Design Of Regulatory Policy Research Articles

Setting the deadline and the penalty policy for a new environmental standard

A common approach that governments use to combat the potential environmental harm caused by industry is to set an environmental standard for firms to either comply with by a specified deadline or face a penalty. Two penalty policies that governments often rely on to pressure firms to comply with a new standard are a per-period penalty policy and a per-unit penalty policy. We examine how a government should set the deadline and the penalty for a new standard in a market with two competing firms, both of whom make development investment decisions. We analyze and compare the government’s decisions under both penalty policies. Our results show that only when one of the firms has a significantly higher development capability and/or production capability should the government set the deadline in a way such that only one firm complies on time. Comparing the two penalty policies, we find that when the firms’ production decisions are not impacted by the penalty, the government either prefers the per-unit policy or is indifferent between the two policies. Our work adds to the environmental literature on regulatory policy design by examining a government’s deadline choice and penalty decisions (both type and size) for a competitive market with heterogeneous firms.

Regulation Design in Insurance Markets

Regulators often impose rules that constrain the behavior of market participants. We study the design of regulatory policy in an insurance market as a delegation problem. A regulator restricts the menus of contracts an informed firm is permitted to offer, the firm offers a permitted menu to each consumer, and consumers choose contracts from offered menus. If consumer types and firm signals are ordered in a way that reflects coverage need, the regulator can leverage the firm’s information by forcing the firm to offer specified additional options on each menu. Several extensions illustrate the practical application of our results. (JEL D21, D43, D82, D86, G22, G28, L51)

Reducing systemic risk in a multi-layer network using reinforcement learning

This paper introduces a novel framework to assess and manage systemic risk in a multi-layer financial network by taking advantage of reinforcement learning (RL). The reduction of systemic risk in the financial network is achieved by applying the deep deterministic policy gradient algorithm (DDPG) to reorganize the interbank lending structure of the network into an orientation that better mitigates the spread of contagion. The reorganization procedure itself was constrained in order to preserve the balance sheet of every bank. To achieve this, we develop a constraint DDPG model consisting of a safety layer coupled with a linear mapping to satisfy the total borrowing and lending amounts of each bank. Moreover, we propose a new multi-layer DebtRank (DR) algorithm taking into account how contagion spreads from one layer to another. Testing against networks of varying size and depth, our DDPG agent was able to reduce systemic risk levels by significant amounts, suggesting the feasibility and utility of employing RL in managing systemic risk through aiding regulatory policy design. We observe an increase in sparsity and an increase in network dissimilarity between the different layers of the network after optimization.

The impact of insurance institutional investors on corporate value from selection and creation perspective

The majority of insurance investment funds are derived from policy liability debt funds. It differs from other institutional investors in a number of ways, including investment size, horizon, duration, risk, and so on. However, only a small portion of the extant literature focuses on in-depth and extensive analysis of Insurance Institutional Investors' holdings (IIIs). This study analyses the impact of shareholding by insurance institutions on the value of Shanghai and Shenzhen A-share listed companies in China's capital market. The paper offers three major contributions. First, we discovered that long-term equity-holding IIIs have both value selection and value creation functions. Second, the value creation function becomes more significant among long-term stock-holding IIIs with an increase in the period during which they retain the company's shares; Third, fast-in and fast-out (FIFO) IIIs have a value-inhibiting effect on the held company and serve a value selection role, rather than a value creation function. This study provides more insight on the lack of academic interest in insurance institutions and serves as a foundation and reference for the design of regulatory policies for insurance institutions' involvement in stock markets. It also gives empirical evidence for corporations to accurately analyze shareholding by insurance institutions. Furthermore, since this study concentrates on China's capital market, it can serve as a benchmark for other nations, particularly, those designated as developing market economies.

Imagining cooperative tax regulation: Common origins, divergent paths

In many countries, relational field dynamics between tax administrators and corporate taxpayers have undergone significant changes in recent years. We conceive of cooperative compliance models implemented in the Netherlands and the UK between large corporate taxpayers and the respective tax administrations as dynamic strategic action fields, nested within the wider tax field and influenced by shifts in the external environment. Drawing on a series of interviews with skilled actors we identify similarities between the two countries in terms of the initial motivation for introducing cooperative compliance. We also identify differences in the subsequent trajectories. We find that within the respective strategic action fields, an imaginary of cooperation built around mutual trust contributes to the sustainability of the field. Vulnerability to developments in proximate fields on the other hand undermines field sustainability. Together these concepts help to explain the different trajectories and demonstrate the value in exploring shared understandings in strategic actions fields as imaginaries and paying more attention to the influence of proximate fields. The findings have implications for regulatory policy design in other settings.

