Tuesday, August 5, 2014
The institutional architecture of regulation and competition
I just submitted a paper about the institutional architecture of regulation and competition, with an application to the recent regulatory reform in Spain. This is the conclusion: "Competition policy and the regulation of liberalizing industries must be coordinated. This coordination is not easy because several market failures and other public concerns interact. There are few examples in the world where this coordination is achieved through full integration of regulation and antitrust agencies, the Spanish reform analyzed above being thus an extreme case. The reason is that there are good policy and incentive reasons, reviewed above, to keep separate agencies with different mandates. Although the influence of the decision of separation vs integration on regulatory capture is theoretically ambiguous, in countries with very powerful large firms with national and international champions ambitions, the large firms could have a preference for as few regulators as possible and keeping them as close as possible to the executive powers. The incumbents have long term strategies of political connections and international expansion, and may prefer to have a single agency to lobby no matter its size, and to deal with a government that keeps most of the relevant decisions. In addition to this, different industries and policy instruments require different levels of regulatory independence; and there is a trade-off between regulatory independence, which requires accountability, and multi-dimensional tasks, which makes this accountability more difficult. Industries that are being partially liberalized should be regulated balancing the trade off between the need to have clear objectives and the economies of scale and scope that come from regulating similar industries. The Spanish case analyzed above illustrates that independent regulatory agencies are fragile institutions. If this is the case in Spain, a member state of the European Union, what may not happen in countries that are less constrained from an institutional point of view. The EU should reflect about the difficulties experienced, not only in Spain, but also in Denmark and other countries, with de facto independence. It apparently seems that the institution of regulatory independence lacks the resilience and public support that, at least until recently, enjoyed central bank independence (now this is also questioned after the global financial crisis). There is a broad consensus among scholars and practitioners that institutional quality is important, but it is more difficult to say which specific attributes conducive to institutional quality should be adopted. Many of the relevant attributes are probably difficult to measure and define: credibility, stability, good appointments... Both written and non-written rules matter. Institutions are endogenous and they are not good travellers, in the sense that they must fit and complement the previous institutional endowment (see Levy and Spiller, 1994, and Spiller and Tommasi, 2007). In future research, the analysis of regulation and competition laws and institutions should take bounded rationality seriously into account (lack of immediate feedback, biases that especially affect experts): ex post evaluation of regulatory decisions, and de-biasing strategies should be contemplated in any reform (see Cooper and Kovacic, 2012, and Rachlinski and Farina 2002). Behavioral economics insights may include that the saliency of one or several ex ante agencies could help them in their conflict with ex post concerns, when these occur. Monopolistic agencies likely tend to aggravate biases such as confirmation or overconfidence. But one size does not fit all. There is no universal blueprint and policy experiments are necessary as a learning process when there is technological, institutional and demand uncertainty. A good appointment as head of a merged agency might overcome any of the problems of an integrated agency that have been raised here. In the case of the integration of agencies in Spain, to evaluate its future performance the focus will have to be on the wisdon of appointments, and on the ability of the regulators to build a reputation for independence from government and from incumbent firms.The structure of regulation and supervision is only one aspect that affects its effectiveness and efficiency. This paper has only focused on the institutional architecture at the national level. In many EU countries, this level is strongly constrained from above by EU treaties and directives and from below from decentralization. Cihak and Podpiera (2006) claim that “The literature generally concludes that the question of the most appropriate structure for regulation and supervision is to a large extent a practical one and the answer depends on the interaction of a number of factors that, moreover, evolve over time. Therefore, there is no strong theoretical argument for any particular organization of supervision; there are only potential advantages and disadvantages of various setups, the importance of which depends on the conditions in place in a given jurisdiction”. The key issue remains that regulation takes into account other market failures (such as externalities or information asymmetries), public objectives (such as equity) and dynamic considerations, that are typically not considered by competition policy. Of course these additional considerations open the door to special interests. How (taking into account the imperfections of government and the imperfections of individuals) democratic societies deal with these concerns under any institutional architecture is a fundamental aspect of their future evolution.