Monopoly versus Competition in Setting Accounting Standards

Financial accounting standards are set by organizations granted a significant degree of monopoly power by various governments. While there has been considerable debate on the merits of national (e.g., US Financial Accounting Standards Board (FASB)) versus international (International Accounting Standards Board (IASB)) monopolies, little attention has been paid to the merits of using competing standard‐setting organizations (SSOs) for setting accounting standards. We compare the standard‐setting processes of the FASB/IASB to the processes of four technology‐oriented SSOs to assess the role of competition. We also provide a case study of monopoly and competitive standards in telephony. Both telephony and accounting yield some gains from coordination, and similar arguments are used (under the labels of comparability and consistency of accounting) in debates about granting a monopoly to their respective SSOs. Our results show that a group of volunteers competing with the government‐sanctioned monopoly of International Telecommunications Union transformed the telephone industry. Thanks to this standards competition, we enjoy free video internet calling and massive cost savings. Implications for accounting standard setting are discussed.     

The determinants of product lines

We study product line choice allowing for cost asymmetries but ruling out strategic motivations such as a desire to soften competition. We identify two forces that interact with asymmetric competition to shape equilibrium product lines. Possible outcomes range from head‐to‐head competition to complete separation of product lines and include the intermediate case of partial separation. In an international trade context, we predict which qualities a disadvantaged foreign producer will specialize in. If cost factors drive quality‐based discrimination then foreign firms sell only lower qualities. However, if demand factors are the main drivers then foreign firms sell only high qualities.     

How Does Cross‐Border Activity Affect EU Banking Markets?

Cross‐border activity in the EU is widely viewed as a necessary condition for the implementation of a single banking market and therefore as a positive factor for the enhancement of competition and cost performance in the region. In this paper, we analyse the relevance of this view by investigating whether cross‐border activity really promotes competition and cost efficiency in EU banking markets. We also consider the potential role of a bank's mode of entry by comparing existing domestic banks that foreign banks take over (mergers and acquisitions) with new branches created by foreign banks, often through subsidiaries (greenfield operations). We consider the impact of cross‐border banks on cost efficiency (measured by the stochastic frontier approach), profitability (assessed through return on assets) and competition (measured by the Lerner index). We find that greenfield banks enhance cost efficiency and competition, while mergers and acquisitions hamper competition and cost efficiency. Therefore, our results suggest that EU authorities should promote only greenfield banks rather than all cross‐border entries.     

Agency costs and product market competition: The case of audit pricing in Greece

Jensen and Meckling (1976) argue that agency costs are not dependent on product market competition. However, elsewhere in the economics literature, theoretical analysis and empirical research have indicated that product market competition reduces agency costs by reducing the marginal cost of eliciting effort from agents. We investigate the relationship between product market competition and audit fee, as an example of agency cost. Taking advantage of a proprietary data set for Greek audit firms, we find that the audit fee and audit hours are inversely associated with client firm product market competition. We conclude that audit effort, as an agency cost, is reduced where competitive forces reduce the need for shareholders to bear the costs of monitoring agents.     

Competitive cross‐subsidization

Cross‐subsidization arises naturally when firms with different comparative advantages compete for consumers with heterogeneous shopping patterns. Firms then face a form of co‐opetition, as they offer substitutes for one‐stop shoppers and complements for multi‐stop shoppers. When intense competition for one‐stop shoppers drives total prices down to cost, firms subsidize weak products with the profits made on strong products. Moreover, firms have incentives to seek comparative advantages on different products. Finally, banning below‐cost pricing increases firms' profits at the expense of one‐stop shoppers, which calls for a cautious use of below‐cost pricing regulations in competitive markets.     

Procyclical Capital Regulation and Lending

We use a quasi‐experimental research design to examine the effect of model‐based capital regulation on the procyclicality of bank lending and firms' access to funds. In response to an exogenous shock to credit risk in the German economy, capital charges for loans under model‐based regulation increased by 0.5 percentage points. As a consequence, banks reduced the amount of these loans by 2.1 to 3.9 percentage points more than for loans under the traditional approach with fixed capital charges. We find an even stronger effect when we examine aggregate firm borrowing, suggesting that microprudential capital regulation can have sizeable real effects.     

