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Low saving rates and high indebtedness are characteristics of the household sector in many developed countries. As in other countries, financial deregulation has contributed to increased household indebtedness in New Zealand. This paper discusses several aspects of the linkages between deregulation and household consumption decisions. It begins with an overview of the financial sector reforms and a discussion of how the reforms affected households' access to credit. Secondly, the effect of a change in house prices on consumption is measured. Given that New Zealanders hold about 80 per cent of their wealth in housing, changes in house prices have the potential to materially affect household consumption decisions. Also, there is evidence that the effect of changes in housing wealth on consumption is stronger in the period after deregulation. Thirdly, the role of the household sector in the current account is discussed as banks have increasingly been borrowing overseas to fund household borrowing. The results indicate that the household sector's net overseas surplus declined by at least $7 billion over the last decade. Finally, the ability of the household sector to weather an economic downturn is considered. Highly leveraged households are more vulnerable in times of stress, and their debt servicing capabilities might deteriorate when interest rates rise. Also, deterioration in household balance sheets could negatively impact the financial sector.

Economic theory suggests that asymmetric information between incumbents and entrants can generate endogenous barriers to entry into credit markets. First, the entrants are more exposed to adverse selection than the incumbents because the pool of agents that apply for a loan to a newcomer contains all those not creditworthy would-be borrowers who were previously rejected by mature banks in the market. Second, incumbents' creditworthiness tests are likely to be more accurate than those run by the entrants because a substantial amount of the information used to screen loan applicants is generated through repeated interaction with the local business community. For both reasons entrants are likely to experience higher loan default rates than the incumbents. We test these theoretical predictions using a unique database of 7,275 observations on 729 individual banks' lending in 95 Italian local markets. We find that both adverse selection and informational disadvantage play a significant role in explaining entrants' loan default rates. We argue that these endogenous barriers can help to explain why entry in many local credit markets by domestic and foreign banks was slow, even after substantial deregulation.

Financial sector reform in India has progressed rapidly on aspects like interest rate deregulation, reduction in reserve requirements, barriers to entry, prudential norms and risk-based supervision. But progress on the structural-institutional aspects has been much slower and is a cause for concern. The sheltering of weak institutions while liberalizing operational rules of the game is making implementation of operational changes difficult and ineffective. Changes required to tackle the NPA problem would have to span the entire gamut of judiciary, polity and the bureaucracy to be truly effective. This paper deals with the experiences of other Asian countries in handling of NPAs. It further looks into the effect of the reforms on the level of NPAs and suggests mechanisms to handle the problem by drawing on experiences from other countries.

Recent surveys of wheat importers indicate that countries that import wheat via a state-trading enterprise (STE) are less sensitive to quality issues in import decision-making than countries that import wheat through private traders. This study examines conceptually and empirically the impact of the deregulation of wheat imports on the quality and source of wheat imports.

This paper provides a set of "benchmarks", or a scorecard if you will, that will aid in evaluating whether the Federal Communications Commission's actions in three major rulemakings - the Unbundled Network Elements Triennial Review Proceeding, the Wireline Broadband Proceeding, and the Cable High-Speed Access Proceeding - are pro-competitive and deregulatory (that is, consistent with a Dynamic Deregulation Vision) or anti-competitive and pro-regulatory (that is, consistent with a Static Regulated Competition Vision). The scorecard benchmarks are as follows: - Unbundling and sharing should not be required for newly installed fiber or other non-copper facilities; - Regardless of technology platform, broadband services should not be subject to unbundling and sharing requirements or computer-II-type separation requirements; - Local switching should be removed promptly from the unbundling and sharing regime; - Inter-office transport and high capacity loops should be removed promptly from the unbundling and sharing regime and "special access" should not be re-regulated; - A presumptive sunset regime with competitive triggers should be established for the removal of copper local loops from the unbundling and sharing requirements; - The Commission should preempt the states from mandating unbundling and sharing requirements that exceed the scope of the federal obligations; and - Elements that have been removed from the unbundling and sharing regime should not be considered on the "competitive checklist" for evaluating section 271 applications.

It is generally agreed that boards are endogenously determined institutions that serve both an oversight and advisory role in a firm. While the oversight role of boards has been extensively studied, relatively few studies have examined the advisory role of corporate boards. We examine the participation of political directors on the boards of natural gas companies between 1930 and 1998. We focus on the expansion of federal regulation of the natural gas industry in 1938 and 1954 and subsequent partial deregulation in 1986. Using datasets covering the periods from 1930 to 1990 and 1978 to 1998, we test whether regulation and deregulation altered the composition of companies' boards as the firms' environment changed. In particular, did regulation cause an increase and deregulation a decrease, in the number of political directors on corporate boards? We find evidence that the number of political directors increases as firms shift from market to political competition. Specifically, the regulation of natural gas is associated with an increase in the number of political directors and deregulation is associated with a decrease in the number of political directors on boards.

Single-Desk Marketing: Assessing the Economic Arguments identifies the potential benefits and costs and the strengths and weakness of various arguments in favour of current single-desk arrangements. It does not attempt to quantify the costs and benefits of arrangements in any particular industry.

The first years of the new century are characterised by a persistent stagnation of the European economy. In contrast to the long-term trend, but similarly to the late sixties or early eighties, the economic gap between Europe and the US widens again, giving rise to heated discussions on both sides of the Atlantic. Most observers tend to attribute Europe's slack to insufficient deregulation and privatisation, excessive social expenditures and an underrating of new technologies. Too restrictive monetary and fiscal policies are added by some observers. All of these explanations are not incorrect, but they cannot suffice. On the one hand, they neglect the substantial differences within Europe: Distinctive stagnation is restricted to the three large EU economies, while the small countries in the North grow quite as fast as the US. On the other hand, the explanations remain superficial in not analysing the reasons for the large economies' shortcomings. This paper attempts to demonstrate that all three explanations of the European stagnation - lack of reforms, lack of innovation and stability-biased policy - are caused by deep-rooted uncertainty of investors as well as of consumers, showing up as distinctive risk aversion: Surveys reveal that economic agents' uncertainty is highly pronounced in the three large economies, but almost lacking in the North. The large countries' uncertainty could be caused by their sustained stagnation, but the study finds little evidence for this direction of causation. The surveys make the opposite causation highly plausible: that the populations' uncertainty, their attentism, and the resulting stagnation are mainly caused by the large countries' inconsequent economic policy, shying away from approaching urgent problems and proposing fair solutions.

