Season's Greetings

TILEC sends its season's greetings to all readers and extends its best wishes for 2010 to all of them!
The TILEC Office will be closed from
Friday 25 December 2009 till Monday 4 January 2010.

TILEC seminar on the law and economics of settlements

Over the past decades, legal procedure has progressively lost its previous black-letter law identity and begun to attract the scholarly attention of both lawyers and economists. In particular, settlements have steadily grown into an area of ample interdisciplinary research due to complex questions of judicial economy, litigation costs and incentives for the resolution of conflicts out of the courts. On 11 December 2009, TILEC organised a seminar on this topical issue. In her presentation, Kathryn Spier (Harvard University) discussed so-called high-low agreements, whereby a defendant and a plaintiff agree before going to the court on the lowest and highest amounts of compensation to be paid irrespective of the court decision. Jonathan Masur (University of Chicago) and John Bronsteen (Loyola University of Chicago) approached the matter from a 'hedonic' perspective and discussed the effects of an individual's adaptation to physical damage on her incentives for settlement. The seminar was productive and the presentations raised many questions to be addressed by future research.

Second IIPC workshop in Tilburg

On 18 December 2009, TILEC organized its second IIPC workshop in Tilburg. The event aimed at presenting the research of the 2009 winners of a research grant competition on issues relating to Innovation, Intellectual Property and Competition (IIPC). Jens Prufer (TILEC) uncovered the rationale for the existence of so-called semi-public contests, such as business plan competitions. George Norman (Tufts University) described how in a world of "fast seconds" a patent office may want to enlarge the width of patent protection in order to foster innovation by small innovators. Elizabeth Muller (ZEW Mannheim) presented evidence about the impact of IP legal problems on firms' innovation activities. Simone Keunen (TILEC) reported about the attempts to develop a method for the detection of "patent thickets", which are said to stifle innovation by multiplying the cost for current innovators of building upon existing technology. James Prieger (Pepperdine University) explained how to approach the problem of the dramatic increase in patent applications from the point of view of congestion pricing. The meeting, organized by TILEC member Annette van Hirschfeld, proved a success, in the opinion of many attendees. Information about the 2010 IIPC competition will be posted on the TILEC website early next year

How to reconcile national regulatory autonomy with free trade?

The WTO regime aspires to walk the tightrope between progressively liberalizing world trade and preserving well-intentioned regulatory diversity. This is a difficult task for the WTO adjudicating bodies and current services disputes confirm as much, notably when it comes to origin-neutral measures which nevertheless adversely affect trade. WTO Members are currently negotiating the adoption of rules (so-called 'Disciplines on domestic regulation') which will purportedly ensure that origin-neutral measures are not unduly trade-restrictive. In a recent TILEC discussion paper, TILEC member Panagiotis Delimatsis analyses the
Disciplines with a critical eye and draws rudimentary parallels with the EU Services Directive. The author argues that the Disciplines can only be successful if they incorporate certain proxies which could be easily used by the WTO judiciary in the resolution of conflicts. Other than strengthening the rules relating to regulatory transparency, the paper proposes a 'necessity test' drawn from the GATT/WTO history, which is tailor-made to free trade in services and, therefore, is likely to gain the 'mass support' of WTO members. Absent this type of proxies, the disciplines are doomed to fail.

Selective contracting in health care

Health care costs are growing faster than national income in most countries and a fraction of population does not get access to affordable treatment. Selective contracting between insurers and health care providers is often presented as a way to meet these twin challenges. The idea is that insurance companies, which have the
incentives and means to monitor health care providers, could reduce their market power by selectively contracting with them. In a recent TILEC discussion paper, TILEC members Jan Boone and Gijsbert Zwart and co-author Michiel Bijlsma (Netherlands Bureau for Economic Policy Analysis) revisit this issue in a model where consumers can choose to remain uninsured and show that selective contracting does not only lead to positive effects. It can raise the price of uninsured care and it can lead to cheaper insurance for the wrong reason (restricted patient choice rather than cheaper inputs). The solution to these potentially anticompetitive effects is not to ban selective contracting, as the entire pattern of contractual relationships matters for determining the harmful or beneficial effects. The policy implication is instead that selective contracts should raise alarm bells if all insurers exclude a care provider with market power in the uninsured market.

Defending students

The end of the semester is the period where TILEC bids goodbye to those Ph.D. students defending their dissertation before embarking on new challenges. On 23 November 2009, TILEC member Eckart Ehlers successfully defended his dissertation about electricity and gas supply network unbundling, supervised by TILEC members Leigh Hancher and Pierre Larouche. Eckart's thesis analyzes the legality of supply network divestiture measures, as threatened by the European Commission, and the legislative unbundling measures which entered into force in Summer 2009, on the basis of European law and the constitutional framework of the United Kindgom, the Netherlands and Germany. On 1 December 2009 at 10 AM, TILEC member Alan Littler will defend his dissertation about the regulation of gambling, supervised by Tilburg University professor Cyrille Fijnaut and TILEC director Pierre Larouche. Alan´s thesis emphasizes that "although EU Member States take different approaches to regulating the supply of gambling services in many respects" their objectives are broadly similar and that coordination between national regulatory bodies is required to ensure that the national competence to regulate gambling does not undermine the internal market. Ph.D. defences always take place in the Aula of the university; the public is welcome.