Does bank competition reduce cost of credit? Cross-country evidence from Europe

Despite the extensive debate on the effects of bank competition on economic welfare and growth, only a handful of single-country studies deal with the impact of bank competition on the cost of credit. We contribute to the literature by investigating the impact of bank competition on the cost of credit in a cross-country setting. Using a panel of firms from 20 European countries covering the period 2001–2011, we consider a broad set of measures of bank competition, including two structural measures (Herfindahl–Hirschman index and CR5), and two non-structural indicators (Lerner index and H-statistic). We find that bank competition increases the cost of credit and observe that the positive influence of bank competition is stronger for smaller companies. Our findings accord with the information hypothesis, whereby a lack of competition incentivizes banks to invest in soft information and conversely increased competition raises the cost of credit. This positive impact of bank competition is however influenced by the institutional and economic framework, as well as by the crisis.     

Price Setting Practices in Australian Local Government

Revenues generated on a ‘fee‐for‐service’ or ‘user‐pays’ basis are a significant source of income for Australian local governments. However, how local governments set prices and charges remains under‐explicated. This article reports empirical evidence obtained on the pricing policies and practices of Australian local governments. The responses to a national survey reveal considerable diversity – and often an apparent lack of ‘rationality’– in setting specific prices. Instead, general ‘across the board’ adjustments to historical prices are typically made to assist in balancing budgets. The cost of service delivery is neither a prominent nor standardised input to pricing decisions.     

Welfare Effects of Banning Genetic Information in the Life Insurance Market: The Case of BRCA1/2 Genes

We investigate whether regulations that ban insurance companies from access to individuals' genetic tests are likely to lead to substantial adverse selection costs for the specific example of the so‐called breast cancer (BRCA1/2) genes. Using a data set including economic, demographic, and relevant family background information to simulate the market for 10‐year term life insurance, we find generally only modest adverse selection costs associated with such a regulatory ban. However, for family background groups that are at high risk for carrying one of these genes, the efficiency cost of adverse selection may be significant should the test become widely adopted.     

Compliance with pension‐related mandatory disclosures and debt financing

Using hand‐collected data on the level of pension‐related mandatory disclosures required by International Accounting Standard 19 Employee Benefits, we test whether compliance levels with these disclosures convey information that affects firms’ access to the public instead of the private debt market, as well as the cost of their new debt issues. We document a higher tendency to access the public debt market for firms with higher levels of pension‐related disclosure. Furthermore, we find that firms with higher levels of pension‐related disclosure enjoy a lower cost in terms of issuance of public debt, but not a lower cost for private debt issues. Thus, the benefits of disclosure in reducing information risk are only realisable when creditors rely heavily on financial statements in their decision making, due to the limited access to private information. Additional tests reveal that high compliance levels effectively mitigate the negative effect of pension deficits on the cost of public debt. These findings provide novel evidence in the extant literature on the role of mandatory (and, in particular, pension‐related) disclosures on firms’ debt financing. They also have important policy implications.     

Anticompetitive Effects of Common Ownership

Many natural competitors are jointly held by a small set of large institutional investors. In the U.S. airline industry, taking common ownership into account implies increases in market concentration that are 10 times larger than what is “presumed likely to enhance market power” by antitrust authorities. 1 Within‐route changes in common ownership concentration robustly correlate with route‐level changes in ticket prices, even when we only use variation in ownership due to the combination of two large asset managers. We conclude that a hidden social cost—reduced product market competition—accompanies the private benefits of diversification and good governance.     

Will Money Talk? Firm Bribery and Credit Access

We investigate whether corruption impedes firm growth by limiting access to bank credit. Our estimates demonstrate that access to credit tightens when a firm is more frequently involved in bribery practices and that bribery (most likely) causes this loss of access. We also find that the detrimental impact is mainly driven by supply‐side rather than demand‐side factors and that the loss of access is particularly strong when there are fewer foreign banks in the vicinity of the firm or when competition is either very low or very high in the local banking market. Finally, the bribery‐driven increase in financing obstacle significantly impedes future firm growth.     

Subsidizing research programs with “if” and “when” uncertainty in the face of severe informational constraints

We study subsidy policies for research programs when firms have private information about the likelihood of project viability, but the government cannot form a unique prior about this likelihood. When the shadow cost of public funds is zero, first‐best welfare can be attained as a (belief‐free) ex post equilibrium under both monopoly and competition, but it cannot be attained when the shadow cost is positive. However, max‐min subsidy policies exist under monopoly and competition and consist of pure matching subsidies. Under a Research and Development (R&D) consortium, the highest max‐min matching rate is lower than under competition, and R&D investment intensity is higher.     