Over the past century, as the regulatory state steadily expanded its reach, courts frequently addressed claims that regulatory actions amounted to an unconstitutional taking. Recently, however, legislation in the telecommunications and electric power industries have brought deregulatory concerns to the fore. In this landmark Article, Mr. Sidak and Professor Spulber present the first detailed analysis of the interaction between the Takings Clause, deregulation, network pricing, and contract law. In the typical case of regulated industries, firms and their investors agree to bear considerable incumbent burdens in exchange for a regulated rate of return. Sidak and Spulber first demonstrate that this arrangement represents a regulatory contract and find that recent deregulatory measures constitute breach. The authors then argue that, whether or not a regulatory contract in fact exists, recent mandatory unbundling in the electric power industry and open-access regulation in the telecommunications field effectuate a taking without just compensation. Finally, relying on concepts such as investment-backed expectations and the efficient component-pricing rule, the authors not only demonstrate that damages would be equivalent under either contract or takings theory, but also warn that governments could face enormous liability for their deregulatory measures.

the Europe-North America internation-al market is the largest air transport mar-ket in the world, accounting for 419,961billion revenue-passenger-kilometers in2000. It has also traditionally been one ofthe most profitable, and it connects theworld’s largest economic units — the European Union and theNorth American Free Trade Area. Because of its size and vital-ity, there have been numerous calls for the relaxation of regu-lation that limits U.S. and European carriers from expandingservice to each other’s nations.The belief that there should be free trade in services acrossthe Atlantic is not new. There has been a steady move towardthe global liberalization of air transportation markets since t helate 1970s, when the United States initiated the deregulation o fits domestic freight and passenger markets. However, the pat-tern of change has not been consistent across countries.In recent years, a major coalition of interests involving air-lines, user groups, and governments has advocated a freetransatlantic market in air services. But it will not be easy t o cre-ate a fully open transatlantic air transportation market. Thereare significant political obstacles that would need to be over-come, and they — in practice — would seem to dominate theagenda, at least in the short term.But even if the institutional difficulties could be circum-vented, EU airlines would have difficulty competing in an open

This paper considers how firm-specific factors affected the financial relations between banks and firms in Japan during the period in which deregulation and reform of the financing decisions of firms were almost completed. This was also a period in which Japanese banks incurred large bad loans. Our empirical results suggest that: (i) main banks make more short-term loans to firms with smaller prospects for growth and a greater likelihood of financial distress; (ii) main banks misuse their private information for their self-interest at the expense of the other banks in bond underwriting, and (iii) main banks hold a greater number of shares of firms with smaller prospects for growth. These findings indicate that the role of main banks as a lender to firms with greater prospects for growth but a greater likelihood of financial distress is constrained. To overcome this problem, the authorities may be allowed to nationalize most of the major Japanese banks and attempt to reorganize a new banking system that promotes lending to firms with greater prospects for growth but a greater likelihood of financial distress.

The Mexico road to power reform has been a political zigzag toward an undelivered reform, current executive initiative keep several key factors intact all of which are obstacles toward a future broad electricity market. The current political openness is creating a populist turn back in infrastructure market reforms, therefore Mexico is lagged behind international experience and each time is far away from an electricity market formation. The current executive initiative before Congress maintains the State participation in generation, transmission and distribution for almost 75% of the users, and only provides choice for a 558 users (0.002%) that consume 24.5% of the electric power and generate 17.1% of the total revenue of the state-owned monopoly entity. Such users indeed have a broader choice range than the rest of the users because self-supply and joint-generation have been permitted since 1993 deregulation policy. New generators will keep enter under contractual agreements with the state-owned monopoly as independent power producers rather than competitors.

Over the past century, as the regulatory state steadily expanded its reach, courts frequently addressed claims that regulatory actions amounted to an unconstitutional taking. Recently, however, legislation in the telecommunications and electric power industries have brought deregulatory concerns to the fore. In this landmark Article, Mr. Sidak and Professor Spulber present the first detailed analysis of the interaction between the Takings Clause, deregulation, network pricing, and contract law. In the typical case of regulated industries, firms and their investors agree to bear considerable incumbent burdens in exchange for a regulated rate of return. Sidak and Spulber first demonstrate that this arrangement represents a regulatory contract and find that recent deregulatory measures constitute breach. The authors then argue that, whether or not a regulatory contract in fact exists, recent mandatory unbundling in the electric power industry and open-access regulation in the telecommunications field effectuate a taking without just compensation. Finally, relying on concepts such as investment-backed expectations and the efficient component-pricing rule, the authors not only demonstrate that damages would be equivalent under either contract or takings theory, but also warn that governments could face enormous liability for their deregulatory measures.

The intent of the Financial Modernization Act of 1999 is to reform the financial services sector by lowering barriers among the financial industries and strengthening the overall financial services sector. We observe that, in general, the market considers the FSM Act to be good news. We also observe that merger activity peaked in 1997, following loosening of regulations, yet before the final passage of the FSM Act. This suggests that the law did not create new opportunities to merge that were not already available prior to its passage.

Enron's rise was synonymous with energy trading in the new gas and electric markets that developed with energy deregulation in the United States and abroad. Its collapse spawned a new word 'Enronitis': a lack of trust in corporate enterprise and markets. This article asks whether energy markets can be trusted. It surveys government reports, agency dockets, economic analyses, academic journals, press accounts, and industry and trade association publications and websites, critically assessing the biases and ideologies of the many varied sources that have investigated, analyzed or commented on post-Enron events in the deregulated gas and electricity markets. Each part of the article begins with quotations that capture the opinions of key participants or policymakers in the deregulated markets so that readers without a specialized background in energy can nonetheless understand the contours of the battle between regulation, market power and competition in the newly created power markets - and the ability of regulators to protect the public interest in these markets. Myths, nurtured by ideological biases, already abound in many of the analyses of energy markets. After laying an introductory framework, Part II of the article looks at Enron's role in creating energy markets and the success and failure of the business models it developed, from the early Gas Bank to commodities trading on Enron Online and the provision of risk management services. Enron's growth tracked the opening of gas and electric markets to competition through unbundled services, open access transportation, and light-handed regulation. Part III links Enron's trading practices to developments in the California energy crisis through a chronological account of the four major problems that were discovered, often slowly and haltingly, by regulators, consultants, economists and lawyers in the California energy markets, and which eventually implicated many more companies than Enron alone: (1) gaming a flawed deregulatory plan; (2) withholding generating capacity (3) affiliate abuse in the gas pipeline sector; and (4) pervasive manipulation of gas and electric prices by market participants to favor their trading desks. Part IV asks: Where was FERC during the long year of chaos in California? Imbued with the ideology of light-handed regulation, the then-FERC Commissioners neither understood the markets nor had adequate data or monitoring in place to police the market for abuses. California was left to attempt to solve its own problems in a regional power market that only a national regulator like FERC could control. Part V documents the reforms, many of them still proposed rather than enacted, by Congress, at FERC, and by industry's adoption of self-regulating codes of conduct. Many major issues remain unresolved, including accurate ways to determine market power in electricity generation; preventing affiliate abuse; and establishing trustworthy indices of gas and electric prices. Parts VI and VII describe the fallout from the Enron scandals and future prospects for retail electricity markets. Energy trading is virtually dead as a stand-alone enterprise; retail electricity restructuring has halted at the state level; a debt crisis enshrouds the deregulated sector of the energy industry; and FERC has been thwarted in its push for more open national markets in electricity. No vibrant retail market in electric power yet exists in the United States, and there is little evidence to date that the residential consumer will benefit significantly from electricity restructuring. The article concludes that energy markets may be 'made to work' but only by imposing on them a degree of market intervention and monitoring that defies the label of 'deregulation' Deregulation is more corruptible and has a far greater risk of creating dysfunctional markets that are both unfair and inefficient than the regulation it replaced. The article concludes with a coda, reflecting on the lessons that might be learned from the shameful conduct embraced by so many participants in the new energy markets. Greed, ideology, and the complexity of the energy and financial derivatives markets explain much of the doleful history that has caused a lack of trust in energy markets.

