Credit quality, the intensity of regulation and the segmentation of debt markets

Some debt markets have a “competitive advantage” over others due to easier regulatory requirements. Our model explains changes in the market shares of different debt markets. In particular, borrowers may choose between highly regulated and relatively unregulated placement of debt so as to minimize borrowing costs. Borrowers in the highly regulated market incur higher regulatory cost, but are also able to signal accurately their true risk class. In unregulated markets there is an asymmetric information problem. This results in an equilibrium where the debt market is segmented between less regulated and other, more strictly regulated, placements. Raising regulatory costs will lead to an expansion of the market share of unregulated debt. It will also lead to an increase in the overall default rate on corporate debt.     

Financial Innovation and Delegation of Control

The literature on security design has traditionally assumed that control of investment and production rests with the entrepreneur even after flotation. In this article I relax this assumption, which is both unnecessarily strict and unrealistic. The contribution is twofold. First, I show that when control is delegated during flotation, financial innovation is a trade off between agency costs (arising from principal agent relationships) and targeting costs (arising from the inability to split the cash flow). Second, I show that unlevered equity or the use of debt which can be issued without defaulting in equilibrium, are optimal means of financing.     

The supply of education quality in a spatial model with asymmetric moving costs

The paper analyses the characteristics of the supply of higher education in different geographical macroareas using a strategic interaction framework. It focuses on universities operating in centralised funding system that autonomously set the quality of education showing that in equilibrium it is inversely related to students’ moving costs across areas. We show that in the presence of asymmetric information about workers’ ability and asymmetric costs of moving, the only PBE consistent with forward induction involves that only high ability workers acquire education and the quality of education is lower in macroareas where the moving costs are higher. Our model predicts that in economies with centralised university funding, educational policies must be regulated according to the specific socioeconomic characteristics of the area. Direct subsidies to universities may be ineffective in improving the quality of education in the less developed areas. When regional disparities are not too big, efficiency gains may be obtained by reducing moving costs.     

Competition and regulation with product differentiation

We consider a market for differentiated products, where one good is supplied by a regulated monopolist and competitive firms operate in an unregulated segment. In this setting we investigate the issue of whether to allow the monopolist to diversify into the unregulated segment by owning a competitive firm. Under asymmetric cost information, if goods are substitutes a diversified monopolist, which exaggerates its costs in the regulated segment to charge a higher regulated price, stimulates the demand for the competitive affiliate. This strengthens the firm??s incentive to inflate costs, since doing so generates a positive informational spillover to its profits in the competitive segment. Consequently, a regime of separation, which prevents the firm from operating in the competitive segment, is welfare-enhancing. Conversely, with complements, cost exaggeration in the regulated monopoly reduces the demand and harms profits in the competitive segment, and allowing the monopolist to diversify into the competitive segment therefore generates countervailing incentives, which weaken the firm??s interest in cost manipulation and improve social welfare.     

Merchant and regulated transmission: theory, evidence and policy

Economists acknowledge the problems of regulated transmission but have different views on the likely efficiency of merchant transmission. This paper first examines the evidence on alleged market failure and regulatory failure as experienced in practice in Australia, where there have been both regulated and merchant interconnectors. Merchant transmission has generally not exhibited the standard examples of market failure but regulated transmission generally has exhibited the standard examples of regulatory failure. Imperfect information??more specifically, in the form of lack of coordination??has often been a challenge whatever the approach. Experience in Argentina suggests that transactions costs are not a barrier to negotiation and efficient investment determined by users. Policy should seek to improve the regulatory framework and to remove barriers to private initiatives. An important role for regulation is to facilitate coordination between potential providers and users of transmission lines.     

The Life Cycle of Regulatory Agencies: Dynamic Capture and Transaction Costs

The dynamics of regulation is analysed in a model where regulatory capture comes from the repeated interaction between an interest group and a regulatory agency. Regulatory institutions offer a framework for this dynamic process. They put constraints on the interest group's influence. The dynamics of regulation and its long-run outcome depend on the political principal's, the regulator's and the regulated form's time preferences and their information. Some foundations for the transaction costs of side-contracting used in the standard literature on collusion are provided. Those transaction costs are linked to the precise nature of regulatory institutions.     