The law and economics of contractual duress

Virtually all modern legal systems provide that a party who concluded a contract under unacceptable pressure has a right to avoid the offending agreement. Yet what is unacceptable is difficult to establish. Legal doctrines and economic models approach contractual duress with little communication and, therefore, at times reach divergent outcomes. In a recent TILEC discussion paper, TILEC Member Péter Cserne goes on a journey to the heart of duress and attempts to increase communication between doctrinal, jurisprudential and various economic approaches to this fluid and contested doctrine of contract law. The paper finds that in the traditional core of duress i.e. when physical threat was used, jurisprudential and economic justifications converge. It is more controversial whether the range and quality of opportunities available to the contracting parties should also matter or the doctrine should be used to promote substantive fairness or ambitious policy objectives. The paper is forthcoming as a chapter in the new 12-volume edition of the Elgar Encyclopedia of Law and Economics, one of the main references works in the field of law and economics.

Europeanisation of private law: progress and shortcomings

On 27 November, the Economic Impact Group (EIG) led by TILEC within the Joint Network on European Private Law (CoPECL) held its final conference in Brussels. The EIG regrouped many leading and emerging European scholars in the economic analysis of private law. Since 2005, it has worked on a collection of articles on the main elements of the Draft Common Frame of Reference (DCFR), a restatement of European private law prepared by a large network of academics. The final conference offered the opportunity to present the results of the work of the EIG to interested policymakers and academics. It featured papers on non-discrimination in contract law (Ann-Sophie Vanderberghe, Erasmus University Rotterdam), contract formation (Mitja Kovac, University of Ljubljana), non-performance (Urs Schweizer, Bonn University), termination of long-term contracts (Fernando Gomez, Pompeu Fabra University) and review of standard terms (Hans-Bernd Schaefer, Hamburg University). In conclusion, the EIG found that the DCFR would have been strengthened by a greater use of economic analysis, in order to identify trade-offs more clearly and to take account of the effect of the law on private incentives. The resulting book, edited by TILEC director Pierre Larouche and TILEC extramural fellow Filomena Chirico, will be published by Sellier shortly.

Is EU competition policy still "special"?

The Modernisation Project decentralised the enforcement of EU competition policy and increased the symbiotic relationship between the national and supranational enforcement regimes through the formation of a network between the national competition authorities and the European Commission. Regulation 1/2003, the legal background of Modernisation, has now completed its fifth year in operation and the Commission released a report regarding the initial functioning of the system. In a recent TILEC discussion paper, TILEC member Firat Cengiz takes a retrospective look at the institutional elements of Modernisation in response to this report. In general, the paper comes to positive conclusions regarding the initial experiences, particularly due to the increased communication between competition officials with concrete policy outcomes. Nevertheless, there are significant accountability problems in the functioning of the new regime. Overall, the paper argues that as an unanticipated consequence of Modernisation, competition policy has lost its special status in Europe and become prone to the general systemic problems of multi-level governance. The author urges the Commission to give due consideration to these problems and the epistemic community to place competition policy within the broader debate on multi-level governance.

Short-sighted bankruptcy law?

Bankruptcy was once seen as a major moral failure, revealing the reckless nature of the impecunious entrepreneur unable to face up to his obligations. Even nowadays, there are conflicting views about the ultimate goal of bankruptcy regimes: orderly liquidation of failed businesses or efficient re-organisation of viable concerns. In that respect, one often contrasts the "soft" US regime with the "tough" regime which until recently prevailed in most EU Member-States. In a recent TILEC discussion paper, TILEC member Emanuele Tarantino challenges the received wisdom according to which "soft" regimes have positive effects on the financing of long-term projects. Indeed, in the presence of moral hazard, the discontinuation of such projects is the optimal punishment for initially poor performance. If a lender can increase recovery rates in bankruptcy, then such punishment will no longer be credible, as the parties will always prefer renegotiating. Clearly, this exacerbates the difficulty for a lender ex ante to commit capital to long-term projects and may bias business activities towards short-term, less valuable investment projects.

TILEC Conference on "Innovation, Intellectual Property and Competition Policy"

On 18 December 2009, Friday, TILEC will host an exciting half-day workshop on "Innovation, Intellectual Property and Competition Policy" (IIPC). Speakers of the conference include TILEC member Jens Prüfer, George Norman (Tufts University), Elisabeth Muller (ZEW Centre for European Economic Research), TILEC director
Eric van Damme, and James Prieger (Pepperdine University). Opening and closing remarks will be given by TILEC member Damien Geradin. This workshop is particularly special for TILEC, because the winners of 2008 TILEC IIPC grant will present their first research findings. The details for the 2009-2010 IIPC grant competition will be announced on the TILEC website later in the year and communicated via the TILEC Newsletter. Attendance to the workshop is free, however, for organisational purposes attendees are kindly requested to register before 14 December.