This document (of 193 pages) comprises the proceedings of an OECD roundtable on subsidies, state aid and competition policy, held at the OECD in February 2001. Government assistance to firms can have a substantial impact on competition. Competition policy naturally extends, therefore, to policies designed to control subsidies. But what exactly is a subsidy? Government interventions of all kinds (including interventions through payments, taxes, regulation, deregulation or the provision of public goods) can affect competition between firms. Which of these interventions should count as subsidies? Short of a full cost-benefit analysis is it possible to identify and control harmful subsidies? Different methods for controlling subsidies focus on different ways of slicing this problem. The European Union controls on state aid focus on financial transfers to selected firms in a country. Other approaches are possible. Some countries, following the lead of the EC, are expanding their competition law to include controls on subsidies of various forms. This document consists of a background paper by the Secretariat, submissions from 8 OECD countries and a summary of the oral discussion.

This article surveys the trend of consolidation in the banking industry worldwide. It also explores the motivations behind this trend. The possible motivations for mergers in the Indian context are next analyzed. Heightened competition, presence of scale economies, dis-intermediation and need for adequate capital are some of the factors that are found to exist in Indian banking as motivations for mergers. The article finds strong evidence of circumstances that might favour consolidation in Indian banking. It then looks at the preparations regulators need to make to proactively deal with the prospect of mergers. In particular it carries out a critical analysis of the Competition bill in light of the international regulations surrounding merger activity.

Since the beginning of 1990s, the credit balance of the banking system in mainland China has experienced a big swing from negative to positive. The balance has continued to expand up to now. It seems that both negative and positive credit balances are so large that the financial resources have been utilized inefficiently by the banking system. On the eve of China’s accession to the World Trade Organization (WTO), challenges from banking competition will increase. In this paper a three-sector equilibrium model of monopolistic banking competition is set up and is applied to analyze the impact of the expanding credit balances and banking reform on the Chinese economy. Through theoretical analysis, reasons for the expanding credit balance are provided and some possible solutions are given. China’s accession to the WTO will present many challenges to the state-owned banks. Foreign banks will be allowed to compete directly with Chinese local banks. We found that competition will not only promote China’s GDP, investment, consumption and deposits as well as bring benefits to consumers, but also provide the banking sector from Hong Kong with new opportunities.

In an era of free enterprise and exchange, the taxicab is one of the last industries held tightly to the public breast. Local laws in many cities regulate how many taxicabs are on the roads, what they charge, how old a vehicle can be, and how much English a driver must know. Nonetheless, many of the problems associated with taxicab service are just the ones such laws are designed to meet. Nearly all of us have endured the pain of not being able to hail a taxicab, 'felt' overcharged, had a fruitless exchange with a driver who could not speak the language, or ridden in a jalopy unfit for the road. Still, proponents of these laws stand by their position, warning that the consequences of removing restrictions on price and entry are even worse. This Article canvasses the features of economic regulation - price and entry constraints - to determine if local taxicab markets are unsuited for market control. This Article plans to answer several sets of questions by its end. To begin, what are the regulatory regimes in the taxicab industry? What do the regulations cover? Thus, I begin by setting out the instruments of economic regulation in the taxicab industry. Since it is often useful to illustrate by way of example, four large cities (New York, London, Washington, and Indianapolis) are discussed. In attempt to ascertain whether there are good arguments for regulating the taxicab industry, I visit the debate on economic regulation in taxicab markets. The economic rationales for price and entry regulation are considered. Taxicab markets display few, if any, of the symptoms traditionally-associated with a monopoly or an excessively competitive market. Thereafter, I turn to the non-economic rationales for economic regulation of taxicab markets. Finally, what sort of regulatory regime, if any, is appropriate? What are the options? To answer this, three alternatives to full-fledged economic regulation in taxicab markets are put forward and considered in turn. Specifically, this Part discusses briefly split-pricing, partial regulation, and deregulation as possible regimes and starting points for future analyses of taxicab markets. After reviewing the options, I conclude that deregulation is the best choice in large cities.