Cross-subsidization and cost misallocation by regulated monopolists

While cross-subsidization is understood theoretically as involving the sustainability of a cost allocation scheme, it is invoked in regulatory policy contexts, such as the divestiture of AT&T, where costs of serving unregulated markets may be borne by ratepayers of regulated monopolies. We analyze two cross-subsidization tactics—cost misallocation and distorted technological choice — under a spectrum of regulatory cost allocation policies. These tactics lead to higher prices in regulated markets and inefficient production in unregulated markets. Welfare effects are discussed; we conclude with observations on strategic behavior and regulatory policy.     

Network Interconnection in Telecommunications

This paper discusses industries such as telecommunications where firms each have their own customers and must interconnect with other firms to provide a comprehensive service. Two scenarios are considered: (i) the case of a symmetric, unregulated industry, and (ii) the case of an industry with a dominant, regulated incumbent. In the first, provided there is sufficient product differentiation, it is shown that firms agree to set interconnection charges above associated costs in order to obtain the joint profit-maximising outcome. In the second a formula for the welfare-maximizing interconnection charge is derived. Relations with the 'efficient component pricing rule' are discussed     

Cost savings and deregulation: an analysis of fuel cost savings in deregulated electricity markets

Unregulated utilities face competitive pressures that lead to cost-minimizing activities, but regulated monopolies in the US electricity generation sector face pressures only from regulators who must balance a desire for lower prices against the need for the utility to generate a sufficient return to encourage investment. This paper analyses the cost-minimizing behaviours of regulated utilities by comparing their average input coal costs with those of deregulated utilities purchasing coal from the same mine during the same month of the same year. Results indicate that coal-fired electric plants operating in deregulated electricity markets negotiate prices that are 6.1 ¢/MMBtu (3.5%) less than their regulated counterparts. In percentage terms, this is a fairly small discount for deregulated plants, but it happens to be on par with the restructuring gains that others have estimated for labour and nonfuel costs.     

Technological Change Bias In The U.S. Investor-Owned Electric Utility Industry Following Potential Deregulation

This paper estimates regulated and poientially deregulated costs of production for a multiproduct electric utility industry. The empirical evidence suggests technological regression with respect to costs in both regulated and deregulated environments. Analysis of factor cost shares indicates that technological change in a deregulated environment is expected to be less apital saving than technological change in the regulated environment. In addition, this study finds that overall diseconomies of scale may be nduced over time and to a greater extentunder deregulation than under regulation. Also, cost complementarities may be enhancedover time, but to a lesser extent under deregulation. Hence. tendencies toward natural monop oly may be increased or decreased by deregulation, and advancing deregulation may or may not be an appropriate policy.     

Commitment and price competition in a dynamic differentiated-product duopoly

This paper characterizes linear Markov-perfect equilibrium in a duopolistic environment where firms engage in dynamic price competition. Firms have constant (but potentially different) marginal costs and produce differentiated products. We show that, for the case of linear demand, dynamically stable Markov-perfect equilibrium prices are strictly higher than one-shot Nash equilibrium prices, but lower than fully collusive (monopoly) prices. We provide closed-form solutions for the Markov-perfect equilibrium prices which, in principle, can be estimated given data on firm demand and costs. Our results suggest that static two-stage models of price commitment are on reasonably solid ground in that they might be viewed as a reduced form for more complicated dynamic models.     

Managing Permit Markets to Stabilize Prices

The political economy of environmental policy favors the use of quantity-based instruments over price-based instruments (e.g., tradable permits over green taxes), at least in the United States. With cost uncertainty, however, there are clear efficiency advantages to prices in cases where the marginal damages of emissions are relatively flat, such as with greenhouse gases. The question arises, therefore, of whether one can design flexible quantity policies that mimic the behavior of price policies, namely stable permit prices and abatement costs. We explore a number of “quantity-plus” policies that replicate the behavior of a price policy through rules that adjust the effective permit cap for unexpectedly low or high costs. They do so without necessitating any monetary exchanges between the government and the regulated firms, which can be a significant political barrier to the use of price instruments.     

Consequences of Imitation by Poor Countries on International Wage Inequalities and Global Growth

The paper presents an endogenous growth model where the level of international transaction costs may be decisive for whether the relatively poor East specializes in agriculture production, imitates goods from the rich West, or makes its own innovations. The author shows that the East produces only agricultural goods if transaction costs are high, while innovation is profitable when transaction costs are low. In between there are a range of transaction costs where the East imitates, possibly resulting in a lower global growth rate and a larger international wage gap than if imitation were not possible.     

