REVISTA DE ECONOMÍA
INSTITUCIONAL No. 23,
SECOND SEMESTER 2010
Regulation and failure
Joseph Stiglitz [pdf][html] [html]
regulation, market-failure; JEL:
Government plays a necessary role in keeping markets working efficiently and fairly. Market failures -situations in which the invisible hand does not make everyone better off- are among the oldest and most universally accepted justifications for regulation. However, incidents of market failure are more pervasive than recognized and underappreciated. Well-designed regulatory interventions can often correct these market failures.
From Greenspan's despair to Obama's hope: the scientific basis of cooperation as principles of regulation
Yochai Benkler [pdf] [html][html]
[Keywords: macroeconomic policy, macroprudential regulation, inflation targets, automatic stabilizers; JEL: E44, E52, E58, G38, H50]
A common assumption, often accepted by regulators - that individuals act only in their narrow self-interest - is false. Evidence from both the natural and social sciences suggests that most people are strongly motivated to cooperate and help one another. Organizations (such as Toyota and Wikipedia) that cultivate and take advantage of these inclinations have prospered. Policy can be designed to incorporate attitudes toward cooperation, and to channel these tendencies in productive directions.
Why are financial markets so inefficient and exploitative, and a suggested remedy
Paul Woolley [pdf][html] [html]
financial markets, principal-agent; JEL: G11, G14, D82]
The essay offers a new understanding of how financial markets work. The key departure from conventional theory is to recognize that investors do not invest directly in securities but through agents such as fund managers. Agents have better information and different objectives than their customers (principals) and this asymmetry is shown as the source of inefficiency: mispricing, bubbles and crashes. A separate outcome is that agents are in a position to capture for themselves the bulk of the returns from financial innovations. Principal/agent problems do a good job of explaining how the global finance sector has become so bloated, profitable and prone to crisis. Remedial action involves the principals changing the way they contract with, and instruct agents. The essay ends with a manifesto of policies that pension funds and other large investors can adopt to mitigate the destructive features of delegation both for their individual benefit and to promote social welfare in the form of a leaner, more efficient and more stable finance sector.
How should we regulate bank capital and financial products? What role for “living wills"?
Charles Goodhart [pdf] [html][html]
financial regulation, contagion, bank governance, risk assessment, systemic risk, boundary problems; JEL:
E44, E58, G18, G28]
Financial regulation is normally imposed in reaction to some prior crisis, rather than founded on theoretical principle. In the past, regulation has been deployed to improve risk management practices in individual banks. This was misguided. Instead, regulation should focus first on systemic externalities (contagion) and second on consumer protection (asymmetric information). The quantification of systemic externalities is difficult. Since the costs of financial breakdown is high, a natural response is to pile extra regulation onto a set of regulated intermediaries, but this can impair their capacity to intermediate and leads onto border problems, between regulated and unregulated and between different national regulatory systems.
The dynamics of trust: communication, action and third parties
Bart Nooteboom [pdf] [html][html]
trust, trust dynamics; JEL:
After clarifying the notion of trust, this article analyzes the foundations of trust and the role of openness and communication, actions and third parties in the building, breakdown and repair of trust.
Capital inflows: the role of controls
Jonathan D. Ostry, Atish R. Ghosh, Karl Habermeier, Marcos Chamon, Mahvash S. Qureshi and Dennis B.S. Reinhardt [pdf][html] [html]
capital inflows, capital controls, financial crisis; JEL:
This paper analyzes the management of surges in capital inflows to Emerging Markets. It reviews the main policy tools, including fiscal and monetary policy, exchange rate policy, foreign exchange market intervention, domestic prudential regulation, and capital controls. A key conclusion is that, if the economy is operating near potential, if the level of reserves is adequate, if the exchange rate is not undervalued, and if the flows are likely to be transitory, then use of capital controls -in addition to both prudential and macroeconomic policy- is justified as part of the policy toolkit to manage inflows. Evidence from the current crisis suggests that controls aimed at achieving a less risky external liability structure reduced financial fragilities and increased growth resilience.
Telecommunications, convergence and regulation
Ana Teresa Aldana J. and Azucena Vallejo C. [pdf][html] [html]
regulation and industrial policy, technological change government policy; JEL: L5, O33, O38]
This paper provides an analysis of the convergence process in the development of the telecommunication sector and evaluates its impact on market structure and policy in Telecommunication and Information Technologies (ICT), in order to identify sensitive regulatory issues and some aspects that have not yet been discussed in depth. Regulatory models have responded to the challenges raised by the market and technological development, but models that can anticipate innovations are still required. Thus, the need arises for a new generation of regulation that can generate synergies to harmonize the regulations that govern the sector's industries, and to assess the impact of policies on social, economic and cultural rights associated with the ubiquity of networks and information.
The Public Finances of the 'Confederación Granadina' and the 'Estados Unidos de Colombia' 1850-1886
Salomón Kalmanovitz and Edwin López R. [pdf][html] [html]
federalism, taxes, expenditure, fiscal balance; JEL:
H71, H72, N46]
This article analyzes the tax revenues of the Colombian central government and those of the federal states between 1850 and 1882. It aims to determine whether political decentralization of revenues and expenditures favored and improved the fiscal sustainability of Colombia during this period. The federalist structure is contrasted with centralized organization and we try to assess which was more favorable for achieving macroeconomic equilibriums at the central and decentralized levels.
Drug trafficking and conflict: why has the price of cocaine dropped?
Leonardo Raffo López [pdf][html] [html]
illegal markets, drug trafficking, economic theory of contests, illegal armed groups; JEL:
D51, C72, D74]
Combining the approaches of Ortiz and Mejía et al., this paper proposes a new model of drug trafficking and conflict. In a general equilibrium framework, an explanation of the downward trend in the price of cocaine over the last two decades is developed. The model shows that the main factor causing this trend is the increase in productivity in the production of cocaine, which has counterbalanced the impact of the supply-side control policies and the decrease in the number of hectares of land planted with coca.
Forced displacement and living conditions of receiving communities: the case of Pasto, Nariño
María del Pilar Bohada R. [pdf][html] [html]
displaced population, impact evaluation, changes in wellbeing, effects of displacement, propensity score matching; JEL:
R23, O15, I31, I38, D74]
The armed conflict in Colombia has left over 3, 3 million displaced persons seeking refuge in the cities. Studies on displacement in Colombia have focused on examining the losses that this crime inflicts on the victims, but have made little progress on analyzing its effects on the standard of living of the receiving communities. This study uses impact evaluation techniques to assess the effects of displacement on populations living in strata 1 and 2 areas in Pasto, Nariño. The findings indicate that displacement has mixed effects on the living conditions of the receiving communities. Although there are negative effects in terms of security and food security, there have been positive effects on trust and social infrastructure. This indicates that while the displaced population generates tension in the receiving communities, it also provides solutions to historical social problems, such as lack of education and health infrastructure.