A retail benchmarking approach to efficient two‐way access pricing: no termination‐based price discrimination†

We study access pricing rules that determine the access prices between two networks as a linear function of marginal costs and (average) retail prices set by both networks. When firms compete in linear prices, there is a unique linear rule that implements the Ramsey outcome as the unique equilibrium, independently of underlying demand conditions. When firms compete in two‐part tariffs, there exists a class of rules under which firms choose the variable price equal to the marginal cost. Therefore, the regulator can choose among these rules to pursue additional objectives such as increasing consumer surplus or promoting socially optimal investment.     

The effect of information sharing between lenders on access to credit,cost of credit,and loan performance – Evidence from a credit registry introduction

Using a rich dataset from a commercial bank in Albania, we utilize the introduction of a public credit registry by the Albanian central bank in January 2008 as a natural experiment to analyze the effect of information sharing between lenders on (1) access to credit, (2) cost of credit, and (3) loan performance. Our results suggest that information sharing by means of a credit registry does not affect access to or cost of credit, but improves loan performance. Specifically, loans granted after the introduction of the credit registry are 3% points less likely of turning problematic, representing a 35% reduction of the overall sample average arrear probability. We further find that the effect is more pronounced for repeat borrowers and in areas, where competition is weak. This indicates that information sharing among lenders improves loan performance mainly by disciplining borrowers to repay in their concern about future access to credit.     

The role of lockups in takeover contests

We examine breakup fees and stock lockups as devices for prospective target firms to encourage bidder participation in takeover contests. Unless bidding costs for the first bidder are too high, breakup fees provide for the socially desirable degree of competition and ensure the efficient allocation of the target to the highest‐valued buyer in a takeover auction. In contrast, stock lockups permit the target firm to subsidize entry of a new bidder at the expense of an incumbent bidder. Stock lockups induce too much competition when offered to a second bidder and too little competition when offered to a first bidder. Despite their socially wasteful properties, target management would favor stock lockups, as they induce takeover competition at least cost to the target.     

Tax competition, excludable public goods, and user charges

This paper provides an explanation for the increasing reliance on revenue from user charges on excludable public goods. We develop a model with many identical countries. The government of each country imposes a source-based tax on capital and supplies an excludable public good to heterogeneous households. Without tax competition, the price on the public good is zero. Tax competition induces each country to choose a positive price. The reliance on user charges turns out to be increasing in the intensity of tax competition measured by the number of countries. A coordinated decrease in user charges is shown to raise welfare in all countries.      

Imperfect Information, Screening, and the Costs of Informal Lending: A Study of a Rural Credit Market in Pakistan

Many governments have perceived the rural moneylender as usurious.This article takes a first step toward directly testing thevalidity of this view. In a study of services, costs, and chargesof fourteen informal market moneylenders and their clients inChambar, Pakistan, the article examines whether the high implicitinterest rates charged reflect the actual costs of operatingin that market. Estimates of the resource costs incurred byinformal lenders for screening, pursuing delinquent loans, overhead,and cost of capital (including unrecoverable loans) suggestthat lenders' charges are equal to their average cost of lendingbut exceed their marginal cost. This finding is consistent withthe view that the informal credit market is characterized byexcess capacity and monopolistic competition in the presenceof imperfect information.     

The Relative Cost Efficiency of Stock versus Mutual Thrifts: A Bayesian Approach

The relative cost efficiency of the mutual versus stock forms of ownership for thrifts has been a relevant issue in an era of deregulation and competition in the financial services industry. In this study, Bayesian‐based Markov chain Monte Carlo (MCMC) resampling methods are used to solve a stochastic cost frontier model and effectively determine cost efficiencies for the stock and mutual thrift groups. We find a statistically significant difference between both the cost frontiers and the cost efficiencies of the two groups, with the stock group operating at the lower‐cost point. Agency problems explain a significant portion of the cost efficiency difference. Capital structure differences, though not helping to explain differences in cost efficiency, do help to explain differences in cost structure and managerial attitudes toward risk.     

Sequential procurement auctions and their effect on investment decisions

We characterize the optimal mechanism and investment level in an environment where (i) two projects of independent costs are purchased sequentially, (ii) the buyer can commit to a two‐period mechanism, and (iii) the winner of the first project can invest in a cost‐reducing technology between auctions. We show that, in an attempt to induce more competition in the first period, the optimal mechanism gives an advantage to the first‐period winner in the second auction. As a result of this advantage, the first‐period winner invests more than the socially efficient level. Optimal advantages, therefore, create two different channels for cost minimization in buyer‐supplier relationships.