This paper was substantially revised in March 2003 to analyze WorldCom's fraud and bankruptcy and the FCC's February 20, 2003 decision its Triennial Review of mandatory unbundling. To date, policymakers and scholars have failed to recognize how those topics are interrelated. The United States has spent seven years trying to deregulate telecommunications. We are not in the transition any longer. It is time to take stock. In this essay, I address three topics. The first, addressed in Part I, is the administrative cost of deregulation, which has grown substantially under the Telecommunications Act of 1996.Part II addresses the consequences of the FCC's use of a competitor-welfare standard when formulating its policies for local competition, rather than a consumer-welfare standard. I evaluate the reported features of the FCC's decision in its Triennial Review. Press releases and statements concerning that decision suggest that the FCC may have finally embraced a consumer-welfare approach to mandatory unbundling at TELRIC prices. The haphazard administrative process surrounding the FCC's decision, however, increases the likelihood of reversal on appeal.Beginning in Part III, I address at greater length the WorldCom fraud and bankruptcy. I offer an early assessment of the harm to the telecommunications industry from WorldCom's fraud and bankruptcy. I explain how WorldCom's misconduct caused collateral damage to other telecommunications firms, government, workers, and the capital markets. WorldCom's false Internet traffic reports and accounting fraud encouraged overinvestment in long-distance capacity and Internet backbone capacity. Because Internet traffic data are proprietary and WorldCom dominated Internet backbone services, and because WorldCom was subject to regulatory oversight, it was reasonable for rival carriers to believe WorldCom's misrepresentation of Internet traffic growth. Event study analysis suggests that the harm to rival carriers and telecommunications equipment manufacturers from WorldCom's restatement of earnings was $7.8 billion. WorldCom's false or fraudulent statements also supplied state and federal governments with incorrect information essential to the formulation of telecommunication policy. State and federal governments, courts, and regulatory commissions would thus be justified in applying extreme skepticism to future representations made by WorldCom.Part IV explains how WorldCom's fraud and bankruptcy may have been intended to harm competition, and in the future may do so, by inducing exit (or forfeiture of market share) by the company's rivals. WorldCom repeatedly deceived investors, competitors, and regulators with false statements about its Internet traffic projections and financial performance. At a minimum, WorldCom's fraudulent or false statements may have raised rivals' costs by inducing inefficient investment in capacity or inefficient expenditures for customer acquisition and may have artificially reduced WorldCom's cost of capital and thus facilitated its long string of acquisitions.During the prebankruptcy period, WorldCom's business strategy may have been designed to harm rival providers of Internet backbone or long-distance services. Because WorldCom's real costs were unknown, its pricing of Internet backbone services bore no relation to cost. Recoupment of losses was unnecessary as a condition for plausible predation by WorldCom because its management had other ways to profit personally. The coordinated actions of WorldCom's management, its investment bankers, and its auditors may have injured competition in the telecommunications industry. Part V argues that the FCC has a unique obligation-distinct from the mandate of the bankruptcy court or the Securities and Exchange Commission-to investigate the effect of WorldCom's misconduct on the telecommunications industry. For WorldCom, Chapter 11 bankruptcy can be a means to distort competition in the long-distance and Internet backbone markets. Because Chapter 11 bankruptcy is not designed to eradicate anticompetitive business models or to establish policy for the telecommunications infrastructure, the FCC is uniquely empowered to defend the competitive process. After Chapter 11 reorganization, WorldCom's freedom from debt would enable the firm to underprice rivals that are as, or more, efficient than WorldCom. Economic efficiency would suffer because consumers would pay less than the true social cost required to supply the services offered by WorldCom. Moreover, the competitive advantage conferred upon WorldCom by the U.S. bankruptcy court's elimination of WorldCom's debt (in whole or in part) could constitute state aid in violation of Article 87 of the European Community Treaty.In Part VI, I argue that WorldCom's exit from the market would not carry significant social costs. WorldCom's value as a going concern is dubious, and other carriers could readily absorb WorldCom's Internet and long-distance customers. The FCC should investigate the ramifications of WorldCom's fraud for telecommunications policy. The outcome of that investigation may include the finding that WorldCom is unqualified to hold its FCC licenses and authorizations. That legal conclusion would promptly, and properly, propel WorldCom toward liquidation.

During the 1980s and 1990s privatisation and deregulation movements have been shaken up the European network industries - telecommunication, electricity and railways. These reforms did affect also those parts of the public administrations in charge of managing and controlling the industries. While usually the changes in the relationship "administration-market" have been the centre of academic attention, this paper attempts to investigate whether the very functions of the public administration themselves have been affected, i.e. altered or even transformed. Does the emergence of the regulatory state go hand in hand with the arrival of a new public administration? Comparing the examples of regulatory reform in the United Kingdom and Germany this paper attempts to provide a first answer.

This paper examines the impact of increased competition from deregulation on the dynamics of the U.S. banking industry. We find the link between a bank's relative performance and its subsequent market share growth strengthens significantly after deregulation as competitive reallocation effects transfer assets to better performers. Exit dynamics also change in ways consistent with the disciplinary role of competition. The net effect is a substantial reallocation of market share toward better banks. We conclude that earlier regulation of U.S. banks blunted this market mechanism and seriously hindered the competitive process.

The prohibition of insider trading in U.S. federal securities law typically is justified on fairness or equity grounds. Predictably, these arguments have had little traction in the law and economics community. At the same time, however, law and economics scholars have not coalesced around a single view of the prohibition; instead, competing economic arguments generated an extensive debate that is still active. Those law & economics scholars who favor deregulation of insider trading typically argue that efficiency is the sole basis for analyzing a legal regime, and that the prohibition lacks any rational economic basis. This article critiqued two pro deregulation arguments: (1) the effect of insider trading on the pricing of securities and (2) the claim that insider trading is an efficient compensation scheme. The article found neither argument persuasive. Those who favor regulating insider trading typically respond either by rejecting the claim that efficiency is the controlling criterion or by attempting to show that the prohibition is justifiable on efficiency grounds. The pro regulation arguments critiqued herein include: (1) insider trading injures the firm whose securities were traded; (2) insider trading injures shareholders of the firm whose securities were traded; and (3) insider trading violates norms of fairness. In sum, this article contended that neither side had carried the field, but suggested that the argument in favor of regulation probably was winning at the time. The article concludes with some observations on the concept of efficiency as a normative principle.

This study considers the efficiency of banking in Australia during the post-deregulation period 1988-2001. Since 1986 restrictions upon foreign bank entry and foreign ownership have been effectively abolished. Using Data Envelopment Analysis (DEA) and Malmquist Indices, we find that the new foreign banks are more (input) efficient than domestic banks, mainly due to their superior scale efficiency. However, this superior efficiency did not necessarily result in superior profits. Our results are consistent with the limited global advantage hypothesis of Berger et al (2000). We argue that the major Australian banks have used size as a barrier to entry to the new entrants in the post-deregulation period. Furthermore, bank efficiency seems to have increased post-deregulation and the competition resulting from diversity in bank types was important to prompt improvements in efficiency. Finally, the recession of the early 1990s resulted in a distinct shift in the process of efficiency changes.

Even after the 1996 Telecommunications Act gave federal regulators greater authority to preempt state or local laws that restrict telecommunications competition, to a large degree federal and state regulators still exercise shared regulatory authority. For that reason, while the Federal Communications Commission presently is considering adopting a more deregulatory regime in line the increasing competition, the role of the states remains very important in determining whether an environment will be created that encourages investment in new facilities, especially broadband, and also the provision of innovative advanced high-speed services, including Internet access. To identify true free-market state policies, I offer criteria which are meant to provide a guide for determining whether a state's telecommunications policies are, in the main, "deregulatory" and "pro-competitive" in this era of rapid technological change. The guidelines provide a basis for pointing the states in a more deregulatory direction, one that I maintain will be more conducive to producing competition that is sustainable in the long-run to the ultimate benefit of consumers.

