This paper analyzes the value maximization of regulated banks within a moral-hazard framework. In the model, regulators monitor both the capital ratio and the asset portfolio, and banks simultaneously select the optimum capital ratio and asset portfolio. A key assumption is that a bank cannot expect a positive put option value once it is classified as risky by regulators. The optimum values of the two variables depend on investment opportunities and charter values, as well as regulatory parameters. The model that explicitly incorporates regulation can explain various phenomena that are seemingly inconsistent with the predictions of moral hazard models — for example, a positive relationship between the capital ratio and the riskiness of the asset portfolio. A particularly interesting result is that a larger charter value results in a higher-risk interior solution

This paper attempts to estimate both the direct and indirect costs of regulation for major sectors of the UK financial services industry. We also compare UK direct costs with those for the US and France and this provides a benchmark for assessing the effect of regulation on the competitive position of the UK financial services industry. We believe that this is the first attempt to compare regulatory costs in the UK with those of its major competitors. For indirect costs, in the absence of an international benchmark we compare our results with the predictions made at the time of the introduction of the Financial Services Act, by Lomax (Lomax, D., 1987. London Markets After the Financial Services Act, Butterworths, London) and Goodhart (Goodhart, C., 1988. The costs of regulation. In: Seldon, A. (Ed.), Financial Regulation or Over-regulation. Institute of Economic Affairs, London, p. 31). They estimated that indirect costs would be £4 for every £1 of direct costs and that annual aggregate costs would be £100 million. Our results suggest that, so far as direct costs are concerned, the costs of regulation for the securities and derivatives trading and broking sector are substantially lower for the UK than for the US and France. In contrast, for the investment management and unit trust industry UK costs are significantly higher than those for the other two countries. For the life insurance industry, UK costs are similar to those in France but markedly lower than those for the US. We also find for the securities industry around £4.1 of indirect costs per £1 of direct costs. For the investment management industry the corresponding figure is £3.2. However there is substantial variation across firms and, although our sample is too small to be definitive, the ratio appears to be related to firm size. Although these results are broadly in line with the predictions of Lomax and Goodhart it should be borne in mind that both numerator and denominator are substantially higher in real terms than those used by Lomax and Goodhart

We exploit a unique experimental setting within the life insurance industry to examine the effects of taxes, regulation, earnings, and organizational form on life insurers' investment portfolio realizations. A unique equity tax levied on mutual life insurers, as well as the statutory rate variation that occurred during our sample period, allow us to disentangle the effects of taxes from earnings or profitability. Consistent with some policymakers' claims, we find mutual insurers' capital gain realizations are affected by company-specific equity tax rate variation. In addition, we find capital regulation and earnings considerations affect both stocks' and mutuals' realizations

Hospitals expend considerable resources each year to provide health care to the poor. Why do some hospitals voluntarily take on a disproportionate burden of this care? Our view is that the burdened hospitals are not simply altruistic. They are indirectly compensated for this expense with legal protections against competition under certificate-ofneed (CON) regulation. We test this hypothesis in a recursive model, explaining which hospitals are likely to win CON approval. The results indicate that, controlling for the endogeneity of indigent care, regulators in Florida systematically awarded licenses to hospitals providing greater amounts of care to the poor

In a 1991 essay in Scientific American, Michael Porter suggested that environmental regulation may have a positive effect on the performance of domestic firms relative to their foreign competitors by stimulating domestic innovation. We examine the stylized facts regarding environmental expenditures and innovation in a panel of manufacturing industries. We find that lagged environmental compliance expenditures have a significant positive effect on R&D expenditures when we control for unobserved industry-specific effects. We find little evidence, however, that industries' inventive output (as measured by successful patent applications) is related to compliance costs

This study evaluates the impact of variations in regulation, ownership, and market structure in the U.S. electric utility industry during the period surrounding the New Deal, when considerable institutional variation provided a natural experiment for analysis. A simultaneous-equations model of electricity supply and demand is developed and estimated for the years 1930 and 1942 with firm- and market-level data collected on utilities serving cities of population 50,000 or more. The paper offers evidence that regulation, public ownership, and competition served to reduce electricity prices and enhance allocative efficiency during the period under examination

In recent years there have been growing demands to make trade liberalization contingent on adoption of common labor and environmental standards. The straightforward economic answer is that this makes little sense: neither the gains from trade nor the gains from appropriate regulation are compromised if other countries impose standards that are weaker than your own. It is possible to offer second-bet economic rationales for harmonization, but these are empirically unconvincing. The only serious argument in favor or regulation is political: that regulation which is in the national interest may not be politically feasible unless other countries do the same

When should regulators close a financially ailing bank? FDIC practice in the US has moved in the direction of early closure. In contrast, banking regulators in Japan continue to follow a more patient approach. This paper analyses a series of models in which closure rules and bailout policies arise endogenously through the interaction of (i) regulators' attempts to minimize discounted, expected bankruptcy costs, and (ii) equity-holders' incentives to recapitalise banks. We characterize subsidy policies for distressed banks that implement socially optimal closure rules at minimum financial cost to regulators and which reduce moral hazard

Ecuadorian labor costs are said to be high because of the existence of many mandated benefits. Using the 1994 Living Standards Measurement Survey, we show that the effect of these benefits is actually mitigated by a reduction of base earnings, that is, of the foundation on which they are paid. The reduction is larger in the private than in the public sector and is negligible for unionized workers. We also show that, in spite of mandated benefits, interindustry wage differentials are comparable to those of Bolivia, a country characterized by “flexible” labor markets but otherwise similar to Ecuador.

This paper examines whether golden parachute adoptions in the banking industry during the eighties aligned the interests of CEOs with those of regulators and or shareholders. Our results provide evidence supporting concerns expressed by regulators: that boards of directors behaved opportunistically by adopting golden parachutes prior to large bank failures in order to exploit the FDIC guarantee. Parachute adoption was correlated with poor performance ex ante and ex post. Moreover, adoption of parachutes virtually ceased when the FDIC guarantee was withdrawn by FDICIA