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.     

Estimating spatial differences in the Brazilian cost of living with household location choices

This paper uses a model of optimal household residential decisions to construct a comprehensive “true” spatial cost of living index with readily available Brazilian census data. We find evidence of a decreasing or U-shaped relationship (differing with education level and region) between the cost of living and urbanization, suggesting that both market disintegration and congestion play roles in raising costs. Controlling for spatial differences in the cost of living is shown to have important consequences for the determinants of poverty and (contrary to many previous results) to increase income inequality.     

Child labor,urban proximity,and household composition

Using detailed survey data from Nepal, this paper examines the determinants of child labor with a special emphasis on urban proximity. We find that children residing in or near urban centers attend school more and work less in total but are more likely to be involved in wage work or in a small business. The larger the urban center, the stronger the effect is. Urban proximity is found to reduce the workload of children and improve school attendance up to 3 h of travel time from the city. In areas of commercialized agriculture located 3 to 7 h from the city, children do more farm work. Urban proximity effects are accounted for by a combination of local labor supply and demand conditions, most notably the local importance of agriculture, the education level of the parents, and the local wage rate. Child servants, which represent a small proportion of all children, work much harder than other children and appear particularly at risk.     

Tradeable permits,missing markets,and technology

This paper examines the effects of missing markets, heterogeneous pollutants, and the pollution technology of firms on the efficacy of transferable pollution permits. Under the assumption of perfect competition in all markets, we show that if firms can substitute among pollutants, then setting the optimal number of permits for only one pollutant will not, in general, lead to an efficient outcome. The degree of the inefficiency will depend on the information set available to the regulator and the substitutability among pollutants by firms. When establishing transferable pollution rights regulators should, therefore, consider the technology of firms. If firms discharge pollutants in the same fixed proportions, then the regulator need only set a market for one of the pollutants to ensure an efficient outcome. Where firms can substitute among pollutants, however, establishing a market for only one pollutant provides an incentive for firms to substitute to unregulated ones. This is an important policy issue as substitutability among pollutants within and across production processes may dampen the dynamic advantages of a tradeable permit policy.     

Price determination and dynamic adjustments: An inverse demand system approach to meat products in the United States

In this study the process of retail meat price determination is depicted in the form of an inverse demand system taking into consideration the dynamic adjustments present in monthly consumption data. The general dynamic framework identifies both long run and short run effects in a systematic manner and allows direct estimation of the long run price and scale flexibilities that are consistent with theory. The empirical application based on monthly U.S. meat products data provides reasonable and promising results.The authors are senior econometrician, Department of Risk Management, TRS, American Express Co., Phoenix, and assistant professor, Department of Applied Economics, University of Minnesota, St. Paul, respectively. The work was performed when the first author was an assistant research scientist at the Center for Agricultural and Rural Development, Department of Economics, Iowa State University, Ames. Journal Paper No. J-15784 of the Iowa Agriculture and Home Economics Experiment Station, Ames, Iowa. Project No. 3109.     

Entry regulation as a barrier to entrepreneurship

Using a comprehensive database of European firms, we study the effect of market entry regulations on the creation of new limited-liability firms, the average size of entrants, and the growth of incumbent firms. We find that costly regulations hamper the creation of new firms, especially in industries that should naturally have high entry. These regulations also force new entrants to be larger and cause incumbent firms in naturally high-entry industries to grow more slowly. Our results hold even when we correct for the availability of financing, the degree of protection of intellectual property, and labor regulations.     

Competition and cooperation among exchanges: A theory of cross-listing and endogenous listing standards

We analyze firms’ choice of exchange to list equity and exchanges’ choice of listing standards when insiders have private information about firm value, but outsiders can produce (noisy) information at a cost. Exchanges are populated by two kinds of investors, whose numbers vary across exchanges: sophisticated (low information production cost) investors and ordinary (high–cost) investors. While firms are short-lived, exchanges are long-lived, value-maximizing agents whose listing and disclosure standards evolve over time. The listing standards chosen by exchanges affect their “reputation,” since outsiders can partially infer the rigor of these standards from the post-listing performance of firms. We show that, while exchanges use their listing standards as a tool in competing for listings with other exchanges, this will not necessarily lead to a “race to the bottom” in listing standards. Further, a merger between two exchanges may result in a higher listing standard for the combined exchange relative to that of either of the merging exchanges. We develop several other implications for firms’ listing choices and resulting valuation effects, the impact of competition and co-operation among exchanges on listing standards, and the optimal regulation of exchanges.     

Board composition, regulatory regime and voluntary disclosure

This study, which examines the association between board monitoring and the level of voluntary disclosure, finds new evidence that firms with a higher proportion of independent directors on the board are associated with higher levels of voluntary disclosure. Although board size and CEO duality are not associated with voluntary disclosure, boards with a majority of independent directors have significantly higher levels of voluntary disclosure than firms with balanced boards. Notably, we find that the presence of an external governance mechanism, the regulatory environment, enhances the strength of the association between the proportion of independent directors and the level of voluntary disclosure. This association is some two to three times greater under a “disclosure-based” regulatory regime than under a “merit-based” regulatory regime.     

Does the Basle Capital Accord reduce bank fragility? An assessment of the value-at-risk approach

We examine the economic implications arising from a bank using a VaR-constrained mean-variance model for the selection of its trading portfolio as a consequence of the Basle Capital Accord. Surprisingly, we show that when a VaR constraint is imposed, it is plausible that certain banks will end up selecting ‘riskier’ portfolios than they would have chosen in the absence of the constraint. Accordingly, regulators such as the Basle Committee on Banking Supervision should be aware that allowing a bank to use VaR to determine its minimum regulatory capital may increase its fragility. Alternatives to VaR-based bank capital regulation that mitigate or even preclude its perverse implications are presented.     

Bank CEO materialism: Risk controls,culture and tail risk

We investigate how the prevalence of materialistic bank CEOs has evolved over time, and how risk management policies, non-CEO executives’ behavior and tail risk vary with CEO materialism. We document that the proportion of banks run by materialistic CEOs increased significantly from 1994 to 2004, that the strength of risk management functions is significantly lower for banks with materialistic CEOs, and that non-CEO executives in banks with materialistic CEOs insider trade more aggressively around government intervention during the financial crisis. Finally, we find that banks with materialistic CEOs have significantly more downside tail risk relative to banks with non-materialistic CEOs.