Regulating Availability with Demand Uncertainty

I evaluate German regulation that requires retail discounters to guarantee the availability of their products in bargain sales. The regulation is meant to prevent loss leaders. Retailers however claim that rationing is due to demand uncertainty and thereby undermine the regulation's rationale. Indeed, demand uncertainty explains empirical observations better than a theory of loss leaders. This paper shows, however, that also under demand uncertainty the regulation has positive effects. Ultimately, it raises production, which, under imperfect competition, is beneficial. A strict regulation overshoots its goal when high demand is relatively unlikely. In this case more sophisticated regulation is required.

Regulatory Investment Incentives

This paper examines recent policy issues relating to foreign investment incentives in the regulatory domain. By 'regulatory incentives' in this context we mean those administrative conditions offered by governments to foreign firms other than special fiscal (eg tax) or financial (eg subsidies) treatment. The key issue addressed in this paper is whether competition between host countries for inward investment on the basis of their regulatory regimes has any effect on the level and 'quality' (technology, stability, employment etc) of that investment on the one hand. And on the other hand, whether such competition between countries leads to a welfare loss to that country and other OECD members or non-members. Section 2 examines the economic principles involved in the analysis of the impact of regulatory incentives on the investment decision of the international firm; where the predictability of future regulatory policy can be as significant to investment decisions as the particular standard enforced. Section 3 explores three current issue areas in relation to regulatory incentives at the national level: (i) property rights and market access rules; (ii) environmental protection; and (iii) labour standards. Section 4 addresses the existing international codes and agreements that might provide an alternative to, or support for, national regulatory arrangements and overcome the co-ordination problem. Section 5 concludes with some suggestions as to a possible agenda for policy research.

Uncertainty, Information, and Trust in Banking Intermediation

Banking intermediaries help to coordinate different agents’ plans, reducing the uncertainty that might otherwise hamper transactions because of disruptive “lemon” problems. By establishing trust relationships based on private information, banks allow risk pooling and provide insurance to different classes of agents, act as market makers, and provide services that save transaction and notary costs. “Lemon” problems are also important to understand the difference between market pricing of the risk of bonds and the banks’ pricing of the risk of loans. In the first case risk is priced on the basis of freely available information, relying heavily on the informational content of statistical time series. The resulting equilibria, though, are fragile, because they are subject to abrupt regime changes as new information becomes public. Banks, on the contrary, price loans on the basis of their private information, and they can thus provide insurance against different kinds of shocks. Given the opacity of their activities, and the huge externalities that their entrepreneurial choices imply, banks must be subject to an extensive regulation, imposing a transparent disclosure of their risk taking activities.Banks; Credit; Uncertainty; Information Costs; Trust

Imperfect Information and Monopolistic Pricing in the Banking Industry

We critically discuss recent developments in the theory of banking, focusing on the two set of services that banks jointly provide: payment services by means of bookkeeping transactions and financial intermediation services. The limitation of the available information, of the capabilities of the human mind, and of the available time of any individual, produce relevant departures from the basic assumptions of perfectly competitive markets, creating the need for institutions such as banks. It can be shown that market forces can be very effective in assuring contractual performance in the banking industry, reducing the need of generalised legal restrictions. Besides, taking into account the peculiarities of contemporary banking institutions, credit rationing seems to be a far less significant phenomenon. The main conclusion of the analysis is that the focus of many current regulations of the banking system, in continental Europe in particular, is misplaced. The current regulatory framework produces too many distortions in market prices and the allocation of resources, and regulations impose a heavy burden on taxpayers. On the contrary, the more fundamental causes of instability are not properly addressed by the current legal requirements.