The role of externalities and uncertainty in policy design: evidence from the regulation of genome editing

Externalities and uncertainty play an important role in the design of regulatory policies. Regulatory tools must be selected while taking into consideration the side-effects that regulated products or services have on other individuals and on the environment. This study investigates the externalities and uncertainty that arise from the use of genome editing (with specific reference to CRISPR technique) and how they relate to regulatory policy design choices. Building on evidence from genome editing regulation and on the NATO (Nodality, Authority, Treasure and Organization) policy tools framework, this study argues that a mix of regulatory tools is required to tackle externalities of genome editing applications and to cope with sources of uncertainty about their beneficial, neutral and harmful side-effects. The study provides some recommendations to policy-makers about reducing uncertainty, diversifying regulatory tools over time, and communicating to the public about features of genetically edited products.

Do Cannabis Users Reduce Their THC Dosages When Using More Potent Cannabis Products? A Review.

Background: Higher potency cannabis products are associated with higher risks of negative physical and psychological outcomes. The US cannabis industry has opposed any restrictions on THC levels, arguing that people titrate their THC doses when consuming higher potency products.Objective: To review research on the degree to which people who use cannabis for recreational purposes can and do titrate their THC doses.Method: A systematic search was conducted for studies published from 1973 to 2020. We included (1) experimental laboratory studies on dose titration of cannabis products that varied in THC content; (2) observational studies on the use of more potent products; and (3) surveys on whether cannabis users titrate when using more potent products.Results: In some experiments, there were inverse associations between the THC content and the amount smoked and smoking topography, while others indicated higher doses consumed and psychological and physiological effects observed. Findings of observational studies of regular cannabis users were more equivocal. In some surveys, cannabis users reported that they use less when using more potent products, but in other surveys, persons who used more potent cannabis had more adverse effects of use.Discussion: There is some evidence from experimental studies that people who use higher potency cannabis for recreational purposes can titrate their THC doses, but less evidence that regular cannabis users do in fact do so. We need much better experimental and epidemiological research to inform the design of regulatory policies to minimize harms from the use of high THC cannabis products.

Under the Radar

International regulatory cooperation (IRC) refers to a diverse range of ways government regulators from different countries work together on developing and enforcing regulations. It has grown rapidly over the last 40 years, but it is little understood because much of it occurs beneath the radar. New research shows that ASEAN countries, along with the New Zealand government, are deeply imbedded in a complex web of international regulatory cooperation arrangements and agreements. Among ASEAN countries these groupings are predominately multilateral, bilateral and regional. In New Zealand, bilateral agreements with Australia predominate. Much of this cooperation occurs outside formal free trade agreements and the World Trade Organization’s Technical Barriers to Trade regime. Instead, regulators often work directly with their foreign counterparts through informal networks. The economic and technological drivers of the growth in international regulatory cooperation will persist in the post-Covid-19 era, providing continued impetus. For example, the need to manage international spillovers will increase the need for cooperation on regulatory policy design and enforcement and other regulatory practices to ensure that domestic regimes remain effective. The experience of Covid-19 has underlined the value of cooperative activities between states, such as information gathering and exchange. Dealing effectively with three of the principal issues currently confronting public policymakers – pandemics, climate change and effective governance of the digital environment – requires extensive international cooperation.

Tax or subsidy? Design and selection of regulatory policies for remanufacturing

This study investigates a regulatory policy design and selection problem for a social-welfare-maximizing regulator, whose policies influence the remanufacturing production of a profit-maximizing manufacturer. The decisions of the regulator and the manufacturer are characterized by a Stackelberg game model, where three regulatory policies, namely, a tax policy, a subsidy policy, and a tax-subsidy policy are considered. Analytical results show that regulatory policies cannot always promote remanufacturing, which goes against the original intention of the regulator who hopes to encourage remanufacturing via regulatory policies. Accordingly, we address regulatory policy design strategies to help the regulator make policy-making decisions on respective regulatory policies. We then propose a threshold-based regulatory policy selection strategy to aid the regulator in making policy-choice decisions between the three policies. Further analyses indicate that the quality of available cores and the environmental treatment cost essentially influence the policy selection decisions of the regulator. The selected policy helps the regulator achieve maximum social welfare with the best environmental performance in most cases. An interesting finding in this study is that when the subsidy policy is selected, it is superior to the tax policy in improving social welfare and economic benefit, but may lead to heavier environmental burdens.