CoPECL Conference on the Economics of European private law

On 27 November 2009, Friday, the results of the work of the Economic Impact Group (EIG) led by TILEC will be presented in a one-day conference at the Fondation Universitaire / Universitaire Stichting of Brussels. The EIG was part of CoPECL (Joint Network of Excellence on European Private Law) and funded by the EU under the 6th RTD Framework Programme. The task of the EIG was to study and assess the Draft Common Frame of Reference (DCFR), which sets out a proposed European private law, from an economic perspective. The EIG produced a collection of papers on the main elements of the DCFR, which will be presented at the conference and will appear in an edited book. All academics, practitioners and policymakers who are interested in the Europeanization of private law are invited to attend. Presenters of the conference include Hans Schulte-Nölke (Osnabruck University), Urs Schweizer (Bonn University), Fernando Gomez (Pompeu Fabra University), Hans-Bernd Schaefer and Patrick C. Leyens (Hamburg University) and TILEC director Pierre Larouche. The closing address will be given by Alain Brun from the European Commission. Attendance to the conference is free, however, for organisational purposes attendees are kindly requested to register through the TILEC website before 16 November 2009.

Procuring efficiently

On 21 October 2009, TILEC, in cooperation with the Dutch Ministry of Economic Affairs and the Netherlands Bureau of Economic Policy Analysis (CPB), organized a workshop in The Hague about the procurement of public services. The workshop was the most recent one in a series of semi-annual meetings on competition issues that has been running for years. Steven Tadelis from the University of California, Berkeley stressed the importance of the trade-off between achieving productive efficiency and reducing adaptation costs. Neoclassical models neglect the latter and frequently conclude that open procurement is the best option. Once transaction cost and the risk of hold-up are taken into account, such as with custom-made products, alternatives may actually be preferable. The two other presentations focused on some Dutch policy issues. Bjorn Volkering (Ecorys) discussed procurement of high school books, which has become compulsory, now that schools are under the obligation to provide books for free. TILEC director Eric van Damme focused on procurement of home care by local authorities. From the event, the lesson emerged that decision-makers have to pay extreme attention to the procurement rules, whose design is not merely a technical exercise.

Disciplining proxy proposals

Would banks' management teams have avoided excessive risk-taking if they had been thoroughly monitored by shareholders? Is shareholder activism a good thing in general? In a recent TILEC discussion paper TILEC member Luc Renneboog and TILEC extramural fellow Peter G. Szilagyi (Judge Business School, Cambridge) provide evidence on the corporate governance role of shareholder-initiated proxy proposals. Previous studies debate over whether activists use proposals about corporate decisions to discipline firms or to simply advance their self-serving agendas, and whether such proposals are effective at all in addressing governance concerns. Using the largest sample yet examined as well as extensive controls for governance quality, the authors find that activists use the proxy process as a disciplinary mechanism, and as such are valuable monitoring agents. Moreover, proposal announcements in the proxy statements have positive stock price effects, and both the market and the voting shareholders respond as much to the target firm´s governance quality as to the proposal´s objective and sponsoring shareholder. The authors conclude that shareholder proposals have nontrivial control benefits, countering arguments that they should be restricted by regulatory authorities.

Saving lives and saving costs

On 26 October 2009, TILEC, TRANZO and the Dutch Ministry for Health, Welfare and Sport organized a major conference at Tilburg University on "effective managed competition". Both the US and the Netherlands have health care systems that combine managed competition with managed care. Hence, one aim of the conference was to achieve some mutual learning. Leading economists from Harvard University (Chernew, Cutler, and Rosenthal) discussed the strengths and weaknesses of the US system and the challenges of achieving universal coverage, while reducing cost and increasing quality. Martin Gaynor (Carnegie Mellon University) detailed the strong aspects of the Dutch system. A policy discussion featuring Dutch minister Ab Klink and Donald Moulds, acting head of the in-house think-tank of the US Department of Health, closed the day. Several
lessons emerged, such as the importance of a good ex ante risk equalization scheme, the need to move from fee-for-service to pay-for-performance, and the necessity of some form of competition. The conference attracted high attendance and interest from the media. It was organized by TILEC member Marcel Canoy, with strong support of the TILEC office, and the secretariats of the Department of Economics and Netspar.

Network neutrality: transatlantic policy learning can be mutual!

Being fascinated by the maturity of American antitrust policy and feeling embarrassed and apologetic for the weaknesses of its European counterpart is a common attitude among the comparativists of European antitrust scholarship. In a recent TILEC discussion paper, TILEC member Jasper Sluijs challenges this conventional opinion and argues that Europeans also have reasons to be proud. The paper conducts a comparative analysis between different approaches to telecoms regulation on both sides of the Atlantic with a specific focus on the issue of network neutrality. The paper places the question of network neutrality in the greater debate of incentivising investment to the next generation broadband infrastructure, under the grave uncertainties regarding the future of the broadband market. The concepts of false negatives and positives, which the paper successfully borrows from statistics, constitute the main analytical foundation for the comparison between the European and American regulatory approaches. Overall, the paper finds the European approach more flexible and responsive, as the existence of both consistent sector specific regulation and a strong antitrust policy makes it possible to address any false negatives and positives swiftly. The paper is to appear in the Federal Communications Law Journal.

