Motivation

1. Measuring Competition Policy and its EffectivenessPaolo Buccirossi (LEAR)Lorenzo Ciari (European University Institute & LEAR)Tomaso Duso (DICE – Henrich-Heine University)Giancarlo Spagnolo (University of Rome Tor Vergata, SSE, & CEPR)Cristiana Vitale (LEAR)ACLE Conference – Competition Policy for Emerging Economies: When and How?May 20, 2011

2. Is competition policy socially beneficial? • Crandall and Winston’s (JEP 2003) provocative paper claims that competition policy is ineffective • Baker (JEP 2003) and Werden (JEP 2003) disagree and point to the social benefits of competition policy as a deterrence mechanism • The key empirical question is how to measure competition policy (deterrence) and how to identify the effectiveness of such a broad policy • We propose a way to quantify the quality of competition policy • We provide a framework to measure the effectiveness of competition policy in providing higher efficiency and productivity • We analyze the interactions and complementarities between competition policy and legal institutions Motivation Measuring Competition Policy and its Effectiveness 20 May 2011 | ACLE| 2

3. 1. Measuring the quality of competition policy Buccirossi, P., L. Ciari, T. Duso, G. Spagnolo, and C. Vitale (2011), “Measuring the Deterrence Effect of Competition Policy: The Competition Policy Indexes,” Journal of Competition Law and Economics, 7, 165-204  Measuring Competition Policy and its Effectiveness 20 May 2011 | ACLE| 3

4. The term competition policy refers to: • Competition legislation:A set of prohibitions and obligations including merger control provisions that firms have to comply with • Its enforcement: Anarray of tools for policing behavior and punishing any violation • Competition policy shoulddeter firmsfrom undertaking any behavior that reduces social welfare by distorting competition, while not frightening any behavior that improves social welfare (no over-deterrence) Competition Policy: Definition and Objective Measuring Competition Policy and its Effectiveness 20 May 2011 | ACLE| 4

5. The optimal level of deterrence is determined by 1) the size of the sanctions 2) the (perceived) probability of detection and conviction, and 3) the (perceived) probability of errors(Becker, JPE 1968; Polinsky and Shavell, JEL 2000) • The following policy variables affect these three factors: • the formal independence of the CA with respect to political or economic interests • the degree of separation between the adjudicator and the prosecutor • the quality of the law on the books • the level of loss(sanctions) that firms (and their employees) can expect to suffer as a consequence of a conviction • the type of investigative powers held by the CA • the amount and quality of the CA’sfinancial and human resources (the budget and skills of the CA’s staff) Deterrence: Competition Policy Variables Measuring Competition Policy and its Effectiveness 20 May 2011 | ACLE| 5

6. The Competition Policy Indexes (CPIs) • We submitted a set of tailored questionnaires to the CAs in 13 jurisdictions and integrated them with information from the OECD country studies and from the CAs’ own websites • We obtained information on each of the six policy variables identified as determinants of deterrence, separatelyfor each type of possible competition law infringement (hard-core cartels, abuses, other infringements) and for mergers over the years from 1995 to 2005 • Each piece of information at each step of the aggregation process was assigned a score/weight on a scale of 0-1 against a benchmark of generally agreed best practice • We tested the sensitivity of this weighting scheme to alternative ones using 1) equal weights, 2) random weights, and 3) factor analysis Measuring Competition Policy and its Effectiveness 20 May 2011 | ACLE| 6

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9. The CPIs embody both formal and practical aspects of a competition policy regime by combining key information on the legal framework, the institutional settings, and the enforcement tools • This information is evaluated against a benchmark of best practices and then aggregated • There is room for further refinement of the CPIs • Cover a longer time period, as well as more (developing!) countries • Include more detailed data on the enforcement features (more extensive information on the level of the sanctions that are effectively imposed) • Exercise serves as a tool of transparency and accountability for public enforcement agencies, as well as a starting point for an assessment analysis The CPI: Discussion Measuring Competition Policy and its Effectiveness 20 May 2011 | ACLE| 9

10. 2. Measuring the effect of competition policy Buccirossi, P., L. Ciari, T. Duso, G. Spagnolo, and C. Vitale (2011), “Competition Policy and Productivity Growth: An Empirical Assessment,” CEPR DP 7470 Measuring Competition Policy and its Effectiveness 20 May 2011 | ACLE| 10

11. The aim of Competition Policy is to protect social welfare by deterring anti-competitive behavior • By making markets more competitive, competition policy affects static and dynamic efficiency through a variety of channels (e.g., Aghionand Schenkerman, EJ 2004; Aghion et al. QJE 2004, ReStat2009). The causal link is thus: • Competition Policy  Competition  Efficiency / Productivity • Given our main research focus, we look at the direct link between competition policyandefficiencyto identify and estimate the causal effect of the policy (e.g. Pavnick, RES 2002; Nicoletti and Scarpetta, EP 2003) • The deterrence effect of competition policy also depends on external factors such as the institutional environment (Aghion and Howitt, JEEA 2006) • We look at the complementarities between the policy and the judiciary system Theoretical Background Measuring Competition Policy and its Effectiveness 20 May 2011 | ACLE| 11