This document (of 418 pages) comprises the proceedings of an OECD roundtable on promoting competition in the natural gas industry, held in February 2000. Natural gas is a key source of energy for OECD countries, both in its own right and as an input into the production of electricity. Regulatory reform in this sector shares both important similarities and important differences with regulatory reform in other network industries. Like other network industries, regulatory reform in natural gas involves promoting competition in the competitive segments of the industry (particularly competition between gas producers), the development of a robust regime for access to the remaining essential facilities, and structural separation between the competitive and non-competitive segments of the industry. OECD countries have pursued each of these steps, licensing independent producers, pricing access to pipeline infrastructure and separating gas production from transportation (although long-term take-or-pay contracts make this last reform more difficult). Unlike other network industries, however, the structure of the industry varies widely from country to country according to the number of domestic gas producers, the geographic location of pipelines and the uses to which natural gas is put. Countries which rely primarily on imported gas have less to gain from domestic reform and much to gain from reform in producing countries. As OECD gas sources diminish and reliance on imports increases, regulatory reform in natural gas will increasingly become an issue for international trade. This document consists of a background paper by the Secretariat, submissions from 18 OECD countries and a summary of the oral discussion.

In this paper, we assess cost and profit efficiency for a sample of banks operating on the Dutch banking market in the period 1992-1998, using stochastic frontier analysis. Over the entire period, the cost-efficient frontier deteriorates, but mean cost efficiency and profit efficiency are relatively stable at the industry level. No evidence is found for trend changes in mean efficiency due to the previous consolidation and deregulation. However, whereas all banks appear to perform rather similarly in terms of cost efficiency, in terms of profit efficiency large general banks and specialized bank clearly outperform small, general banks. Large banks appear to benefit from sheer size and perhaps market power. This is evidence in favor of the large banks behaving collusively and capturing oligopoly rents. Specialized banks operate savely and efficiently in what might be termed niche markets.

Developments in regulation theory have generated a wide-ranging literature aimed at making regulation more effective. A general dissatisfaction with 'command and control' regulation by the state has led to an upsurge in interest in the possibilities for corporate self-regulation. This article examines the ramifications for international labour regulation of a recent proposal, the 'Ratcheting Labor Standards' (RLS) thesis of American academics Charles Sabel, Dara O'Rourke and Archon Fung. The traditional conception of international labour regulation as embodied in the International Labour Organisation (ILO) is used as a basis for the analysis of RLS. The authors of the RLS thesis argue that their proposal charts a third way between the polar extremes of inflexible, fixed-rule regulation and a certain form of deregulation. The article concludes that the RLS proposal has much in common with proposals for business self-regulation, and that, taken as a whole, it has radical elements that are close to the deregulatory pole. This conclusion is based on a number of fundamental assumptions which appear to be implicit in the RLS thesis: first, that the transnational realm is a regulatory void, secondly, that the domestic sphere (in developing states) is ungoverned, and thirdly, that the appropriate subject of regulation is the multinational firm. Each of these assumptions represents a profound challenge to the legitimacy of the ILO, its multilevel system of regulation and its traditional philosophies of regulation.

Major technological, regulatory, and institutional changes have made finance more widely available in recent years. The ability of financial institutions to price a variety of exotic instruments, and to assess and spread risks, has increased. More data on potential borrowers is now available, and it is also more timely. Improvements in accounting disclosure have resulted in greater borrower transparency. Deregulation has resulted in greater competition and better prices in financial markets. Finally, regulatory barriers protecting the turf of different kinds of financial institutions have come down, resulting in the emergence of new institutional forms.

The Telecommunications Act of 1996 marked a fundamental departure in U.S. regulation. Monopoly market structures were officially deemed inefficient, and extensive rules were authorized to jump-start competition. Canada opened long-distance markets to entrants in 1992, and did likewise with local telephone access five years later, but employed distinct tools from those utilized by U.S. regulators. In this paper we compare and contrast the two alternative approaches to deregulation. The conventional wisdom is that telephone competition in the U.S. has lagged under the Telecommunications Act. Rates are alleged to have risen for most customers, just the reverse of what was promised by policy makers. We examine broad trends within the sector, and conclude that the Act, while flawed, actually scores well in comparison to previous reform measures. We prefer the approach taken in Canada, however, which is less regulation-intensive in the transition to competition.

The 1996 Telecommunications Act represents a major turn in U.S. policy towards 'deregulation.' Instead of tying price deregulation to the opening of entry in a market that has been regulated for decades, the Act creates a maze of new regulatory responsibilities for the Federal Communications Commission (FCC) and the states. Incumbent local telephone companies, who were being freed from cost-based regulation prior to 1996, are now subject to detailed regulation of their wholesale services. Specifically, they must 'unbundle' their network facilities into a large number of components and lease these components or 'elements' to entrants at cost. Moreover, the Bell companies are not permitted to compete with long distance companies until they satisfy regulators that they have complied with a large number of interconnection requirements. This complex new regulatory regime has been the source of three years of regulatory battles and legal challenges and has needlessly delayed facilities-based entry into telecommunications. It would be far better if the FCC and the states were to pursue a strategy of full deregulation. The regulators should announce a date sufficiently far in the future at which all rate and entry regulation will cease, much as the Congress did for airlines in 1978. This would place potential competitors and customers on notice that fully flexible rates will be in place on this date and that new opportunities could be available for both. It also would reduce the value of rent seeking before the regulatory commissions and the never-ending cycle of rulemakings and court appeals.

In implementing its mandate for telecommunications deregulation the Federal Communications Commission has virtually ignored an important set of telecommunications issues affecting local governments and their suburban and urban constituencies. This paper reviews the very circumscribed role provided for local public sector involvement in telecommunications issues in the Telecommunications Act of 1996 and suggests that role is an insufficient predicate for state and local governments to address telecommunications governance issues that cannot be effectively addressed through centralized FCC policy: e.g., urban and suburban telecommunications infrastructure governance; open access issues; planning for universal broadband service across metropolitan areas; metropolitan approaches to the digital divide and the "E" Rate; development of community networks; regional economic competitiveness; urban network security, and digital governance policies. A hypothetical Metropolitan Telecommunications Organization (MTO) is proposed as public-private vehicle to promote local public and community values in telecommunications policy in these subjects as counterweight to the exclusive pursuit of competitive corporate interests that today determine the location, timing and availability of access to broadband services in metropolitan regions. These public values include affordable open access, equal access and universal service policies in the emerging telecommunications networks in metropolitan areas, as well as local public sector options for inducing private sector coordination with public sector initiatives in developing regional, metropolitan or large city institutional infrastructures for high speed high capacity telecommunications for the public sector and for the public at large.

