Economic incentives for the self-regulation of the release of price-sensitive information

Companies, as primary disseminators of information, and financial institutions, as major recipients, have economic incentives to self-regulate the transmission and usage of price-sensitive information. These include increased (lost) reputation costs and adverse share price penalties arising from poor management of information disclosure. The economic motivation for self-regulation is seen as conceptually linked to but distinct from legislative changes. Self-regulation has the strong support of economic efficiency arguments, whereas recent additional new legislative changes do not. This article examines a major corporate and institutional response to the new regulatory climate—to internalize part of the regulatory process during their regular relationship communications. Relationships between the case companies and institutions already exist for transaction purposes. They are used as a convenient and low-cost means to pursue self-regulation and to avoid errors of price-sensitive information release. This self-regulatory process is illustrated using case material. It is clear from the response pattern presented that the development of a self-regulatory framework by the parties has been an iterative one. The corporate and institutional systems that have been evolving seem to be significantly influenced by the regulatory trends. The regulatory changes appear to have played a role in increasing market costs incurred by those companies with poor stock market communication practices. The article ends by arguing that new proposals to change in the formal regulatory system should recognize that further legislation is unlikely to improve the poor prosecution record. Nevertheless, legislative changes can combine with and buttress the self-regulation process to create an effective regulatory system.     

Competition by regulation in energy markets: the case of Turkey

A fundamental question facing the regulatory and competition authorities is whether to delegate competition policy issues of utilities to regulatory agencies or competition authorities. While, some countries prefer ‘light handed regulation’ by competition authorities, others grant substantial power to independent regulatory agencies. Turkey followed the liberalization wave in electricity with a regulatory reform in 2001. Recently, a slight shift of tide has appeared in previously liberalized markets. Electricity markets are the forefront example of this change of course. A similar trend is apparent in Turkey as well. Increasing pressures on prices and excess demand have created more reasons for active government involvement. As political factors weigh in, economic considerations take a secondary place in electricity markets. In order to show the tension between political and economic preferences, we use the Pareto and Kaldor-Hicks criteria of welfare economics metaphorically. This paper discusses the scope of competition policy in the Turkish electricity industry. We focus on the issue of regulatory governance. The absence of a well established institutional environment reduces the potential role of competition policy in the industry and increase political meddling in all segments of the Turkish electricity market. By looking into changes in prices, market power and new entry closely, we discuss the relative success of the regulatory reform in the electricity industry. We conclude by emphasizing the consequences of a passive competition authority in establishing a competitive electricity market.     

Franz Böhm as a pioneering champion of an economic theory of legislative science

The transaction costs concept is operationalized and expanded in order to demonstrate that Franz Böhm can be considered a forerunner of the economic analysis of law. Within economic systems transaction costs are more than mere friction. They are social catalysts inasmuch as low transaction costs foster desirable processes and high ones inhibit undesirable processes. According to Böhm, economically relevant institutions must be organized in such a way as to ensure that the transaction-cost structure is compatible with the economic functions of social processes. This should be done by cooperation between lawyers and political economists.     

Waiting for Enron: The Unstable Equilibrium of Auditor Independence Regulation

A primary function of auditor independence regulation is to ensure that any financial incentives auditors may have to approve misleading or inaccurate accounting are outweighed by market and regulatory deterrents to compromising an auditor's independence. This article is an inquiry into the current state of this incentive equilibrium in the United Kingdom: the possible costs and benefits that may be incurred by auditors if they elect to acquiesce to management's demands to accept problematic accounting. It argues that the equilibrium position currently incentivizes a rational auditor to acquiesce. On the one hand, the article demonstrates that the recent evolution of audit firm revenue streams has provided auditors with a substantial incentive to compromise their independence and provided management with credible sanctions to pressurize them to do so. On the other hand, the article shows that regulatory and market costs of acquiescence do not counterbalance the benefits of acquiescence.     

Credible Commitment in Non-Independent Regulatory Agencies: A Comparative Analysis of the European Agencies for Pharmaceuticals and Foodstuffs

Abstract: The creation of more and more supranational regulatory agencies has been one of the most significant institutional developments in the European Union during the last decade. Usually, these agencies evolve from EU committees and take over most of their structures. Accordingly, like most EU committees and the Commission, regulatory agencies are not independent, but act under the control of the member states. The question is, how far do they indicate a credible commitment of the Member States to long-term policy goals like health and consumer protection. This article compares the institutional structures and decision-making rules of the European Agency for the Evaluation of Medicinal Products and of the newly established European Food Safety Authority, in order to clarify the extent of credible commitment that the Member States show through the setting-up of these agencies. It concludes that the commitment of the Member States in the foodstuff sector is not as deep as in the pharmaceutical sector, and that the creation of the European Food Safety Authority will not lead to a success story similar to that of the European Agency for the Evaluation of Medicinal Products.     

