations on their productive and commercial activities. In many instances a firm can take various actions to pre-empt regulations. This article determines the optimality of pre-emptive action for a firm subject to natural resource regulation. The regulation may be either fixed or relative to the production history. Dependent on the type of regulation, a firm can pre-empt by terminating its current use of resources and converting to other use or by building up the input use or output history in the period prior to regulation. It is shown that the optimal pre-emption decision depends on the extent and perceived probability of regulation, on the rate of discount and on technological characteristics of the production process including the alternative use of the resource.     

Price and quantity regulation in general equilibrium

We consider a general equilibrium model with a production externality (e.g. pollution), where the regulator does not observe firm productivity shocks. We examine quantity (permit) regulation and price (tax) regulation. The quantity of permits issued by the regulator are independent of the productivity shock, since shocks are unobserved. Price regulation implies use of the regulated input is an increasing function of the productivity shock because firms take advantage of a good productivity shock by increasing input use. Thus price regulation generates higher average, but more variable, production. Therefore, we show that in general equilibrium the relative advantage of quantity versus price regulation depends not only on the slopes of marginal benefits and costs, but on general equilibrium effects such as risk aversion. The general equilibrium effects are often more important than the slopes of the marginal benefits and cost curves. In the simplest model, a reasonable risk aversion coefficient implies quantity regulation generates higher welfare regardless of the benefit function.     

Trade, regulations, and income

We examine the relationship between openness and per-capita income using cross-country data from 126 countries. We find that trade leads to a higher standard of living in flexible economies, but not in rigid economies. Business regulation, especially on firm entry, is more important than financial development, higher education, or rule of law as a complementary policy to trade liberalization. Specifically, after controlling for the standard determinants of per-capita income, our results imply that a 1% increase in trade is associated with more than a one-half percent rise in per-capita income in economies that facilitate firm entry, but has no positive income effects in more rigid economies. The findings are consistent with Schumpeterian “creative destruction”, which highlights the importance of new business entry in economic performance, and with previous firm-level studies showing that the beneficial effects of trade liberalization come largely from an intra-sectoral reallocation of resources.     

The Contested Sovereignty of the Firm

This paper suggests that the firm can be analysed as a regulated system of contested sovereignty. The economic literature on the firm is categorised in terms of four different perspectives on sovereignty identified using the twin factors of power and authority. But rather than any single perspective being identified as analytically superior, it is argued that a system of contested sovereignty should be based on all four perspectives. Following this, a Polanyi-inspired analysis of firm regulation is presented in which the regulation of the firm emerges to control the costs of free markets. However, this regulation depicts firm sovereignty as complex and contested rather than simply an optimal response to market failures.     

Firm location,political geography and environmental information disclosure

As the subjective and objective factors that influence corporate behaviours, political region and firm location are of great importance to environmental information disclosure (EID). With spatial and political geography as a research perspective, this article makes a study by using the samples of manufacturing listed companies from 2009 to 2011. As a result, we determine that regulatory distance and political geography had negative effects on EID, while political geography weakens regulatory distance’s function. After considering an enterprise’s administrative rank, we determined that when the rank is higher, regulatory distance has negative effects on EID; when the rank is lower, the effects are the opposite. Regarding political geography, it always weakened the regulatory distance’s function. Moreover, the effects are significant only when the enterprises had low governmental regulation. The study shows the effects that firm location and political geography have made on EID. At the same time, this study also gives theoretical and empirical evidence to the necessity of raising governmental regulatory effectiveness.     

Lobbying and the power of multinational firms

Can multinational firms exert more power than national firms by influencing politics through lobbying? To answer this question, we analyze the extent of national environmental regulation when policy is determined in a lobbying game between a government and a firm. We compare the resulting equilibrium regulation levels, outputs and welfare in a game with a multinational firm with those in an otherwise identical game with a national firm. For low transportation costs, output and pollution of a national firm are always as least as high as for a multinational; this changes for high transportation costs and intermediate damage parameters. When there is no lobbying, welfare levels are always higher with multinationals than with national firms. However, the existence of lobbying may reverse this ordering.     