12. As a measure of efficiency/productivity we use Total Factor Productivity (TFP) growth • The proposed specification is derived from a standard neoclassical aggregate industry production function Yijt=TFPijtFijt (Lijt, Kijt) (e.g. Griffith et al. REStat 2004). It is estimated with a three-dimensional (country, industry, time) panel data approach: where TFPLjt is the TFP level in the country-industry on the productivityfrontier, (TFPijt/TFPLjt) represents the productivity gap to the technological frontier, X and Z are sets of control variables (R&D, PMR, human capital, trade openness, and the quality of institutions) and are country-industry and time fixed effects The Empirical Application: The TFP Model Measuring Competition Policy and its Effectiveness 20 May 2011 | ACLE| 12

13. The identification problem derives from the possible endogeneity of the CPIs because of omitted variables and two-way causality • Aggregatethe features of the competition policy regime (institutional inertia) • Lagthe potentially endogenous explanatory variables • Panel data allows us to control for time invariant unobserved individual heterogeneity • We include all possible controls based on the existing literature on the determinants of TFP growth • We take two further steps (more formal) to tackle the problem of potential endogeneity: • Instrumental Variables(IV) approach: We use political and institutional variables(government type and its attitudes towards regulation, economic planning, market economy) policy in neighboring countries as instruments • Look at non-linearities: CP has a stronger impact in countries with better legal institutions and in industries which are not strongly regulated Identification Measuring Competition Policy and its Effectiveness 20 May 2011 | ACLE| 13

14. We selected 13 jurisdictions (Canada, Czech Republic, France, Germany, Hungary, Italy, Japan, Netherlands, Spain, Sweden, the UK, EU, and US) over the years from 1995 to 2005 • For the countries that are part of the EU, we built a set of indexes that incorporate information on both national as well as EU competition policy regimes • For each country, our sample includes 22 industries based on the definitions of the International Standard Industrial Classification (ISIC) • Data on TFP growth is drawn from the KLEMS consortium and from the Groningen Growth and Development Center • Other data come from the OECD Structural Analysis (STAN) database, the OECD Main Economic Indicators (MEI) database, the OECD PMR database, the OECD Analytical Business Enterprise Research and Development (ANBERD) database, and the World Bank Worldwide Governance Indicators (WGI) database TheData Measuring Competition Policy and its Effectiveness 20 May 2011 | ACLE| 14

15. Competition policy has a positive impacton TFP growth, and this is statistically significant at the 1% level [Table] [Figure] • We can reject the hypothesis of the policy being endogenous by using political variables (government types and their ideological position) or policy in neighboring countries as instruments [Table] • Using different weighting schemes for the Aggregate CPI, labor productivity instead of TFP, different lag structures, long run/aggregated effects, different sets of control variables, sub-samples, structures for the error terms does not change our qualitative results [Table] Results Measuring Competition Policy and its Effectiveness 20 May 2011 | ACLE| 15

16. Results - Heterogeneity • Controlling for institutions (contracts enforcement and quality of the judiciary/law) does not alter our results. Yet, good institutions have a positive impact on TFP growth [Table] • We explorethe interactions between legal institutions and competition policy. CP has a significantly larger impact in countries with: • Low cost for the enforcement of contracts (Doing Business), • high rule of law(Fraser) • We further look at the effect of competition policy in different industries. CP has a much stronger impact in the manufacturing sectors • Sector specific regulationsin services industries (e.g. electricity, gas, water, communication, financial intermediation) may make them to a lesser extent subject to the ex-ante antitrust scrutiny • Both results improve our identification strategy Measuring Competition Policy and its Effectiveness 20 May 2011 | ACLE| 16

17. We identify important dimensions of a good competition policy, which can be quantified using hard data. Along these dimension, CAs should be kept accountable (keep track of their activities) • Especially in developing country, clear data on institutional details should be collected • Keep track of the policy’s enforcement (cases & sanctions)! • Good competition policy appears to exert a significant and positive impacton efficiency. But, results are based on OECD countries • We find complementarities between good judiciary institutions and competition policy • Very important for institutional design. One size fits all is not a good policy Conclusions Measuring Competition Policy and its Effectiveness 20 May 2011 | ACLE| 17

18. To verify the robustness of our results we perform several robustness checks with which we consistently obtain a positive and significant effect of the CPI • Employ an alternative CPI in which information is aggregated using Factor Analysis • Use 1,000 sets of random weights and generate a distribution of coefficient estimates [Figure] • Include the EU dimension of the policy • Use alternative measures of productivity (non corrected for mark-ups and labor productivity) • Use long-run rates of TFP growth • Test the sensitivity of our results to the exclusion of specific countries-industries [Figure] • All results point to the robustness of our main findings Results - Robustness Checks [Table] Measuring Competition Policy and its Effectiveness 20 May 2011 | ACLE| 18

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20. Fig 1: The Aggregate CPIs [back] Measuring Competition Policy and its Effectiveness 20 May 2011 | ACLE| 20

21. Fig 1: TFP Growth and the Aggregate CPIs [back] Measuring Competition Policy and its Effectiveness 20 May 2011 | ACLE| 21

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24. Results – Low-level indexes [Table] • Both the Institutional CPIand the Enforcement CPI coefficient are positive and significantyet the former has a much larger impact • Both the coefficient estimate for the Antitrust CPIand Merger CPI are positive and strongly significant, yet the former has a larger impact • A positive impact on the intensity of competition is suggested for the quality of the law and for the powers held by the CAs during the investigation • Also the resources held by the CAs have a positive impact on TFP growth Measuring Competition Policy and its Effectiveness 20 May 2011 | ACLE| 24

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