Intermediation, compensation and tacit collusion in insurance markets

Recent events involving major insurance companies and insurance brokerage firms highlight substantial incentive problems in commercial and reinsurance markets where intermediation takes place. We show that in markets with informed as well as uninformed consumers and heterogeneous risk profiles intermediation has the potential to improve social welfare. However, since intermediation reduces insurers’ market power, incentives for tacit collusion are higher compared to markets without intermediation. A controversial matter in the discussion concerning insurance intermediation is the issue of compensation customs. Our analysis provides explanations for the counterintuitive observation that brokers are usually compensated by insurance companies. The rationale for the latter is the fact that a fee paid by uninformed consumers limits the insurers’ ability to extract rents from informed consumers. -- Aktuelle Ereignisse in der deutschen und der US-amerikanischen Industrieversicherung deuten nachhaltige Anreizprobleme in der Beziehung zwischen Anbietern, Nachfragern und den beteiligten Versicherungsvermittlern an. In den USA wurde dem weltgrößten Versicherungsmakler Marsh & McLennan vorgeworfen, Industrieversicherungsverträge bewusst zu schlechteren Konditionen bzw. zu überhöhten Preisen vermittelt und im Gegenzug unverhältnismäßig hohe erfolgsabhängige Provisionen erhalten zu haben. In Deutschland verhängte das Bundeskartellamt sowohl im März 2005 als auch im September 2005 Bußgelder in Höhe von 150 Mio. Euro gegen 17 führende Industrieversicherer und deren Vorstände. Die beteiligten Industrieversicherungsunternehmen wurden unter anderem beschuldigt, seit 1999 Versicherungsbedingungen und -preise gemeinschaftlich verabredet zu haben. Im Fokus unseres Beitrages stehen unter anderem die folgenden Fragestellungen: Welchen Einfluss haben Vermittler auf Wettbewerbsintensität und Wohlfahrt in Versicherungsmärkten? Wie lassen sich Anreize zur Anbieterkollusion im Bereich der Industrieversicherung erklären? Welche Vorteile hat die vorherrschende Provisionierung, bei welcher der Vermittler vom Versicherer bezahlt wird, gegenüber einer Beratungsgebühr, die der beauftragende Kunde entrichtet? Die zuvor beschriebenen Forschungsfragen werden in einem modifizierten Hotelling-Oligopolmodell untersucht. Im betrachteten Versicherungsmarkt fragen sowohl informierte als auch uninformierte Nachfragergruppen mit jeweils unterschiedlichen Risikoprofilen Versicherungsprodukte nach. Die zentralen Modellergebnisse, die anhand des aktuellen Kartellverfahrens gegen deutsche Industrieversicherungsunternehmen verdeutlicht werden, lassen sich wie folgt zusammenfassen: Die Existenz von Vermittlern führt in Versicherungsmärkten mit teilweise uninformierten Nachfragern einerseits zu Wohlfahrtsgewinnen und erhöht andererseits den Wettbewerbsdruck auf die Anbieter. Infolgedessen steigen die Anreize zur Kollusion auf der Anbieterseite. Aus gesamtwirtschaftlicher Sicht ist die Wahl des Entlohnungssystems auf einem Konkurrenzmarkt im gewählten Modell irrelevant, wenn eine Falschberatung von uninformierten Kunden ausgeschlossen ist. Die Teilnehmer des Anbieterkartells können in einem Provisionierungssystem höhere Konsumentenrenten abschöpfen als in einem Vergütungssystem mit Beratungsgebühr.insurance,brokerage,collusion,compensation,information

Endogenously determined price rigidities

Game Theory;Price Theory;Voting

Energy Efficiency Policy: Surveying the Puzzles

Promoting energy efficiency (EE) has become a leading policy response to greenhouse gas emissions, energy dependence, and the cost of new generators and transmission lines. Such policies present numerous puzzles. Electricity prices below marginal production costs could warrant EE policies if EE and energy are substitutes, but they will not be substitutes if the energy price is sufficiently high. Using EE savings to meet renewable energy requirements can dramatically increase the marginal cost of electricity. Rejecting “rationality” of consumer energy choices raises doubts regarding cost–benefit analysis when demand curves may not reveal willingness to pay. Decoupling to guarantee constant profit regardless of use contradicts findings that incentive-based mechanisms outperform cost-of-service regulation. Regulators may implement EE policies to exercise buyer-side market power against generators, increasing consumer welfare but reducing overall economic performance. Encouraging utilities to take over potentially competitive EE contradicts policies to separate competitive from monopoly enterprises.energy efficiency, energy policy, decoupling, monopsony, vertical integration

Ethics and health care 'underfunding'

There are continual “crises” in health care systems worldwide as producer and patient groups unify and decry the “underfunding” of health care. Sometimes this cacophony is the self interest of profit seeking producers and often it is advocacy of unproven therapies. Such pressure is to be expected and needs careful management by explicit rationing criteria which determine who gets access to what health care. Science and rationality, however, are unfortunately, rarely the rules of conduct in the medical market-place