Microeconomic regulation

Credit ratings and regulatory risk weights

Harold Cole, Thomas F Cooley, 22 June 2014

In the aftermath of the sub-prime crisis, the major credit rating agencies have been criticised for giving overly generous ratings to mortgage-backed securities. Whereas many commentators have blamed the ‘issuer pays’ market structure for distorting incentives, this column argues that the key distortion came from regulators’ use of private ratings to assign risk weights. This induced investors to focus on the risk weights attached to ratings rather than their information content, thus undermining the reputation mechanism that had previously kept ratings honest.

Net neutrality: Goals and challenges

Joshua Gans, 11 June 2014

Netflix recently agreed to pay Comcast for faster access to Comcast’s customers, intensifying the debate over ‘net neutrality’ – the principle that internet service providers should treat all data equally. This column argues that without net neutrality regulation, ISPs can capture the benefits of higher-quality content, thereby discouraging innovation from content providers. To be effective, net-neutrality regulation must prevent content-based price discrimination on both sides of the market.

Taxing Amazon.com sales

Brian Baugh, Itzhak Ben-David, Hoonsuk Park, 5 May 2014

Several US states have recently implemented laws requiring the collection of sales tax on online purchases. In practice, however, only Amazon.com has been affected. This column shows that households living in these states have reduced their Amazon expenditures by 9.5%. It also shows that the decline in Amazon purchases is offset by a 2% increase in purchases at local brick-and-mortar retailers and a 19.8% increase in purchases through the online operations of competing retailers.

Controlling UK executive pay

Ian Gregory-Smith, Steve Thompson, Peter Wright, 24 March 2014

In 2003, the UK adopted a ‘say on pay’ policy, whereby quoted companies’ executive compensation offers have to be put to a shareholder vote. This column presents evidence that this policy has had a relatively modest impact on executive pay. A 10% increase in compensation is associated with an increase in shareholder dissent against the proposal of just 0.2%. However, remuneration committees representing the more highly rewarded CEOs are quite sensitive to dissent, provided it exceeds a critical threshold of about 10%. Shareholders do not appear more anxious about pay since the crisis.

Efficient retail payments and growth in Europe

Iftekhar Hasan, Tuomas Takalo, 24 January 2014

Efficient retail payments are associated not only with lower direct costs but also with indirect benefits, and ultimately – with enhanced economic growth. This column presents research on different retail payment habits in the Eurozone. A correlation exists between the forms of payment in a country and its recent economic fortune. There are a number of methods to promote more efficient payments. The biggest challenge to increase the efficiency of retail payments in Europe is the heavy regulation and barriers to entry of new payment methods.

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