The competitive market price of electricity will contain two components: (1) the costs of providing optimal reliability, and (2) a price premium that would be analogous to a surety bond that the utility will lose if it fails to provide the optimal reliability reflected in the market price. Analyses of future electricity prices that focus only upon capital, fuel, labor, and other directly observable costs are likely to understate competitive market prices. State regulated transmission companies are unlikely to provide optimal reliability. States should rationalize their electric power markets through deregulated transmission companies.

According to the conventional wisdom, a revolving door operates between government and industry. High ranking government officials leave office and head for Washington law firms or major corporations where they use their connections and influence to further their new employers' political interests. Despite the pervasiveness of this story, remarkably little evidence exists on the motivations underlying the revolving door phenomenon. Indeed, a few competing theories attempt to explain the revolving door phenomenon, but almost no work has been done to empirically distinguish which of these theories is most relevant. In this study we examine the participation of political directors on the boards of natural gas companies over a period of deregulation. We focus on the 1986 deregulation of the natural gas extraction companies. This event provides a natural experiment to distinguish between competing theories, namely the traditional rent-seeking revolving door theory and the managerial human asset theory. Using data covering the period from 1978 to 1998, we test whether deregulation altered composition of the board as the firm's environment changed. In particular, did deregulation cause firms to reduce the number of political directors on their boards? We find evidence that board members serve a rent-seeking role. In general, the 1986 deregulation of natural gas extraction is associated with a decrease in the number of political directors on boards. In addition, using a fixed-effects model we find that deregulated firms reduce the number of political directors. Keywords: Corporate governance, deregulation, political directors

This Article addresses two fundamental areas of inquiry in personal bankruptcy. First, it examines what conditions justify an expansive vs. stringent bankruptcy debt relief regime in a given country. Second, the article examines what contributes to the particular profile composition of individuals in bankruptcy. The author hypothesizes that the scope of the fresh-start policy and the composition of the bankruptcy population in a given country is predicated on government's predisposition towards credit deregulation, the extent of the welfare state and the standards employed by financial institutions when extending credit to the private sector. To test this hypothesis, the author has undertaken an empirical study of consumer bankruptcy filings in Israel examining the characteristics of the petitioners and the causes of filings. By comparing the findings of this undertaking with the results of similar empirical studies in the United States and Canada, this Article provides strong support for the suggested three-prong hypothesis.

This paper describes the changes in economic policies and in macroeconomic conditions in the 1990s and analyses their impact on the agricultural sector in Brazil. We emphasize four aspects of the reform period that were either unexpected or not given sufficient attention by authors writing in the period prior to the reforms. The first issue relates to the importance that events outside of the agricultural sector, specially the stabilization problems, have not only for the performance of the sector but also for the timing and sequence of policy reform. A second issue that we emphasize is that policy reform involved far more than trade liberalization. Deregulation and the reform of rural credit and support price policy have been central as well. A third issue that was not given sufficient attention by the pre-reform analyses that focused on agricultural prices is the impact of policy reform on input markets and productivity. We identify changes in input markets as one of the key components of the adjustment process. A fourth and final issue that we address is that policy reform had a highly differentiated impact on the sector. Reform was neither uniformly beneficial, nor entirely prejudicial. Thus, our analysis seeks to distinguish between different groups of products, such as importables and exportables, geographic regions, farm sizes, and sub-periods. The paper emphasizes also that, since not all reforms were introduced simultaneously, the 1990s should be treated as a decade of transition in which the old model was replaced, but not all of the features of the new model were firmly established. Este trabalho descreve de modo sintético as mudanças de política econômica e de condições macroeconômicas nos anos 90 e analisa o impacto dessas mudanças sobre o setor agrícola. Procura-se enfatizar quatro aspectos que foram ignorados ou que não receberam a atenção devida pelos autores que trataram do assunto no período anterior às reformas. A primeira questão relaciona-se com a importância dos fatores macroeconômicos, sobretudo as políticas de estabilização, para a análise do tema. A segunda questão reside na importância de mudanças em outras políticas que não a mera abertura externa, como a desregulamentação dos mercados domésticos e as mudanças nas políticas de crédito rural e de preços mínimos.Um terceiro aspecto que também não recebeu a devida atenção das análises pré-reforma é o impacto das novas políticas econômicas sobre o mercado de insumos e sobre a produtividade. A quarta e última questão enfatizada neste trabalho é que os efeitos das reformas foram muito diferenciados segundo produtos, regiões ou tipos de agricultores. O trabalho sugere, ainda, que, como nem todas as reformas foram introduzidas simultaneamente, os anos 90 devem ser tratados como uma década de transição em que o velho modelo foi substituído, porém nem todas as etapas do novo modelo foram firmemente estabelecidas.

In a partial-equilibrium model, removing a binding constraint creates value. However, in general equilibrium, the stakes of other parties in maintaining the constraint must be examined. In financial deregulation, the fear is that expanding the scope and geographic reach of very large institutions might unblock opportunities to build market power from informational advantages and size-related safety-net subsidies. This paper reviews and extends event-study evidence about the distribution of the benefits and costs of relaxing longstanding geographic and product-line restrictions on U.S. financial institutions. The evidence indicates that the new financial freedoms may have redistributed rather than created value. Event returns are positive for some sectors of the financial industry and negative for others. Perhaps surprisingly, where customer event returns have been investigated, they prove negative.

The Telecommunications Act of 1996 (the "1996 Act"), by stressing the reduction or elimination of entry barriers that prevent the fragmentation of market structure and an increase in the number of competitors, established competition and deregulation as the foundation for public policy towards the telecommunications and commercial broadcasting industries. By lowering barriers to entry, telecommunications markets should be expected to grow as new firms expand industry capacity and broaden the scope of consumer choice. Presumably, market concentration will decline as entry continues, eventually producing sufficient fragmentation that competitive rivalry will obviate the continuing need for regulation. Suppose, however, that the ongoing process of competitive entry becomes truncated and market concentration fails to continue falling even if market size continues to grow so that concentration appears to reach a lower bound. There is some evidence suggesting that such a lower bound may, in fact, exist in local telecommunications markets, notwithstanding the statutory provisions of the 1996 Act reducing barriers to entry. This Policy Paper draws from the analyses of competition developed over the last decade or so that offers new insights about the market size-market concentration relationship. The Policy Paper proposes that this new economic thinking is directly applicable to understanding the evolution of entry and competition in telecommunications markets and the growing concentration in commercial broadcasting markets following adoption of the 1996 Act. Moreover, this new economic thinking, unlike the more standard analyses of market structure and competition, provides guidance for public policy towards both telecommunications and broadcast markets.