Taxes,Tradable Rights and Transaction Costs

With respect to market-based policy approaches, it is a widely held view that corrective taxation entails substantial, though far fewer transaction costs than tradable permit systems. This conclusion only holds if set-up costs are singled out. This paper explores all relevant market, managerial and political transaction costs associated with environmental taxes and tradable emission rights. It is argued that the prevalence of transaction costs is largely dependent on the design of the policy instrument, respectively the tax base or the trading regime chosen. Comparative analysis further shows that a cap-and-trade program of emission permits distributed for free, traded on a brokered market and monitored upstream is not only more effective, but also likely to entail fewer transaction costs than environmental taxes. Any attempt, in turn, to save the huge information, enforcement and compliance costs incurred by corrective taxation impairs its efficacy by severing the link between the environmental externality and the tax base.JEL Classification: K32, K34     

Explicit inflation targets and central bank independence: friends or foes?

The paper studies the relationship between two institutional innovations in monetary policy of the past few decades: central bank independence (CBI) and explicit inflation targeting (EIT). The aim is to make inferences about the optimal institutional design of monetary policy, and the right sequencing of policy reform. Our reduced-form model unifies several approaches in the literature, and offers three novel institutional findings (that we square with existing empirical evidence). First, instrument-CBI is a complement to EIT, whereas goal-CBI acts as a strategic substitute for EIT in ensuring low inflation and policy credibility. Second, out of these two ‘commitment technologies,’ EIT is shown to be socially superior to goal-CBI. Third and controversially, countries that first implement goal-CBI are then less likely to adopt the desirable EIT regime. This is because independent central bankers may have less need to do so (their independence partly substitutes for EIT), as well as less willingness to do so (due to a higher degree of accountability associated with a transparently legislated target). Our analysis therefore implies that developing and emerging market countries should go down the New Zealand route—legislate EIT together with instrument-CBI, but stay clear of goal-CBI. Unfortunately, many transition countries have followed the opposite Fed/Bundesbank route, which we show may have adverse welfare consequences through several channels.     

Fair use and copyright protection: a price theory explanation

Copyright scholars suggest that computer technology has reduced transaction costs associated with copyright transfer, allegedly eliminating the need for the fair-use doctrines that were developed to allow limited use of copyrighted material in situations where the transaction costs of securing authorized use would be prohibitive. According to this emerging view, in an ideal world with no contracting costs, third party use of copyrighted material could realistically only take place with the express consent of the copyright holder. This would give the author absolute power to dispose of his work, including the right to veto uses, without the possibility of a fair use “override” of any sort.This paper shows the limits of such transaction cost-based arguments. If transaction costs provide the dominant economic justification of “fair-use” doctrines, an exogenous reduction of such transaction costs would limit the scope and application of the defense of fair use. Nevertheless, in this paper we suggest that, when viewed in light of the anticommons theory, fair-use doctrines retain a valid efficiency justification even in a zero transaction-cost environment. Fair-use defenses are justifiable, and in fact instrumental, in minimizing the welfare losses prompted by the strategic behavior of the copyright holders. Even if copyright licenses can be transferred at no cost (for instance, in a “click and pay” frictionless computer world), the strategic behavior of the copyright holders would still create possible deadweight losses.In this context, we identify a number of critical variables that should guide and constrain the application of fair-use doctrines. These variables include (a) the number of copyright holders; (b) the degree of complementarity between the copyrighted inputs; (c) the degree of independence between the various copyright holders in the pricing of their licenses; and (d) ability to price discriminate.     

The meaning of regulatory costs

Regulatory costs are an essential aspect of the efficiency and quality of regulations. Moreover, they are a genuine loss of welfare which have a negative impact on national income. Surprisingly, regulatory costs are often neglected or misinterpreted in regulatory assessments, except—though only recently—for administrative compliance costs. One important reason is the lack of a clear and consistent definition as well as a practical and exhaustive typology of regulatory costs. This conceptual paper presents a cost taxonomy that takes into account all costs of regulation. We identify 16 direct and two indirect regulatory cost types. The former are costs borne by society in preparing and implementing regulations. For the government, they consist of information, decision-making, drawing-up, planning, administrative start-up, operational, monitoring, and enforcement costs. Citizens and businesses, on the other hand, incur rent-seeking, information, planning, three types of compliance, delay and enforcement costs. The indirect costs comprise the efficiency loss plus, in the event of poorly designed or market-based regulation, also transaction costs. The neglect of any of these costs may lead to the underestimation of costs in absolute or relative terms and thus to inefficient regulatory choices.     

