The Economic Effects of Competition Policy Cross-Country Evidence Using Four New Indicators

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1 Copyright rests with the author The Economic Effects of Competition Policy Cross-Country Evidence Using Four New Indicators Presentation based on paper forthcoming with The Journal of Development Studies by Stefan Voigt Philipps University Marburg and CESifo

2 1. Introduction Surprising how little we know about the effects of competition policies: Are competition agencies conducive to higher rates of economic growth? Does it make any difference whether they are independent from government? Does this hold independently of the contents of the competition laws? Are competition policies in line with other market-oriented policies? Does it make any difference if countries have competition laws? Voigt, Effects of Competition Policy 2

3 1. Introduction II Here: introduce four objective competition policy indicators that deal with (i) the substantive content of competition laws, (ii) the degree to which they incorporate an economic approach, (iii) the formal independence of the competition agencies that are to implement the competition laws, and (iv) the factual independence of the competition agencies. Dataset covers 58 (out of approximately 90) states that have competition laws Voigt, Effects of Competition Policy 3

4 1. Introduction III Procedure: 2 Does More Competition Lead to Higher Growth? An Overview of Competing Views 3 Introducing the 4 New Indicators 4 Are Competition Policies a Good Predictor for Attitudes Toward Competition More Broadly Delineated? 5 On the Effects of Competition Policies on Economic Growth Estimation Approach and Discussion of Results 6 Conclusion and Outlook Voigt, Effects of Competition Policy 4

5 2 Does More Competition Lead to Higher Growth? An Overview of Competing Views Effects of intensity of competition for innovation as well as for growth still unclear. Schumpeter Argument recently used in growth models (e.g. Aghion and Howitt 1992 or Aghion, Bloom, Blundell, Griffith and Howitt 2005). Empirical evidence highly ambiguous (e.g. Rey 1997). Voigt, Effects of Competition Policy 5

6 2 Does More Competition Lead to Higher Growth? An Overview of Competing Views II No consensus on relationship between competition and growth, not surprising that there is no consensus on adequate competition policies. let the data speak Dutz and Hayri (1999): competition policy explains differences in economic growth. Problem: Subjective evaluations of surveyed businesspeople. Voigt, Effects of Competition Policy 6

7 2 Does More Competition Lead to Higher Growth? An Overview of Competing Views III Public choice: competition laws often protect competitors rather than competition. Existence of competition law not sufficient to assume that competition-enhancing policies will be implemented. Two consequences for empirical research follow: (1) Aims, instruments, implementation mechanisms etc. need to be analyzed in detail. (2) the competition friendliness of other policy areas (cost of entry, cost of exit) should be explicitly taken into account. Conjecture: Independent agencies with potentially positive effects. Voigt, Effects of Competition Policy 7

8 3 Introducing the 4 New Indicators 3.0 Introductory Remarks Two different aspects analyzed: (1) Content of competition laws and (2) the organizational structure that is supposed to implement the laws. Voigt, Effects of Competition Policy 8

9 3 Introducing the 4 New Indicators II Four indicators introduced here: (1) basis and contents of competition laws, (2) economic reasoning used, (3) formal independence of the competition agency, (4) factual independence of the competition agency. Construction of the indicator: Variables between 0 and 1, Based on questionnaire sent to competition authorities Voigt, Effects of Competition Policy 9

10 3 Introducing the 4 New Indicators III 3.1 The Basis and Contents of Competition Laws (1) Competition named in Constitution? (2) Specific Law with Purpose to Safeguard and Promote Competition? (3) Number of years since first competition law passed? (4) Does Competition law contain purposes other than competition? (5) Kinds of practices deemed to be anti-competitive? Voigt, Effects of Competition Policy 10

11 3 Introducing the 4 New Indicators IV 3.2 The Economic Approach (1) Per se rules vs. rule of reason? (2) Modern instruments promoted by economists used? (e.g. collective dominance, conglomerate effects) (3) Instruments with regard to merger policy? (e.g. remedies, efficiencies) Voigt, Effects of Competition Policy 11