In the past few decades, most state legislatures fundamentally reformed and deregulated the banking industry by adopting new laws on branching and other banking activities. Because those efforts took place on a state-by-state basis, the reforms offer a rich laboratory in which to investigate what drives deregulation. Did banking deregulation happen first in states in which people would most benefit from reform, or in states in which well-organized political groups had the most to gain from deregulation? The author's analysis of branching deregulation suggests the latter explanation, known as the private interest theory of government action, best accounts for the pattern of banking reform that unfolded in the last 30 years.

In the last 20 years, the financial services industry has witnessed dramatic changes, largely driven by globalisation, deregulation and consolidation. Technological advances helped make globalisation and consolidation feasible and encouraged deregulation. More recently, IT has accelerated the process, reinforcing some of these trends, particularly globalisation and deregulation, as well as facilitating the development of e-finance. In the first part of this paper, attention will be focused on the interaction between the recent trends that have been shaping the way financial services are provided worldwide and the advent of IT. The second part focuses on the regulatory challenges posed by IT to financial services. First, we discuss why regulation of financial markets continues to be necessary in spite of the changes in the financial structure brought about by technology, and what sort of approach to regulation is better suited to this new environment, particularly in consumer and investor protection and promotion of competition. Secondly, we discuss in more detail the challenges posed for the traditional regulatory approach to reducing systemic risk. Thirdly, we comment on a supervisory model that seems to fit better an ever more complex financial structure.

Mail delivery is one of the few economic activities that has avoided the wave of deregulation and privatization that has swept network industries over the last few decades. This Article examines several questions regarding the business activities of Canada Post Corporation in a competitive environment. What should be the appropriate mandate of Canada Post? If Canada Post is a natural monopoly, what form of regulation best serves Canadian consumers? If Canada Post's delivery of letter mail is not a natural monopoly, what basis exists for retaining Canada Post's current statutory monopoly? What potential exists for Canada Post to abuse its statutory monopoly-and other statutory privileges and immunities-to compete unfairly against efficient private suppliers of postal services? Part I of this Article outlines the regulatory and institutional setting in which Canada Post operates, including the nature and extent of Canada Post's legal monopoly. Part II demonstrates why technological justifications for the postal monopoly are no longer valid. Part III establishes that public provisions of the full range of postal services is no longer needed. Part IV explains how postal pricing and regulation can cause competitive problems for private firms because of incorrect measurement and misallocation of attributable costs and because of the potential to misuse Ramsey pricing principles. Part V presents four options that are available to the Canadian Parliament for addressing the problem of protecting efficient competition from the postal monopoly.

This paper investigates whether the efficiency effect of product market dispersion is a function of the infrastructural and policy environment. We hypothesize that more developed transportation and communication infrastructure and lower government regulation may reduce transaction costs, intensifying the competition associated with a given market structure, and we use data from the recently liberalized and regionally diverse country of Russia to test the hypothesis. Estimating translog production functions on a large 1992-99 panel of manufacturing firms, we find that the efficiency impact of market dispersion varies positively with the regional density of highway, railroad and telephone infrastructure, but negatively with regional price regulation and the share of votes received by the Communist Party.

Product and labor market deregulation are fundamentally about reducing and redistributing rents, leading economic players to adjust in turn to this new distribution. Thus, even if deregulation eventually proves beneficial, it comes with strong distribution and dynamic effects. The transition may imply the decline of incumbent firms. Unemployment may increase for a while. Real wages may decrease before recovering, and so on. To study these issues, we build a model based on two central assumptions: Monopolistic competition in the goods market, which determines the size of rents, and bargaining in the labor market, which determines the distribution of rents between workers and firms. We then think of product market regulation as determining both the entry costs faced by firms, and the degree of competition between firms. We think of labor market regulation as determining the bargaining power of workers. Having characterized the effects of labor and product market deregulation, we then use our results to study two specific issues. First, to shed light on macroeconomic evolutions in Europe over the last twenty years, in particular on the behavior of the labor share. Second, to look at political economy interactions between product and labor market deregulation.

Although the goal of market integration has not actually been challenged in recent years, it has nevertheless increasingly come to be considered incomplete and in need of complementary goals which serve the general interest by promoting social cohesion and equality. The debate has been conducted in various areas, such as in the fight against unemployment and poverty and in the provision of public utilities. In the latter case, regarding the provision of energy, water, communication and transport, the debate was sparked by the privatisation of public monopolies and their infrastructure networks, and the deregulation of service provision. The network industries which had traditionally been shielded from competition and were run within national boundaries were dramatically transformed. This change - which in some countries resulted from European legislation - was meant to induce more producer competition, improved productivity, more consumer choice in the supply of network services, and lower prices. However, it has triggered concerns over the maintenance of general-interest goals in service provision, i.e., over safeguarding the accessibility, equality, continuity, security and affordability of these services after liberalisation. There is a general political consensus that communicating by voice telephony, enjoying a certain degree of mobility, and using energy are basic needs that should be guaranteed and that firms operating in network industries should thus be subject to "public-service" objectives. This contribution raises the questions: why and to what extent does a conflict exist between economic liberalisation and general-interest goals in the first place? I will then turn to the role of European policy-making, which aims at striking a balance between the poles of market integration and competition, on the one hand, and the provision of public services, on the other. What are the existing European policies and how do they fare when measured against these two goals? I then focus on the central question of the analysis: how can the pro-general-interest decisions at the cross-sectoral and sectoral level (in energy, telecommunications and rail) be accounted for in terms of the interaction of the formal political and legal actors involved in shaping the outcomes at the European level?

The competitive transformation of telecommunications and other network industries in the United States has caused governmental policy makers to be increasingly concerned with the fairness of the deregulatory process. This Essay offers a set of concrete guidelines that regulators of network industries should follow in removing regulatory controls: To achieve the productive and allocative benefits of competition and to ensure that the transition from regulation to competition is accomplished fairly, regulators should observe the principles of economic incentive, equal opportunity, and impartiality. Economic incentives allow incumbent firms to maintain their quality of service and innovation and investment, and allow them to recover stranded costs for past, present, and future regulatory obligations. Regulators can ensure equal opportunity by ensuring that regulation falls evenly on both competitive entrants and incumbents. Impartiality in increasing competition can be achieved by regulators refraining from market interventions that favor particular competitors. Only by treating incumbents and entrants symmetrically and resisting the temptation to manage competition will the regulators ensure that the deregulatory process in network industries will yield all of the benefits of market competition.