Transaction costs in the evolution of transnational polycentric governance

Polycentric systems of governance may help address two key challenges in the transnational governance of socioecological systems, the problems of fragmentation and fit, but there is limited understanding of the processes through which polycentric governance systems emerge. This paper draws on institutional economics and accounts of international regime formation to develop an ideal-type model of the evolution of transnational polycentric governance. In particular, the model highlights systematically different transaction costs across different phases of polycentric governance evolution. These costs result in important trade-offs between building a broad coalition during agenda setting and addressing complexity in implementation. The plausibility of the model is probed using the case of Reducing Emissions from Deforestation and Forest Degradation (REDD+), drawing on global-level data on REDD+ collaboration, as well as fieldwork in Central Kalimantan, Indonesia. This case suggests that low transaction costs in the agenda-setting phase led to a confused vision for what REDD+ should be, ultimately hampering implementation.     

‘We are not asking you to hug each other,but we ask you to co-exist’:1 the Kosovo assembly and the politics of co-existence

This article examines the role of parliament in the promotion of co-existence in post-war Kosovo. The vast majority of Kosovans are ethnic Albanians who aspire to independence; Serbs constitute the largest minority and are opposed to independence so Kosovo's politics are deeply divided. It considers Kosovo's social divisions, the political consequences thereof and the institutional measures put in place by the United Nations to try and moderate the influence of the divisions in the legislative process. The principles and objectives underpinning the Assembly, including those derived from Yugoslav constitutional history, are explored via the problem of ‘constitutional nationalism’ and its consequences. The Assembly has a range of complex procedures that are designed to promote the protection of minority rights and encourage power-sharing between the various communities. The article examines their operation and effectiveness in a political context of deep mistrust and, as the events of March 2004 demonstrated, continued violence.     

Theories on the Economics of Regulation: A Survey of the Literature from a European Perspective

This article is, on one hand, a survey of the core theoretical literature on the economics of public regulation; and, on the other hand, a cohesive discussion about how the literature has matured and how recent contributions on political and regulatory institutions—US and European—are related to, and affect the results of, former lines of research. We conclude that the traditional distinction between public interest theories and special interest theories has lost validity due to the entry of game theory and institutional research. The evolving institutional analysis provides a sophisticated interpretation of possible corrective rationales inherent in regulatory restrictions, and is as such an important complement to the still vigorous special interest literature focusing on the redistributive rationales and their effects.     

Exploring the survival of patent licensing: some evidence from French foreign agreements

This paper aims to determine the factors that impact on the duration of technology licensing contracts. Using a transaction costs framework, we derive some propositions related to the influence of the contractual safeguards and of institutions on the failure rate of such agreements. We conduct an empirical investigation based on a new dataset of 250 contracts from the French National Institute of Intellectual Property. We show that the actual duration of licensing agreements (a) is positively associated to their profitability and to the level of technological competition, (b) is positively associated to the presence of a renegotiation clause, and (c) is independent of other contractual or institutional safeguards.     

Constructing International Crime: Lawyers,States, and the Origin of International Criminal Prosecution in the Interwar Period

This article explains the development of international crime as a legal category. I argue that states’ pursuit of political rights claims empowers international lawyers to develop new legal categories to grant states new tools to pursue their interests. At the same time, lawyers have a stake in defending the autonomy of law from politics, thus pushing for the development of legal norms and institutions that go beyond the original state intent. States’ turn to law thus begets more law, expanding the legal and institutional tools to solve international problems while simultaneously enforcing a commitment to principles of legality. To demonstrate the plausibility of the theory, the article studies the construction of the concept of an international crime in the interwar period (1919–1939). In response to the Allies’ attempt to prosecute the German Emperor, international lawyers sought the codification of international criminal law and drafted enforcement mechanisms. The interwar legal debate not only introduced international crime into the legal and political vocabulary, it also legitimized a new set of institutional responses to violations of international law, namely, international criminal prosecution.     

Institutional competition of optional codes in European contract law

The Common European Sales Law (CESL) is the European Commission’s most recent policy initiative for European contract law. It aims to address the problem that differences between the national contract laws of the Member States may constitute an obstacle for the European Internal Market. This paper develops a model of the institutional competition in European contract law and uses it to addresses the question as to whether an optional European contract code and the CESL are economically desirable for European contract law. To do so I examine the transaction costs involved in the process of choosing an applicable law that European businesses face when they conduct cross-border transactions in the European Internal Market. I then describe how these transaction costs shape the competitive environment, i.e. what I refer to as the “European market for contract laws” in which the contracting parties choose a law to govern their cross-border contracts. Having identified this environment and the competitive forces operating within it, I propose a model, the “Cycle of European Contract Law”. I use this model to analyze the competitive processes that take place in the European market for contract laws. Based on my results I make recommendations for the optimal implementation of an optional European contract code and the CESL in European contract law.     