Regulation Design in Insurance Markets

Regulators often impose rules that constrain the behavior of market participants. We study the design of regulatory policy in an insurance market as an optimal delegation problem. A regulator restricts the menus of contracts an informed firm is permitted to offer, the firm offers a permitted menu to each consumer, and consumers choose contracts from offered menus. Under an ordering on consumer types and firm information, the regulator can fully leverage the firm's information by forcing the firm to offer specified additional options on each menu. Several extensions illustrate the applicability of our framework.

Motivating energy suppliers to promote energy conservation

We examine the design of regulatory policy to induce electric utilities to deliver the surplus-maximizing level of energy efficiency services, $$e^{*}$$ . The rebound effect (whereby increased energy efficiency stimulates the demand for energy) typically renders revenue decoupling insufficient in this regard. The additional financial incentive required to induce $$e^{*}$$ is shown to vary with such factors as the prevailing price of energy, the magnitude of the rebound effect, the extent of observable energy efficiency investments, and the utility’s objective.

Regulatory Policy Design for Agroecosystem Management on Public Rangelands

This paper develops a model to analyze regulatory design for agroecosystem management on public rangeland. We define and compare the efficiency of the most prominent regulatory instruments on public rangeland—input regulation, cost‐sharing/taxation, and performance regulation. We show that given informational asymmetries between ranchers and regulators within federal land management agencies, performance regulation can achieve first‐best outcomes when regulators can perfectly monitor ranch‐level ecological conditions and do not face constraints due to budget limitations or restrictions on the level of penalties they can assess, but that under imperfect monitoring and/or budgetary/penalty constraints, input regulation and cost‐sharing/taxation can dominate performance regulation.

After Airline Deregulation and Alfred E. Kahn

Among Alfred E. “Fred” Kahn's many accomplishments, none is better remembered than his pivotal role in deregulation of the US airline industry. Kahn's commitment to marry core microeconomic principles with institutional analysis, willingness as Chairman of the Civil Aeronautics Board to step outside the “regulation as usual box,” and appealing wit made him the face of the Airline Deregulation Act of 1978, one of the great microeconomic policy triumphs. Lessons drawn from Kahn's work and the airline deregulation experience remain instructive for current academic research and regulatory policy design across broad sectors of the economy.

Signal Quality and the Option Value of Shareholder Rights

We present a model that shows that strong shareholder rights have a greater impact on value for firms that operate in less opaque information environments. We model shareholder rights as an option at the disposal of shareholders to stop projects chosen by a manager, and show that the value of this veto increases with the precision of a signal the shareholder receives about project type. The model has implications for design of regulatory policy aimed at strengthening shareholder rights.

Regulating regulators in transitionally competitive markets

During the course of the first thirty CRRI conferences, we have gained considerable insight about how to design regulatory policy in the presence of developing competition. The insight to date has focused on how to harness competitive forces to motivate incumbent suppliers to serve the best interests of consumers. This paper stresses the importance of considering the incentives of regulators and explores the associated changes in standard recommendations for regulatory policy design in the presence of developing competition.

Development of a system to produce maps of agricultural profit on a continental scale: An example for Australia

Policy makers in the agricultural sector are confronted with challenges which might drive land use change and ultimately agricultural profitability to a substantial degree. The challenges include questions around climate variability, demographic changes, use of land for bio-fuel production and ensuring an increase in food production. As profitability triggers many agri-business decisions, knowledge about the existing socio-economic landscape and the economic profile of a region as well as potential impacts on profits provides useful contextual information when agricultural policies are designed. Given the upcoming challenges and their associated uncertainties, it is important to ensure that a map of agricultural profit can be reproduced in a scenario and simulation setting which will allow exploring uncertainties around the impacts on agricultural profits as well. There is however currently no flexible system in operation which allows for a consistent update of a map of agricultural profits in Australia or elsewhere. This paper describes a process that has been developed to produce a map of agricultural profit for Australia for the year 2005/2006. The process involves a complex data architecture that accounts for heterogeneous information that is collected by a variety of institutions across different scales. All information can be comfortably queried and query results can be forwarded for immediate processing and subsequent visualisation in a geographic information system (GIS). To facilitate the production of profit maps in the future, the system provides flexibility regarding an update of new economic information but it can also be linked to maps that show an updated distribution of land use. A map of agricultural profit on a large scale and regular updates thereof will help understand profit trends in time and across space. It will help identifying regions that have a lower economic profile and will inform decisions regarding the design of regulatory policies. As these maps are developed using national scale data, we do not recommend using the results at the farm level but we suggest using separate catchment scale profit assessments to calibrate the national scale profit map. The proposed system is well suited to be used in various land use management and economic scenarios and will represent a step forward regarding a scenario impact assessment on agricultural profits. It will also help understand the economic benefit of land use on a large scale.