The NAFTA and MERCOSUR agreements seem to have accelerated the regional integration process respectively within North and South of America. In the South in particular, MERCOSUR has led to trade liberalisation and deregulation, which has resulted in significant growth of its regional trade. In this article, we study the pattern of that trade growth in the automobile industry. Our results highlight an increase of intra-industry trade in the corresponding industry since the beginning of the 1990s. Firstly, we use the Grubel and Lloyd indicator (1975). Secondly, following Abd-el-Rahman (1991), Greenaway et al. (1995), Fontagne and Freudenberg (1997), we distinguish horizontally differentiated goods from vertically differentiated goods using a comparison of the unit values. With the increase of intra-industry trade, it appears that MERCOSUR has favoured in particular the development of trade in vertically differentiated goods. In NAFTA, intra-industry trade exists in most sectors and in two bilateral relations (US-Canada and US-Mexico). In MERCOSUR, the automobile industry has experienced the highest rate of growth in intraindustry trade, which accounts for 66% of total trade and 90% of all intra-regional trade. Thirdly, we analyse the nature of that increase and more precisely, the determinants of intra-industry trade. In order to explain the pattern of trade for the automobile industry, we use a gravity-type model taking into account some country-specific variables.

Many studies of regional disparity in China have focused on the preferential policies received by the coastal provinces. We decomposed the location dummies in provincial growth regressions to obtain estimates of the effects of geography and policy on provincial growth rates in 1996?99. Their respective contributions in percentage points were 2.5 and 3.5 for the province-level metropolises, 0.6 and 2.3 for the northeastern provinces, 2.8 and 2.8 for the coastal provinces, 2.0 and 1.6 for the central provinces, 0 and 1.6 for the northwestern provinces, and 0.1 and 1.8 for the southwestern provinces. Because the so-called preferential policies are largely deregulation policies that have allowed coastal Chinese provinces to integrate into the international economy, it is far superior to reduce regional disparity by extending these deregulation policies to the interior provinces than by re-regulating the coastal provinces. Two additional inhibitions to income convergence are the household registration system, which makes the movement of the rural poor to prosperous areas illegal, and the monopoly state bank system that, because of its bureaucratic nature, disburses most of its funds to its large traditional customers, few of whom are located in the western provinces. Improving infrastructure to overcome geographic barriers is fundamental to increasing western growth, but increasing human capital formation (education and medical care) is also crucial because only it can come up with new better ideas to solve centuries-old problems like unbalanced growth.

Electricity prices are known to be very volatile and subject to frequent jumps due to system breakdown, demand shocks, and inelastic supply. As many international electricity markets are in some state of deregulation, more and more participants in these markets are exposed to these stylised facts. Appropriate pricing, portfolio, and risk management models should incorporate these facts. Authors have introduced stochastic jump processes to deal with the jumps, but we argue and show that this specification might lead to problems with identifying the true mean-reversion within the process. Instead, we propose using a regime jump model that disentangles mean-reversion from jump behaviour. This model resembles more closely the true price path of electricity prices.

Mr. Sidak and Professor Spulber extend here the analysis in Deregulatory Takings and Breach of the Regulatory Contract, published last year in this Review. They respond to comments and criticisms raised not only by Professors Baumol and Merrill, but also by Judge Williams and Professor Williamson in their Comments published last year. Sidak and Spulber begin by exploring the constitutional limitations on the government's ability to redefine the public purpose to which a regulated utility has dedicated its private property. Then, the authors examine whether the government has made givings that implicitly compensate the regulated firm for its diminution in value owing to the imposition of policies mandating network unbundling at regulated prices. Sidak and Spulber refine the limiting principles for the recovery of stranded costs that they articulated in their earlier article and show how those principles reconcile with the actual treatment of losses from deregulation in disparate industries. Next, they expose the economic fallacies in the notion of forward-looking costs as that term has been used by the Federal Communications Commission and state public utility commissions to set prices for mandatory network access under the Telecommunications Act of 1996. The authors analyze the Supreme Courts 1996 decision in United States v. Winstar Corp. and argue that the reasoning employed by seven Justices in that case comports not only with earlier decisions of the Court construing the regulatory contract with public utilities, but also with the contemporary economic analysis of why the regulatory contract is essential and efficient. Sidak and Spulber explain how transition bonds may solve the stranded cost conundrum in the telecommunications and electric power industries by permitting the securitization of stranded costs in a manner that restores investors' faith in the state's ability to make credible commitments. Finally, the authors examine the significance of the Eighth Circuit's 1997 decision in Iowa Utilities Board v. FCC for the debate over deregulatory takings and breach of the regulatory contract.

The work of the Government Panel on Corporate Governance has laid the foundation for a comprehensive reform of German company law. The Panel's recommendations aim to improve corporate management and supervision, transparency and competition. They improve the protection of stockholders and strengthen Germany's financial market. The Government Panel not only has accomplished its mission of formulating recommendations to correct undesirable past trends, but has also developed proposals with well-reasoned future orientation to strengthen the German system of Corporate Governance and eliminate potential shortcomings. To better protect investors, the Panel recommends extending the civil liability of management and supervisory board members of publicly listed companies from its current standard of "willful intent" to also include "gross negligence" in connection with the release of false information to the capital market. Quarterly reports should be mandatory for all publicly listed companies and audits by certified public accountants should be required. In addition, the Government Panel recommends measures to improve the independence of auditors. The federal government will immediately act on the Panel's central proposal by appointing a group of experts to draft and continuously improve a Code of Corporate Governance, as well as by creating the legal framework for this new, flexible instrument. In accordance with the principle of "comply or explain" which the Panel recommends, the Code itself will not be fixed in law. It would only be required that publicly listed companies state in their annual reports whether they observe the Code of Corporate Governance or, in the alternative, set forth the reasons why they do not follow its recommendations. The financial markets will value this innovative element internationally, and this will further improve the financing conditions obtained by German companies. The Government Panel expects that the Code will, among other things, define goals for improving the performance of supervisory boards. This includes, for example, restricting to five per person the number of external supervisory board positions that a supervisory board member may hold, strengthening the independence of supervisory board members, and the recommendation that supervisory board members should not be permitted to fill positions that are in competition with the company. Further, the Code should contain expanded transparency standards, such as for management stock option plans and for the shareholdings of members of the reporting company's management and supervisory boards, as well as increase the duties of the management board to provide information to stockholders. In addition, the federal government will immediately begin drafting a "Transparency and Disclosure Act" in which further proposals of the Government Panel will be implemented. These will include the legal foundation for the "comply or explain" principle, measures to strengthen supervisory boards, such as through broader disclosure duties for the management board and tighter confidentiality requirements for supervisory board members, the use of electronic media for company publications and deregulation in corporation law, such as through a further reduction of the minimum par value of stock. In a further stage, the Panel's recommendations will serve as the foundation for a comprehensive reform of corporation law and accounting regulations. The federal government thanks the Government Panel for its excellent work. Thanks go to the international law firm Shearman & Sterling which has provided the translation of the recommendations into English.