1. The Effect of Entry Regulation on Risk Management
Mahito Okura
Faculty of Economics, Nagasaki University (Japan)
APRIA 2014 annual conference
July 27-30, 2014

2. Introduction
This research investigates the relationship between entry regulation and firms’ risk management (RM).
Build the economic model.
Derive the condition in which all firms would voluntarily conduct RM.

3. Literature review Gordon et al. (2009):
Enterprise risk management is more effective when the degree of competition is greater.
Martinez-Miera and Repullo (2010), Fungacova and Weill (2013):
The relationship between competition and the risk of bank failure is confirmed.
Pauly (2004), Cooper et al. (2011), Palangkaraya and Yong (2013):
They analyzed how the level of competition affects the hospital quality that is (partially) related to RM.

4. Entry regulation and RM
Suppose that the number of firms becomes small (large) by regulation (deregulation):
Incentives (Disincentives) for conducting RM: Penalty for neglecting RM is large (small) because market share of each firm is relatively large (small).
Disincentives for conducting RM: Few (many) alternative firms in market because the number of rivals is small (large).
The relationship between the number of firms and RM is unclear because the number of firms has opposing effects on the conduct of RM.

5. Research questions
How the entry regulation affects the situation in which all firms conduct RM?
If the number of firms affects whether all firms conduct RM, the regulator needs to control the number of firms through the regulation.
If the number of firms does nothing to promote RM, it is meaningless to control the number of firms through the regulation.
What kind of conditions to realize the situation in which all firms conduct RM?
From the answer to this question, the regulator knows how to impose entry regulation in various exogenous situation.

6. Actual Case 1: Tour bus accident
Overview of the accident:
occurred in April 2012.
caused by the driver falling asleep at the wheel.
7 people killed and 39 people were injured.
This tour bus company went bankrupt in June 2012.

7. Actual Case 1: Tour bus accident
Why did this tour bus company violate safety standards?
The number of tour bus companies increased rapidly in recent years.
Penalty of neglecting RM is small because market share is too small.
Prospect: Firms do not have an incentive to conduct RM if the number of firms is too large?

8. Actual Case 2: Railroad accident
JR Hokkaido has been prone to serious accidents particularly since 2011.
Train derailed and burned in a tunnel.
Engine of the train broke down and burned.
Signal faults.
Drivers falling asleep at the train.
JR Hokkaido is still operating and the number of passengers was hardly affected by these accidents.

9. Actual Case 2: Railroad accident
Why did JR Hokkaido neglect to conduct RM?
There are no private rail companies in Hokkaido because of very restricted entry regulation in railroad industry.
Alternative firms do not exist in market because JR Hokkaido is a local monopoly.
Prospect: Firms do not have an incentive to conduct RM if the number of firms is too small?

10. The model identical firms in the market.
Each firm plays the following two-stage game:
First stage: Each firm chooses whether to conduct RM.
:RM cost per quantity
: probability that a revealed law violator remains in the market
Assume that
: the degree of pressure to exit the market

11. The model Demand function ( ) :
Second stage: Each firm chooses its quantity ( ):
: RM is conducted ( “M” means RM is conducted)
: RM is not conducted (“N” means RM is not conducted)
Demand function ( ) :
: price
: potential demand in the market

12. The model Profit levels:
: conducting RM
: not conducting RM
Each firm contemplates selling its own product for as long as it remains in the market.
Present values of the expected profit:
　 : conducting RM
: discount factor

13. The model Restricted equilibrium is derived:
It is difficult to derive the complete set of possible equilibria for this model because there are many cases in which some firms conduct RM while other firms do not.
This research limits to analyze the situation in which all firms conduct RM.
We need check whether one firm has an incentive to neglect RM when firms conduct RM.

14. Proposition 1 There are three possible cases.
If , all firms conduct RM.

15. Proposition 1
The effect of entry regulation on whether all firms conduct RM is ambiguous because there are three possible cases.
All firms conduct RM when the entry regulation is moderate.
All firms conduct RM when the entry regulation is severe.
There is no possibility to realize the situation in which all firms conduct RM regardless of the level of entry regulation.

16. Proposition 2 Comparative statics:
The following two equations are the conditions which case is realized.
There are four exogenous variables.

17. Proposition 2
The effect of the exogenous variables ( ):

18. Proposition 2
Which case is realized? When the firms are not too myopic ( 　　　　), following results are derived.
The conditions in which all firms conduct RM (Case 1 or 2 realizes) are that potential demand is not too low, the cost of RM is not too high, the discount factor is not too low, and the degree of pressure to exit the market is not too low.
If cost of RM is small and discount factor and the degree of pressure to exit the market are large, all firms conduct RM when the entry regulation is severe (Case 2 realizes).
If cost of RM, discount factor, and the degree of pressure to exit the market are intermediate, all firms conduct RM when the entry regulation is moderate (Case 1 realizes).

19. Concluding remarks The purpose of this research:
How the entry regulation (the number of firms) affects firms’ RM?
The research questions:
How the entry regulation affects the situation in which all firms conduct RM?
What kind of conditions to realize the situation in which all firms conduct RM?

20. Concluding remarks The main results of this research:
Proposition 1
Proposition 2
Possible extensions of this research:
Derive all kinds of equilibrium
Incorporate firm heterogeneity (RM cost, discount factor)