Regulatory Policy Design in an Uncertain World

AbstractThe paper examines principal–agent relationships in uncertain environments where beliefs of the contracting parties (the regulator and the firm) are represented by sets of probabilities. In addition to fully characterizing the first‐best and the second‐best solutions, we examine optimality of zero‐risk, fixed‐payment schemes and the relationship between the first‐best and the second‐best solutions. In the second‐best world, where the regulator can only contract on the quality of the good, a zero‐risk standard is optimal when the firm has beliefs that are so ambiguous that the firm’s marginal rate of transformation belongs to the set of the firm’s relative probabilities.

Designing Smarter Regulation with Improved Benefit-Cost Analysis

AbstractBenefit-cost analysis is required for many regulatory decisions in the United States and in other countries. In this paper, I examine a standard textbook model that is used in benefit-cost analysis as it is actually applied to environmental policy and other areas of regulation. My primary objective is to suggest how including some key factors in the analysis could promote the development of smarter regulation.I begin by presenting a standard economic model for government intervention in markets, which balances benefits and a narrow definition of costs. I then introduce a richer normative theory that considers several political and economic costs that are frequently not considered in analyzing real-world applications. Examples include costs associated with rent seeking, design and implementation, and raising revenues. The richer theory suggests that the government should supply less of a good, or ask the private sector to provide less of that good, than the standard economic model suggests. The reason is that intervening in markets is often more costly than the standard model assumes. In special cases, the theory provides guidance on the setting of socially optimal taxes and subsidies. I then explore how the theory needs to be modified in the presence of biased estimates of benefits and costs. I conclude with a discussion of how the theoretical framework can be applied to the actual design of regulatory policy.

The Regulatory Policy Design of Nonpoint Pollution from Agricultural Activities: Issues and Challenges in China

Non-point pollution (NPP) has become a major issue of environmental degradation in China. Uncertainty, moral hazard, and incomplete knowledge of NPPP make conventional policy instruments applied to point source pollution problems difficult addressing NPP problems. NPP regulatory policies should be designed to induce agricultural producers to change their production practices in ways that improve the environmental. The economic literature on NPP has not considered the possible use of both voluntary and mandatory approaches as complementary parts of a policy package. Factors influencing farmers’ cooperative action to conserve environmental public goods are critical in regulatory policy formation in transitional China with huge amount of small subsistence farmers. Under a changed political environment, a joint effort between government and farmers is the approach most favored to address NPP issues, under which relationships between environmental outcomes and agricultural production must be accounted for.

Designing Smarter Regulation with Improved Benefit-Cost Analysis

Benefit-cost analysis is required for many regulatory decisions in the United States and many other countries. In this paper, I examine a standard textbook model that is used in benefit-cost analysis as it is actually applied. My primary objective is to suggest how including other key factors in the analysis could promote the development of smarter regulation.I begin by presenting a standard economic model for government intervention in markets, which balances benefits and a narrow definition of costs. I then introduce a richer normative theory that considers several political and economic factors that are frequently not considered in analyzing real-world applications. Examples include costs associated with rent seeking, design and implementation, and raising revenues. The richer theory suggests that the government should supply less of a good, or ask the private sector to provide less of that good, than the standard economic model suggests. The reason is that intervening in markets is often more costly than the standard model assumes. In special cases, the theory provides guidance on the setting of socially optimal taxes and subsidies. I then explore how the theory needs to be modified in the presence of biased estimates of benefits and costs. I conclude with a discussion of how the theoretical framework can be applied to the actual design of regulatory policy.