科斯三定理的新表述与新证明

科斯第二定理指出,在交易费用大于零的现实世界,产权的不同界定会对资源配置效率产生影响。政府(或法院)的基本原则应该是把权利界定给能以较低交易费用解决外部性问题的一方。科斯第三定理的准确含义是,在交易费用大于零的现实世界,制度安排的生产本身是有成本的,净收益最大的制度安排就是最佳的选择。科斯第二、三定理为市场经济中普遍存在的外部性问题提供了新的解决措施和科学的决策原则,间接意味着科斯并非政府干预的完全反对者,科斯定理也不足以成为有些学者把新制度经济学定性为新自由主义的充分理由。     

RETAIL PRICE REGULATION AND THE OPTION TO DELAY

ABSTRACT ** :  This paper examines a two-period model of an investment decision in a network industry characterized by demand uncertainty, economies of scale and sunk costs. In the absence of regulation we identify the market conditions under which a monopolist decides to invest early as well as the underlying overall welfare output. In a regulated environment, we consider a monopolist who faces no downstream (final good) competition but is subject to retail price regulation. We identify the welfare-maximizing regulated prices when the unregulated market outcome is set as the benchmark. We show that if the regulator can commit to ex post regulation – that is, regulated prices that are contingent to future demand realization – then regulated prices that allow the firm to recover its total costs of production are welfare-maximizing. Thus, under ex post price regulation there is no need to compensate the regulated firm for the option to delay that it foregoes when investing today. We argue, however, that regulators cannot make this type of commitment and, therefore, price regulation is often ex ante – that is, regulated prices are not contingent to future demand. We show that the optimal ex ante regulation, and the extent to which regulated prices need to incorporate an option to delay, depend on the nature of demand uncertainty.     

Ramsey pricing in a hierarchical structure with an application to network-access pricing

This paper studies a hierarchical structure where an upstream regulated industry sells an intermediate good to a downstream regulated industry. Some sufficient conditions for all Ramsey prices to exceed marginal costs are derived. This hierarchical structure is shown to decrease the profit margin of the intermediate good but preserve its sign. Further, the hierarchical structure also decreases the profit margin of the final good sold by the downstream regulated industry. This is because this final good is a hierarchical complement to the intermediate good sold by the upstream regulated industry. The impacts upon other publicly produced goods, however, could be said to be neutral. Therefore, the hierarchical structure has asymmetric impacts upon publicly produced goods. Accordingly, the equiproportional output-reduction statement of Ramsey rule does not survive. This paper ends with providing an application to the network-access pricing problem.     

The Disunity of Unanimity

Unanimity is the optimal voting rule in a world of zero transactions costs, when side payments are impossible. When side payments are available and transactions costs are zero, the voting rule is irrelevant to the ultimate outcome. In the more realistic situation where side payments are allowed but transactions costs are positive, a unanimity voting rule creates situations where the collective choice may fail a proposed measure even if all members favor the measure in principle. This evidences a disunity between unanimity rules and unanimous outcomes. Constitutional design should focus on rules leading to unanimous outcomes, as opposed to unanimity rules.     

The water market in Israel: An example for increasing the supply

In this study we search for solutions to the problem of Israel's water shortage. To illustrate the shortage, we first model the water market in Israel, i.e., the corresponding supply and demand of water, and from it the dynamics of water prices. A direct way to solve the shortage problem and to reduce the high equilibrium price can be found via a different way of sharing water among the Levant countries, or by bringing more water from outside the region. The latter can take the form of conveying Nile water or water from Turkey or by constructing desalination plants along the shores. In this study we concentrate on the importing of Nile water.The costs of most of the solutions are too high compared to the returns to water in agriculture. This relation is continuously changing with the increasing demand for water for domestic and agricultural use. Our analysis shows that within 5–10 years the marginal value product of water in the area west of the Jordan river would equal the marginal costs of water from the Nile, $0.40m³.     

Spot and forward markets for natural gas: The effects of state regulation

Since the emergence of a spot market in natural gas in 1984, state regulators have been concerned that regulated utilities would fail to choose between contracts and spot purchases in a way that minimizes costs. Grounds for this concern are shown, under two alternative rate structures, in a model where regulation produces ex post profit and loss restrictions. Two policy resolutions to the problem are suggested, one that uses an alternative mechanism for triggering rate reviews, allowing the substitution of ex ante for ex post profit and loss restrictions, and one that exploits the special structure of gas markets within the context of traditional regulatory practice.