Antidumping Regulations: Anti‐Competitive and Anti‐Export

In a Bertrand duopoly model, it is shown that an antidumping regulation can be strategically exploited by the home firm to reduce the degree of competition in the home market. The home firm commits not to export to the foreign market which gives the foreign firm a monopoly in its own market. As a result the foreign firm will increase its price allowing the home firm to increase its price and its profits. If the products are sufficiently close substitutes then the higher profits in the home market are large enough to compensate for the loss of profits on exports.     

A dynamic model of advertising by the regulated firm

A profit-maximizing firm subject to price regulation typically seeks alternative variables to control if the regulatory constraint is binding. Advertising may be one such variable. By shifting the demand curve inward or outward between rate hearings, the firm may increase its earnings above the allowed level. Here, a simple discrete-time optimal-control model is proposed to examine the dynamic implications of advertising by the regulated firm. Our results indicate that, in the long run, the combined effect of regulation and advertising leads to a steady-state equilibrium that is closer to the minimum point on the firm's long-run average-cost curve than the original output level. Thus, an invisible-hand property is established that pushes the regulated firm to shift its demand curve toward the minimum point on its long-run average-cost curve in the presence of regulation. As a result, the well-known allocative inefficiency created by rate-of-return regulation (PMC), on which so much has been written over the past 100 years, is reduced (and, under certain conditions, eliminated) if the regulated firm is allowed to advertise.     

Incentive Regulation of Prices When Costs are Sunk

We present a model featuring irreversible investment, economies of scale, uncertain future demand and capital prices, and a regulator who sets the firm’s output price according to the cost structure of a hypothetical replacement firm. We show that a replacement firm has a fundamental cost advantage over the regulated firm: it can better exploit the economies of scale because it has not had to confront the historical uncertainties faced by the regulated firm. We show that setting prices so low that a replacement firm is just willing to participate is insufficient to allow the regulated firm to expect to break even whenever it has to invest. Thus, unless the regulator is willing to incur costly monitoring to ensure the firm invests, revenue must be allowed in excess of that required for a replacement firm to participate. This contrasts with much of the existing literature, which argues that the market value of a regulated firm should equal the cost of replacing its existing assets. We also obtain a closed-form solution for the regulated firm’s output price when this price is set at discrete intervals. In contrast to rate of return regulation, we find that resetting the regulated price more frequently can increase the risk faced by the firm’s owners, and that this is reflected in a higher output price and a higher weighted-average cost of capital.     

A general equilibrium analysis of financial regulation

This paper utilizes a general equilibrium approach to investigate the factor returns and output effects on a regulated and unregulated sector from imposition of a rate of return on investment regulatory constraint. The results differ from those of the ‘traditional’ partial equilibrium model of the regulated firm as originally developed by Averch and Johnson (AJ). The differences are explained by the fact that the general equilibrium approach assumes the existence of efficient capital markets whereas the AJ approach does not. Introduction of the competitive capital market framework in the study of financial regulation through the general equilibrium methodology is this paper's major contribution.     

Firm/interruptible gas pricing patterns in a regulated environment

Conclusion This study provides empirical tests for the effects of rate base regulation, curtailment priorities, fuel clauses, and elected commissioners on firm/interruptible gas pricing patterns. These regulations do alter observed pricing patterns with curtailment priorities, fuel clauses, and elected commissioners all producing net social gains. Rate of return regulation imposes social costs resulting in a net decrease in social welfare. Ignoring the political influences upon regulators, regulation generally encourages consumption at the peak relative to the off-peak. Nonetheless, overall social welfare is improved if all four types of regulatory characteristics are present, since most rates are reduced from their monopoly levels.     

Firm growth and R&D: Evidence from the Portuguese manufacturing industry

This work studies the effects of R&D activities and investment, both physical and R&D, on the growth of firms by considering a dynamic firm growth model with serial correlation. The main hypotheses maintain that firms with a strong commitment to R&D have a higher growth rate, and investment has a positive effect on firm growth. We investigate such relations with reference to an unbalanced panel data set of Portuguese manufacturing firms over the period of 1990 to 2001. We find that a systematic tendency for smaller firms to grow more quickly is the main reason why firm growth is not entirely stochastic.     