New administrative structure, new faces

On August 17, 2009 Nicola Heeren joined TILEC as the new TILEC Office Manager. Nicola has recently moved to the Netherlands after working as a project manager in London. Nicola, who has become part of the TILEC management team, will liaise between the academic and the administrative staff. She will be responsible for supervising all the administrative processes which support TILEC's activities. After a difficult period of shortage, the TILEC Secretariat is now fully staffed and consists of Marlous Winters, Rochelle van Rooij and Katja Zondervan. In addition, Quinten Blok is currently working as a student assistant and provides support to the team. As all members of the team work part-time, members and interested parties are kindly requested to send their enquiries to TILEC@uvt.nl to ensure that they can be dealt with in a timely and appropriate manner, unless otherwise stated. Project leaders who need assistance for projects or events are also asked to involve Nicola at an early stage so that the workload of the secretariat could be planned and support timely provided.

Do taxes affect entry?

In the past decade, evidence accumulated that most of productivity gains in the economy are actually realized by entrants. Competition policy often aims at making room for them by preventing incumbents from unduly deterring them but are we sure that some other determinants are not as important? In a recent TILEC discussion paper, TILEC member Marco Da Rin (and co-authors Marina Di Giacomo and Alessandro Sembenelli) study the effect of corporate income taxation on entry patterns. The authors use a novel country-industry panel database with information on newly incorporated firms in 17 European countries between 1997 and 2004. After accounting for the fact that tax rates and tax rules could actually be determined by public authorities in reaction to the observed entry pattern, they find that a reduction in the effective corporate income tax rate leads to a significant increase in entry rates and to a
reduction of the scale of entrants, two possible measures of the ease of entry. Interestingly, these effects are non-linear, suggesting that corporate income tax reductions can facilitate entry only below a certain threshold level.

Insider trading in the Netherlands

On 23 September 2009, TILEC organized a workshop on insider trading at the premises of the Dutch financial markets authority (AFM) in Amsterdam. This activity was part of the on-going cooperation between TILEC and the AFM, which aims at delivering a better understanding of the functioning and regulation of financial markets. TILEC member Peter de Goeij presented a paper (joint with Peter Cziraki and Luc Renneboog) investigating whether there are patterns of abnormal stock performance around insider trades and option exercises on the Dutch market. The authors find that insider share purchases, sales and option exercises are both better-timed and followed by a stronger market response at firms where shareholder rights are not restricted. They argue that this pattern reflects the high value of private benefits of control enjoyed by insiders at firms which effectively curtail shareholder rights. Former TILEC member Jérémie Lefebvre (Louvain-la-Neuve) presented a paper (joint with Hans Degryse and Frank de Jong) analyzing the bid-ask spread and other liquidity measures on the Dutch stock market on dates of legal insider trading. Measures of asymmetric information increase when insiders trade but there is little evidence of changes in quoted spread, although those can help in predicting abnormal returns.

TILEC has a new research coordinator on the law side

Firat Cengiz joined TILEC as a post-doctoral researcher in July 2009 from the European University Institute in Florence, where she was a Max Weber Fellow. Firat received her Ph.D. degree from the ESRC Centre for Competition Policy of the University of East Anglia, UK, with a thesis titled "Antitrust Federalism in Comparison: Multi-level Enforcement of Competition Policy in the US and the EC". Institutional aspects of competition policy constitute Firat's primary research interest and for the rest of this academic year she will principally be working on a book project based on her doctoral research. Firat was engaged in university administration both at the University of East Anglia and the European University Institute. Therefore, she enthusiastically agreed to take on her shoulders the task of research coordination of TILEC on the law side. Firat has a firm belief in transparency and a bottom-up approach to administration at all levels. Therefore, she will be more than happy to discuss any questions or suggestions about TILEC activities or research in general. She can be found in room M513 and reached by phone at +31 13 4663648 or by e-mail at f.cengiz@uvt.nl.

Financial contagion

The recent financial crisis, while having its roots in the US, spread globally in a very short span of time. Banks' interdependence played an obvious role but not much is known about world financial contagion channels. In a recent TILEC discussion paper, TILEC members Hans Degryse and María Fabiana Penas and co-author Muhammad Ather Elahi (Tilburg University) examine cross-border contagion risk over the period 1999-2006. To that purpose they use aggregate cross-border exposures of banks in seventeen countries. They find that a shock which affects the liabilities of one country may undermine the stability of the entire financial system. For instance, a shock wiping out 25% of US cross-border liabilities against non-US banks could lead to bank contagion eroding at least 94% of the recipient countries&acute banking assets. They also find that since 2006 a shock to Eastern Europe, Turkey and Russia affects most countries. Simulations also reveal that the speed of contagion has increased in recent years resulting in a higher number of directly exposed banking systems. Finally, they find that contagion is more widespread in geographical proximities. Ironically, the US is the only country immune to cross-border shocks stemming from other countries!