Politics and economics of hospital cost containment

Voluntary and regulatory efforts toward hospital cost-containment have accelerated with rapid increases in those costs and under pressures of national health insurance. Possible causes of hospital cost inflation are examined in the context of market analysis and with reference to the nature of hospitals as institutions facing special combinations of economic and political conditions and pressures. Some details of voluntary experiments and state regulatory efforts are examined in order to assess the elements of experience to date and their relationships to causes of hospital cost inflation. Federal proposals for a regulatory cap on costs are also discussed along with a view of how such proposals are related to probable causes of hospital cost inflation and of the relevance of other experience.     

The "Compliance" Trap: The Moral Message in Responsive Regulatory Enforcement

Simple deterrence will often fail to produce compliance commitment because it does not directly address business perceptions of the morality of regulated behavior. Responsive regulation, by contrast, seeks to build moral commitment to compliance with the law. This article shows that a regulator can overcome the deterrence trap to improve compliance commitment with the skillful use of responsive regulatory techniques that "leverage" the deterrence impact of its enforcement strategies with moral judgments. But this leads it into the "compliance trap." The compliance trap occurs where there is a lack of political support for the moral seriousness of the law it must enforce, such as is the case with cartel enforcement in Australia. In these circumstances, business offenders are likely to interpret the moral leveraging of responsive regulation as unfair or stigmatizing, and business perceptions of regulator unfairness are likely to have a negative influence on long-term compliance with the law. Moreover, big businesses that perceive regulatory enforcement as illegitimate are also likely to actively lobby for the political emasculation of the regulator. In these circumstances, most regulators are likely to avoid conflict by taking the easy option of enforcing the law "softly," and therefore ineffectively.     

Morality, social norms and the rule of law as transaction cost-saving devices: the case of ancient Athens

The importance of the institutional framework for economic development is widely accepted today and it is duly stressed in the economic literature. The protection of property rights, the enforcement of contracts and an efficient legal system are the pillars of the contemporary rule of law. However, formal institutions cannot function without being internalized by the citizens and without the strong backing of social norms. Morality and social norms are the major elements of the informal institutional structure, the social capital, which is also critical for social welfare and economic development. In this paper we will discuss both the formal and the informal institutional framework of Ancient Athens, which was a free market society with economic problems similar to contemporary market societies. Athenians developed a highly sophisticated legal framework for the protection of private property, the enforcement of contracts and the efficient resolution of disputes. Such an institutional framework functioned effectively, cultivating trust and protecting the security of transactions. This entire system however was based on social norms such as reciprocity, the value of reputation and widely accepted business ethics. Conformity to social norms as well as moral behavior was fostered by social sanction mechanisms (such as stigma) and moral education. The Athenian example is a further proof of the importance of morality and social norms as transaction cost-saving devices even in quite sophisticated legal systems. Their absence or decline leads inevitably to the need for more regulation and litigation and to a growing preference for clear-cut rules instead of discretionary standards. Athenian law was pioneering in the development of rules and institutional mechanisms suitable for the reduction of transaction costs, many of them surviving in the most complex contemporary legal systems.     

The political economy of the green technology sector: A study about institutions, diffusion and efficiency

This paper discusses aspects related to the green technology sector (GT sector) in Germany. In a first step institutional reforms enabling diffusion of green technologies are analyzed. Cost arguments are also taken into account. In a second step a theoretical model developed by Tanguay et al. (Public Choice 120:1–27, 2004) is modified in order to evaluate the efficiency of the institutional setting in a political economy framework. The model is able to show that command and control policies (CCPs) are accompanied by cost-inefficiencies depending on the political weight of technology related interests groups. We further come to the result that relatively high marginal production costs may generate suboptimal high diffusion of a certain GT j. For relatively low marginal production costs policy induced demand may also be too low.     

Towards ‘Accountable Independence’? Parliamentary Controls of the European Central Bank and the Rise of a New Democratic Model

The independence of the European Central Bank is legally defined in very clear and strict terms. Although most scholars in economics describe this status as a crucial condition of the Bank's efficiency, it is frequently criticised by politicians and political scientists as a contradiction to democratic theory. This paper will examine the emerging practice of parliamentary control of the ECB, from its installation until September 1999, in order to understand which kind of ‘accountability’ is elaborated in this unprecedented relationship between ‘politicians’ and lsquo;technocrats’. It will first show that MEPs have rejected all forms of parliamentary control based on a logic of constraint. It will then describe the numerous institutional links created between the Bank and the EU political organs to favour their cooperation. Finally it will analyse the recent initiatives taken by MEPs to influence central bankers and to convince them to submit their decisions to public debates. The hypothesis developed from these empirical analyses is that a new kind of ‘accountability’ is emerging in the EU. From a horizontal point of view (inter‐institutional controls), it is based on influence rather than traditional parliamentary constraint. From a vertical point of view (accountability to citizens), it focuses on responsiveness rather than on classic responsibility.