Corporate tax and location choice for multinational firms

This article examines the effects of corporate tax on these location decisions of newly established multinational subsidiaries across 26 European countries over an 8-year period. We contribute to the existing literature by examining the effects of a non-linear response of firm location decisions to changes in the tax rate. We also show that there are large variations in the sensitivity to tax rates across sectors and firm size groups. In particular, financial sector firms are more than twice as sensitive to changes in corporation tax rates relative to other sectors. Our baseline result is a finding that a 1% increase in the statutory or policy rate of corporation tax would lead to a reduction in the conditional location probability of 0.68%. Using the effective average tax rate, the marginal effect implies a reduction in the location probability of 1.15% following a 1% increase in the tax rate. Although overall tax has the expected negative effect on location probability, the marginal effect of an increase is lower at higher rates of tax.     

Validity of the “Principle of Maximum Product Differentiation” in a unionized mixed-duopoly

Developing a location-price spatial model in a unionized mixed-duopoly, we find that the welfare-maximizing nature of the public firm implies a lower degree of product differentiation such that, in contrast to the private duopoly, the “Principle of Maximum Product Differentiation” is not reproduced. Considering two different wage-regimes for the public firm, this paper examines the effects of wage regulation imposed on civil servants. It is shown that, when a public firm’s union is prohibited from collective bargaining, the firm is more competitive, and the degree of differentiation is less. Moreover, regulation always reduces both the private firm’s profit and the level of social welfare.     

Intertemporal price cap regulation under uncertainty

This paper examines the intertemporal price cap regulation of a firm that has market power. Under uncertainty, the unconstrained firm 'waits longer' before investing or adding to capacity and as a corollary, enjoys higher prices over time than would be observed in an equivalent competitive industry. In the certainty case, the imposition of an inter-temporal price cap can be used to realise the competitive market solution; by contrast, under uncertainty, it cannot. Even if the price cap is optimally chosen, under uncertainty, the monopoly firm will generally (a) under-invest and (b) impose quantity rationing on its customers.     

Infrastructure regulation and reallocations within industry: Theory and evidence from Indian firms

Many firms in developing countries adopt captive power generators to deal with expensive and unreliable supply of electricity. I present a model that combines upstream regulation with downstream heterogeneous firms in a monopolistic competition framework, where firms can pay a fixed cost to adopt this marginal cost-reducing device. The presence of captive power affects the market equilibrium by increasing the level of idiosyncratic productivity a firm needs to survive in the market and by re-allocating sales and profits towards the more productive, adopting firms. Additionally, the rate of adoption is shown to increase with the price of electricity, industries' electricity–intensity and with higher barriers to firm entry. The mechanisms I propose are present for a cross-section of Indian firms.     

LOCATION OF PUBLIC FIRM IN THE PRESENCE OF MULTINATIONAL FIRM: A MIXED DUOPOLY APPROACH*

By incorporating a multinational private firm into the mixed duopoly model with Hotelling‐type spatial competition, we show that the private firm's nationality is a matter of the public firm's location. As the share of foreign capital increases in the private (multinational) firm, the public firm moves to a central place. The effects of price regulation and sequential location choice are also discussed.     

A welfare anomaly in the rate-of-return regulated monopoly model which creates opportunities for offsetting taxation and regulatory policies

The impact of the property tax on a fair rate of return regulated firm is examined. We find that a change in the tax rate has exactly the same effect on factor employment, output and hence the price as an equivalent change in the allowed rate of return. However, an increase in the allowed rate of return will lead to higher profits, whereas the same increase in the property tax rate will decrease profits. We find that an increase in the tax rate or allowed rate of return may result in a net increase in social welfare. This result contradicts the long-established belief that a lower (or no) tax is preferred to a higher tax rate in maximizing welfare. Finally, a linear iso-welfare locus is derived which creates the possibility of the regulatory agency or the tax authority offsetting the negative effects of the other's policy.