The naked truth about exclusive dealing

Exclusivity clauses that commit a consumer to procure a good from a unique supplier are regularly debated in competition policy circles. One of the main 'theories of harm', the so-called 'naked exclusion' story, holds that an incumbent firm can play on buyers' coordination difficulties to deny an entrant the scale it needs in order to produce efficiently. In a recent TILEC discussion paper, TILEC members Jan Boone, Wieland Müller and Sigrid Suetens report experimental results on the impact of exclusive dealing inspired by this literature. Their key findings are as follows. First, exclusion is widespread in lab markets: it occurs in more than two thirds of all cases. Second, contrary to theory, allowing incumbents to discriminate between buyers increases exclusion rates only when offers can be made sequentially and secretly. Third, allowing discrimination does not lead to significant decreases in the costs of exclusion. Behind those observations lies the fact that buyers are more likely to accept an exclusive deal the higher the payment. The authors conclude that for practical purposes, an antitrust authority should be on high alert whenever the suspected firm (i) staggered its contracts over time, and (ii) took active measures to keep previous offers secret.

Should regulation promote diversity in media markets?

Is globalization threatening cultural diversity? Participants in the TILEC workshop on "Competition Policy and Regulation in Media Markets: Bridging Law and Economics", held in Tilburg on June 4 and 5 2009, discussed these and related questions. The meeting was organized by Ilse van der Haar and Lapo Filistrucchi, with the financial support of the Dutch Royal Academy of Sciences (KNAW). While Mina Burri Nenova (University of Bern) challenged the ability of the EU Audiovisual Media Directive to protect cultural diversity, Joel Waldfogel (University of Pennsylvania) used data from world music charts to show that, while Hollywood dominates world trade in movies, the US has grown less dominant in music markets, where domestic singers are still disproportionately popular. Rachael Craufurd Smith (University of Edinburgh) discussed how media pluralism considerations played a role in recent competition policy cases in the UK and the US, while Peggy Valcke (University of Leuven) presented the results of an inter-university project attempting at constructing indicators of media pluralism for European countries. Simon Anderson (University of Virginia) explained why, even according to conventional economic theory, merger policy in media markets should have the additional objective of preserving the variety of political viewpoints in the public arena.

TILEC looking for a new manager

As a result of its considerable growth over the past years, resulting in some 60 researchers now being associated with it, and following the departure of Ilse van der Haar, TILEC currently has a vacancy for the position of manager. The position consists in maintaining and further developing the smooth functioning of the TILEC Office. The manager will be responsible for the daily management of TILEC and the supervision of the TILEC secretariat. He or she will intermediate between the scientists forming the TILEC management team and the university administration. TILEC is looking for an independent colleague who knows how to take charge. The ideal candidate is trained at the higher vocational education (HBO) or university level and has experience within a university environment. He or she also has several years of relevant work experience in management and administration, especially in taking care of project budgets. He or she is able to motivate administrative staff members and has excellent communication and social skills in Dutch as well as in English. Click here to see the full vacancy notice. The application deadline is set to 4 July 2009.

What do we really know about the banking sector?

With the unfolding of the financial crisis, the question could not have been more timely! TILEC members Hans Degryse and Steven Ongena, with co-author Moshe Kim (Haifa University), have recently published a text on the "Microeconometrics of Banking" with Oxford University Press. The book provides a compendium to the empirical work investigating the hypotheses generated by recent banking theory. It is an ideal companion to the celebrated book by Xavier Freixas and Jean-Charles Rochet on the microeconomic theory of banking. It follows the structure in Freixas and Rochet's text and arranges the relevant methodologies, applications, and results according to each of their original chapters in order to develop a coherent synthesis between available theory and supporting empirics. Each chapter in Microeconometrics of Banking contains a modest introduction (where possible and appropriate), a concise methodology section with one or more relevant methodologies, and several illustrative applications. In a "muscular" results section the authors summarize the main robust and seminal findings in the literature. Without doubt, this book will provide inspiration for many students, researchers and policy-makers concerned with financial intermediation in the years to come.

NCCR/TILEC workshop on financial services

The Swiss National Centre of Competence in Research (NCCR, individual projects 8 and 10) and TILEC have jointly organized a workshop on Challenges and New Directions in the Regulation of Financial Services. The workshop will take place on June 25-26, 2009 at the World Trade Institute, Berne, Switzerland. Amidst the financial crisis, this interdisciplinary workshop gathers renowned economists and lawyers and aims to tackle several aspects of financial services regulation relating to financial innovation, transparency, trade policy considerations as well as some of the newly identified issues in financial regulation. Speakers for this two-day workshop include Ernst Baltensberger (University of Bern), Thorsten Beck (Tilburg University), Hans Degryse (TILEC), Kern Alexander (University of Cambridge), Eva Huepkes (Financial Market Supervisory Authority Switzerland) and Maria Teresa Fabregas-Fernandez (European Commission). Due to organisational reasons, participation in this workshop is subject to registration. Therefore, if you want to participate, please register with Ms Gaby Hofer by June 2.

