Evaluating network services in Europe: a critique of the EC Evaluation of the Performance of Network Industries

A critique of the EC evaluation of network industries and the Copenhagen economics report on the impact of liberalisation

The Economics of Corporate Executive Pay

[Excerpt] In the past ten years, the pay of chief executive officers (CEOs) has more than doubled, and the ratio of median CEO to worker pay has risen to 179 to 1. High and rising executive pay could be an issue of public concern on two different grounds. First, it is contributing to widening income inequality that may be of concern from an equity perspective. Second, it could be the result of economically inefficient labor markets. It is difficult to determine whether executive pay is excessive across the board since executives’ marginal product cannot be directly observed. An upward trend in pay over time is not sufficient proof that the market is not efficient since factors determining supply and demand, such as the skills required of the position, can change over time. To show that pay is excessive from an economic perspective, one must first demonstrate that there is a market failure that is preventing the market from functioning efficiently. The market failure could originate in the division in large modern firms between management and ownership, which is typically dispersed among millions of shareholders. Shareholders’ interests are represented by a board of directors. Critics of executive pay have argued that boards have all too often been “captured” by the executive and are no longer negotiating pay packages that are in the shareholders’ best interests. They point to a number of common practices that they call “stealth compensation” which are inconsistent with arm’s length contracting. These include “golden parachutes,” generous severance packages, company-provided perks, and bonuses that are unrelated to firm performance. Stock options have been the fastest growing portion of executive pay since the 1990s, and critics believe this pattern can also be explained through the prism of stealth compensation. Rewarding executives with employee stock options was often justified in terms of the “pay for performance” mantra, but options are usually designed to reward absolute, not relative, performance. This means that in the bull market of the 1990s, when virtually all stock prices were rising, a company could fall behind its competitors and its executives could still receive handsome options payouts. Indeed, a sizeable portion of the increase in executive pay in the 1990s was likely due to options that turned out to be much more valuable than expected because of the unprecedented price increases of the bull market. Many of the recent corporate scandals appear consistent with stealth compensation as well. Stock options backdating, earnings manipulation, and accounting fraud might have been motivated by attempts to covertly increase executive pay. If short-term fluctuations in the stock price are not good proxies of firm performance, then tying compensation to the stock price can create incentives for executives to engage in activities that are detrimental to shareholders. Policy proposals mostly focus on improving transparency, increasing board independence, and strengthening shareholder control rather than attempting to curb pay directly. S. 1181 (Obama) and H.R. 1257 (Frank), which the House approved on April 19, 2007, would give shareholders a non-binding vote on executive pay. Another proposal would modify the limit on deductibility of executive pay from corporate taxation. More broadly, income inequality could be reduced by increasing the progressivity of the tax system. For current developments and legislation, see CRS Report RS22604, Excessive CEO Pay: Background and Policy Approaches

How the civil service responded to our proposal for changing the pricing system for Scottish Water

Water is one of Scotland's most vital and largest industries. It is an input into all other forms of economic activity as well as being part of every family's expenditure. It is therefore important, both for living standards and for the economy, that the pricing of water in Scotland is taken extremely seriously and that efforts are made to have an appropriate, sustainable charging system. Since 2002, when the office of the Water Industry Commissioner for Scotland was established, we have analysed the various methods used to determine water charges, and have shown that each of the various methods have major faults. In 2008, the Cabinet Secretary for Finance raised with us the problem of capital charges on the water industry: it was expected that changes in Treasury policy would make water capital charges an increasing real burden to the Scottish government budget. As a result of both this concern and our 2007 Commentary paper, (which had set out the problems with the current method of setting water charges), we proposed a new charging system for Scottish Water, details of which we published in the Fraser of Allander Commentary in February 2009. Under our proposed charging system, net new capital formation financed from customer charges would be regarded as being paid for by a notional loan from the customer base as a whole to Scottish Water. We suggested that the body of customers as a whole would then earn a return: this would be in the form of a rebate, equal to historic cost interest and depreciation on the notional loan. In our paper, we showed how this approach would be fully sustainable, and would lead to significantly lower charges for customers than the present regulatory capital value pricing system. The approach would also have had significant benefits as regards the capital charge which, (when the paper was written), the Treasury levied from departments on the capital assets of public corporations. Although we received no response from the Water Industry Commission for Scotland, (WICS), or the Scottish government civil service with responsibility for water to this or our earlier paper, it transpires that the civil service did provide a briefing on our paper to Ministers. In the summer of 2010 we were given a copy of the brief which had been put to Ministers by the civil service, commenting on our proposal. This brief was originally prepared for Ministers in 2009, and a slightly revised version was put to Ministers again in mid 2010. It is the later version of the brief which has now been given to us. This paper represents our critique of the civil service comments on our proposal. We will demonstrate that the advice put to Ministers was seriously flawed: in several respects the advice was factually wrong – and we believe that there were major omissions relating to matters which should have been covered in advice given to Ministers. Our conclusion is that Ministers would have found it impossible to make a properly informed decision about the relative properties of different charging methods, or about the merits of our specific proposal, on the basis of the civil service brief

Doing Biopolitics Differently? Radical Potential in the Post-2015 MDG and SDG Debates

Post print On institutional repository or subject-based repository after a 18 months embargo, withdraw

Securitization and Post-Crisis Financial Regulation

There are few types of securities as internationally traded as those issued in securitization (also spelled securitisation) transactions. The post-financial crisis regulatory responses to securitization in the United States and Europe are, at least in part, political and ad hoc. To achieve a more systematic regulatory framework, this article examines how existing regulation should be supplemented by identifying the market failures that apply distinctively to securitization and analyzing how those market failures could be corrected. Among other things, the article argues that Europe’s regulatory framework for simple, transparent, and standardised (“STS”) securitizations goes a long way towards addressing complexity as a market failure, and that the United States should consider a similar regulatory approach