12 3 Introducing the 4 New Indicators V 3.3 The Independence of Competition Agencies Independent competition agency := investigates anticompetitive behavior as specified in the competition law without interference from members of the executive. Decisions of agency carried out even if not in the interest of the executive. Competition officers do not have to anticipate negative consequences such as (1) being expelled, (2) being paid less, or (3) being made less influential. Voigt, Effects of Competition Policy 12

13 3 Introducing the 4 New Indicators VI 3.3 (2) Formal independence Up to 13 variables included: (1) Agency under direct supervision of government? (2) Agency restricted to safeguarding/promoting competition? (3) Number of competencies allocated to the competition agency (4) Decisions challengeable in court? (5) Appointment procedure (6) Legal term length of competition officer (7) Are terms renewable? (8) How can competition officers be removed from office? (9) Measure preventing income reductions in real terms? (10) General rule allocating cases to specific members of competition agency? (11) Members of executive with power to give instructions? (12) Members of executive with power to override decisions by competition agency? (13) Economic rationale of decisions published? Voigt, Effects of Competition Policy 13

14 3 Introducing the 4 New Indicators VII 3.4 Factual independence Up to 6 variables: (1) Effective average term length (2) Incomes at least constant since 1990? (3) Budget of agency at least constant since 1990? (4) Number of times members of executive have given instructions ( ) (5) Number of times members of executive overridden decisions ( ) (6) Have parties successfully drawn on goals besides competition although they are NOT part of the law? Voigt, Effects of Competition Policy 14

15 4 Are Competition Policies a Good Predictor for Attitudes Toward Competition More Broadly Delineated? Some Correlations Between Competition Indicators and other competition-relevant indicators Only variable inconsistent with competition policy variables Voigt, Effects of Competition Policy 15

16 5 The Estimation Approach and Results TFP i = α+ βcomp i + χz i + ε i TFP for 2000 (own estimates based on Cobb- Douglas Function of Hall and Jones 1999) Standard growth estimators such as schooling, investment superfluous Z contains both political and economic variables Voigt, Effects of Competition Policy 16

17 5 The Estimation Approach and Results II Components of the Z-vector: (i) Government consumption (in % of GDP, ), (ii) Openness ((exports + imports)/gdp), (iii) Population growth ( ), (iv) Inflation rate, (v) the number of patents (U.S. Department of Commerce), (vi) political rights (Freedom House, proxy for democracy), (vii) civil liberties (Freedom House), (viii)legal origin, (ix) ethno-linguistic fractionalization, (x) government effectiveness, and (xi) regulatory quality (Kaufman et al. 2003). Voigt, Effects of Competition Policy 17

18 5 The Estimation Approach and Results III Voigt, Effects of Competition Policy 18

19 5 The Estimation Approach and Results IV Voigt, Effects of Competition Policy 19

20 5 Estimation Approach and Results V Re-estimating the models on sub-sample (Non-OECD) leads to similar results (lower R 2 but all indicators at least marginally significant). Estimating effects of single variables on further reduced sample (excluding transition countries) shows that restriction to safeguarding and promoting competition is highly significant. Indirect effect of competition policy? (if nobody needs to be bribed for entry due to a factually enforced competition policy, perceived corruption levels should be lower) This is, indeed, the case. Voigt, Effects of Competition Policy 20

21 6 Conclusion and Outlook Effects of competition laws not very robust (overall institutional quality is crucial, not necessarily competition policy) But: it might be too early for final verdict Next steps: More and more precise indicators (e.g. time-series data); Role of private enforcement of antitrust; Be more precise re transmission channels (market structures; price-cost margins) Endogenize choice of competition policies; any specific pattern in their diffusion? Voigt, Effects of Competition Policy 21

22 6 Conclusion and Outlook Thank you very much for your attention! Voigt, Effects of Competition Policy 22