Did the liberalization of gas markets deliver the intended results?

Christian van Hirschhausen, Technische Universität Dresden Fakultät Wirtschaftswissenschaften Lehrstuhl für Energiewirtschaft
The process of liberalizing gas markets started about a decade ago in continental Europe, even earlier in the U.K. and the US. Do we have reasons to be satisfied with the outcome? On April 23 2009, an Energy Economics Policy Seminar, jointly organized by TILEC, the Netherlands Bureau for Economic Policy Analysis (CPB), the Dutch Ministry of Economic Affairs (EZ) and the Netherlands Competition Authority (NMa), took place in the Hague. The event, which aimed at assessing the impact of liberalization on prices and investments, was extremely well-attended. Christoph Riechmann (Frontier Economics) argued that prices at the wholesale and retail level continued moving in line with oil prices in the medium- and long-run while the short-run gas price is determined to a larger extent by parameters which are specific for the gas market. Christian van Hirschhausen (DIW, Berlin) argued that the conventional opposition between liberalization, with its focus on improving static efficiency, and investment incentives was over-emphasized in the gas market, where investments in regazification and pipeline infrastructure were forthcoming both in the US and in Europe (although some specific, publicly-sponsored investments might be needed in Eastern Europe).

The consumer: a source of regulatory legitimacy?

Economic regulation by independent regulatory authorities is traditionally justified in a legal sense by theories based on delegation, (partial) ministerial responsibility and judicial review. More recently, regulatory contracts and stakeholder representation provide a similar function. All these models focus either on the relationship between the regulator and the central authority, or on the parties subject to economic regulation, but do not focus on the ultimate objective of regulation: consumer benefits. Can the consumer, or the general consumer interest, act as an additional source of regulatory legitimacy? Healthcare regulation in the Netherlands provides a good context for this question. The Dutch Healthcare Market Regulation Act (Wmg) creates the possibility of a new starting point for legitimacy, because it not only introduces the general consumer interest as a legal concept, but as the priority objective of regulation. In a recent TILEC discussion paper, Wolf Sauter (TILEC, NZA) investigates how to interpret this new concept, operationalised in three variables: quality, affordability and accessibility. His analysis draws on the economic approach to regulation (market failure, market power, bounded rationality), and whether it can provide a non-trivial source of legitimacy, based on the results achieved in serving the statutory constituency of the regulator: the consumer.

Financial contagion

The recent financial crisis, while having its roots in the US, spread globally in a very short span of time. Banks' interdependence played an obvious role but not much is known about world financial contagion channels. In a recent TILEC discussion paper, TILEC members Hans Degryse and María Fabiana Penas and co-author Muhammad Ather Elahi (Tilburg University) examine cross-border contagion risk over the period 1999-2006. To that purpose they use aggregate cross-border exposures of banks in seventeen countries. They find that a shock which affects the liabilities of one country may undermine the stability of the entire financial system. For instance, a shock wiping out 25% of US cross-border liabilities against non-US banks could lead to bank contagion eroding at least 94% of the recipient countries&ampacute banking assets. They also find that since 2006 a shock to Eastern Europe, Turkey and Russia affects most countries. Simulations also reveal that the speed of contagion has increased in recent years resulting in a higher number of directly exposed banking systems. Finally, they find that contagion is more widespread in geographical proximities. Ironically, the US is the only country immune to cross-border shocks stemming from other countries!

Successful CLEEN meeting in Tilburg

On May 14 and 15, 2009, TILEC hosted the yearly gathering of the Competition Law and Economics European Network (CLEEN). This network, which was created in 2007, associates research centers with a profile similar to TILEC&middots one in order to foster exchanges of ideas, experiences and researchers. Previous meetings had taken place in Bonn and Norwich. This time, 35 researchers from the Amsterdam Center for Law and Economics (ACLE) at the University of Amsterdam, the Center for Competition Policy (CCP) at the University of East Anglia, the Robert Schuman Centre for Advanced Studies (RSCAS) at the European University Institute in Florence, the Max-Planck Institute for Research on Collective goods in Bonn, and TILEC came to Tilburg to present and discuss about 25 papers on competition or regulation issues. The keynote speeches were delivered by J. Gregory Sidak (Criterion Economics) and Edward Droste (CRA), who presented their views on the present and future of merger guidelines in the US and in Europe. The meeting, organized by Cedric Argenton and Rochelle van Rooij at TILEC, was well-received and participants look forward to the collaboration opportunities that may ensue.

