Reading 16: Economics of Regulation

Question 1

Describe classifications of regulations and regulators

Answer 1

Types of Regulations:

1. Statutes
2. Administrative Regulations
3. Judicial Law

Types of Regulators

1. Government Agencies
2. Independent Regulators (no government funding) could be a SRO (self regulating body) or non SRO.
3. Outside bodies (ratings agencies) dotted line

Question 2

Describe uses of self-regulation in financial markets.

Answer 2

• SROs without government recognition NOT regulators
• Conflict of interest between members of SRO and the regulatory role of SRO
• Independent SROs more common in common-law countries
• Independent SROs more effective when properly supervised

Question 3

Describe the economic rationale for regulatory intervention

Answer 3

1. Informational frictions: When information is not equally available (asymmetry)
2. Externalities: Consumption of public goods (cost is not borne in proportion to consumption)

Question 4

Describe regulatory interdependencies and their effects

Answer 4

Regulatory Interdependencies:

• Capture theory: regulatories end up being influenced by regulated industry/entity
• Competition: regulators in different jurisdictions compete for business
• Arbitrage: Business shop for friendly regimes or find loopholes

Question 5

Describe tools of regulatory intervention in markets

Answer 5

1. Price mechanisms: tax/subsidy
2. Restricting/requiring certain activities
3. Provision of public goods or financing rivate projects

• Effectiveness of regulatory tools depends on enforcement abilities of the regulator

Question 6

Explain purposes in regulating commerce and financial markets

Answer 6

• Regulating Commerce: necessary to set the ground rules
• Regulating Financial Markets:
  
  • Promoting investor confidence
  • Mitigating agency problem
  • Protection for small investors
  • Prudential supervision of financial institutions

Question 7

Describe anticompetitive behaviors targeted by antitrust laws globally and evaluate the antitrust risk associated with a given business strategy

Answer 7

Anticompetitive behaviors:

• Discriminatory pricing
• Bundling
• Exclusive dealing

Anti-trust risk assment:

• Excessive concentration of market share
• evaluation of announced mergers

Question 8

Describe benefits and costs of regulation

Answer 8

Benefits:

• Easy to view but difficult to quanitfy

Costs:

• Regulatory burden: direct and indirect
• Net regulatory burden: regulatory burden minus the private benefits of regulation
• Costs easier to assess ex-post

Question 9

Evaluate how a specific regulation affects an idustry, company, or security

Answer 9

Regulation can signifcantly impact valuation

Taxes shring an industry while subsidies help it grow

Is the regulator captive?

Different types of regulations affect different industries