TILEC 2008 report available

TILEC's annual report for 2008 is now available on the TILEC website. The year 2008 turned out to be another successful year for TILEC. At the beginning of the year, TILEC signed a four-year cooperation with the Dutch healthcare regulator NZA to conduct research on competition in healthcare markets. The position of TILEC in the area of energy markets was strengthened further: the research contract with Essent was extended, and TILEC participates actively in the UNECOM network that investigates ownership unbundling of energy networks. A new project that started in 2008 concerns the economics of crime, sponsored by the Dutch Policy Academy and executed by Ben Vollaard. 2008 was filled with research activities: TILEC's fifth anniversary was celebrated with a high-level conference on 'Market Governance and Innovation'. Multiple workshops were organised in 2008 on various topics, such as 'the private enforcement of competition law', 'the future of regulation in energy markets', and 'innovation, intellectual property and competition policy'. Prestigious research grants were received, such as the VENI grant of Sigrid Suetens, and the Open NWO grant of Natalia Fiedziuk. TILEC's continuous challenge is to deepen the interdisciplinary cooperation between legal scholars and economists within its research programme.

Does policing help in reducing crime rates?

Those studies trying to assess the impact of policing on crime which are based on police-recorded crime figures often report a negative effect of police on property crime but no effect of police on violent crime. In a recent TILEC discussion paper, TILEC member Ben Vollaard and co-author Joseph Hamed (Dept for Innovation, Universities and Skills, UK) provide evidence that measurement error in recorded crime statistics in the UK results in underestimation of
the effect of police on violent crime. They do not find a similar estimation bias for the effect of police on property crime. Changes in the way the police record violent incidents rather than changes in reporting behavior of the public are shown to be the underlying cause of the estimation bias. This type of measurement error in police-recorded crime has been found in many countries, including the US. To address the classical chicken-and-egg problem in the relation between police and crime, the authors model the police funding formula which is used to distribute police resources across police force areas in England and Wales. By using the difference between actual police levels and police levels predicted by the funding formula, they can identify the real effect of police on crime.

Can exclusionary long-term contracts be justified?

In spite of the Chicago school arguments, it is well known that in certain cases an incumbent firm may use exclusivity contracts so as to monopolize an industry or deter entry. Such an anticompetitive practice could be tolerated if it were associated with sufficiently large efficiency gains, e.g. insuring buyers against price volatility, a rationale that is often invoked to justify long-term contracts in the energy sector. In a recent TILEC discussion paper, TILEC members Cédric Argenton and Bert Willems study the trade-off between the positive effects (risk sharing) and the negative effects (exclusion) of exclusivity contracts. The authors revisit one of the main 'theories of harm' under risk-aversion and show that although exclusivity contracts induce optimal risk-sharing, they can be used not only to deter the entry of a more efficient rival on the product market, but also to crowd out financial investors willing to insure buyers at competitive rates. They further show that in a world without financial investors, purely financial bilateral instruments, such as forward contracts, achieve optimal risk sharing without distorting product market outcomes. Thus, they argue there is no room for an insurance defense of exclusivity contracts.

Energy investment; a balancing exercise

Investments in energy infrastructure are essential for the creation of the European internal energy market. However, these investments are quite costly and often require support of the State, in particular in the form of State aid.
Paradoxically, State aid is, in principle, prohibited by European competition law unless it contributes to clearly defined objectives of common interest, such as environmental protection or security of supply. State aid must therefore be notified to the Commission in order to be assessed for exemption from the State aid prohibition. The need to balance different objectives in the State aid assessment leaves Member States with great uncertainty about how to design their State aid measures to get Commission's clearance. In her recent discussion paper, TILEC member Natalia Fiedziuk tries to clarify the approach of the European Commission to State funding of energy infrastructure, and in particular what significance it attaches to different objectives of the European energy policy in the final decision making. One of the conclusions of the paper is that the leniency of the European Commission vis-à-vis State funding of energy infrastructure will depend on the extent the infrastructural project delivers priority objectives of common interest set in the European energy policy.

What is competition law protecting?

The subject of the objectives of competition law receives increasing attention. The interest in this topic by economists, as well as legal and political developments in Europe, are two factors that certainly play a role. It is probably fair to say that most lawyers tend to focus on the law as it stands - or as it has evolved over time in legislation and jurisprudence - rather than stepping back and questioning what the law is actually aiming to achieve. This standard now seems to be changing in competition law. In a recent TILEC discussion paper, TILEC member Laura Parret (Belgian Competition Council) presents some new perspectives in the discussion on the objectives of competition law. She analyses the current situation critically and demonstrates the multiple goals or objectives that exist. Parret explores the origins of the present focus on consumers in competition policy, and attempts to broaden the horizon of the debate by including more general EU developments. Parret argues that there is a need for a public debate on the objectives of the system of European competition law, a debate that should not merely be theoretical: objectives have a fundamental impact on the law and policy.

Assessing gas market liberalization

On April 23 2009, TILEC will organize an Energy Economics Policy Seminar in The Hague, in cooperation with the Netherlands Bureau for Economic Policy Analysis (CPB), the Dutch Ministry of Economic Affairs, and the Dutch competition authority (NMa). As the process of liberalizing gas markets started about a decade ago in continental Europe, and about two decades ago in the U.K. and the US, it is now time to assess the results. Christoph Riechmann (Frontier Economics) will discuss the factors driving gas prices, such as scarcity, resource rents, market power and the relationship with oil prices. He will also address the relationship between different geographic market platforms for gas such as TTF and NBP and between spot and bilateral contract markets for gas. Christian von Hirschhausen (TU Berlin and DIW) will discuss whether liberalization has improved the efficiency of investments in transportation and storage infrastructure or whether it has, one way or another, created new obstacles. Using evidence from the U.S. and the E.U. he will draw lessons for the future. Attendance to the seminar is free but advance registration is required.

Accounting for the crisis

The unfolding of the current financial crisis has raised many questions as to the impact of accounting rules and practices on market efficiency and cyclicality. Have accounting firms failed to be true to their auditing obligations? Are accounting regulations themselves responsible for amplifying the variations in financial asset prices? The research group on accounting at Tilburg University regularly organizes Accounting Camps where academics and high-profile practitioners can discuss topical issues in an intimate setting. This year's Spring Camp, to be held at Tilburg University on April 22, is organized in cooperation with the TILEC-AFM Research Network on financial market regulation, and focuses on the role of regulation in financial reporting. Clive Lennox (HKUST Business School) will examine how auditing firms are themselves inspected. Ray Ball (University of Chicago) will discuss the recent accounting scandals. Jonathan Rogers (University of Chicago) will present evidence on disclosure tone and shareholder litigation. Steven Crawford (Rice University) will study how market forces and legal institutions affect bonding cross-listed firms. The meeting is organized by Tilburg professors Stephan Hollander, Philip Joos and Jeroen Suijs. Attendance is by invitation only. Invitation for the few remaining seats can be requested by e-mail. More details can be found on the camp's webpage .

Trading rules in stock exchange competition

In a recent TILEC discussion paper TILEC member Sofia Johan and co-author Douglas J. Cumming (York University) examine stock exchange trading rules for market manipulation, insider trading and broker agency conduct across countries and over time for 42 stock exchanges around the world. Some stock exchanges have extremely detailed rules which explicitly prohibit specific manipulative practices, while others use less precise and broadly framed rules. The authors investigate whether those rules influence investors' decision to trade on a specific exchange. To this end, the paper examines whether differences in trading velocity across exchanges are attributable to differences in rules. A hypothesis is tested that vague regulations create inefficiency as investors and/or traders are not clear as to which activities are acceptable and which ones are in breach of the spirit of the rules. Conversely, one may argue that detailed regulations create inefficiency as investors and/or traders are able to take advantage of inevitable loopholes. The data show a strongly positive and robust effect of trading rules on trading velocity, suggesting that trading rules are an important information source to consider for explaining differences in trading activity among stock exchanges around the world.

Workshop on auctions: a learning experience

Last month, a workshop on the theory and practice of auctions took place in Tilburg. This meeting was organized by Hans Schumacher and Cédric Argenton, under the joint umbrella of the Royal Dutch Mathematical Society (KWG-ITW) and TILEC, with the generous support of the Econometrics and Operations Research Department at Tilburg University. TILEC director Eric van Damme offered an overview of the way auction theory developed over time. Advances, although stunning, were made only recently and the properties of many relevant auction designs are still unknown, as exemplified by the problems besetting the Dutch home care market. Jean-Jacques Herings (Maastricht University) discussed the desirable properties of the so-called bisection auction design
(developed by Jean-Jacques and co-authors), in particular its speed, as measured by the number of bidding rounds it takes to reach the optimal allocation. Sven de Vries (University of Trier) introduced the audience to the use of discrete optimization techniques to study multi-unit auctions. Emiel Maasland (Erasmus University, Rotterdam) presented the (sophisticated) rules governing the auction of the 2.6GHz radio spectrum band to be held by the Dutch government in the near future. The meeting was well-attended and participants got a chance to experience the classical over-bidding effect in several laboratory experiments run by CentERlab director Jan Potters.

Workshop on competition policy and regulation in media markets

On Thursday 4 and Friday 5 June 2009, TILEC will host an intensive workshop whose aim is to bring together economists and lawyers working on media-related issues. A growing number of academics in various fields work on media-related topics, but often independently from one another. There is still much to be gained by bringing them together. Scholars in law and economics typically have different approaches and often move in different policy circles. However, economic reasoning and analysis are playing an increasingly important role in the application of law in the broad field of media, both in the area of sector-specific regulation and in competition law. Moreover, the electronic communications sector (telecom, broadcasting, Internet) is of upmost importance to economic development and social cohesion. Hence, it is essential that media scientists from the two disciplines share their expert knowledge in order to propose high quality regulation to policymakers. Invited speakers for this special event are: Simon Anderson (University of Virginia), Joel Waldfogel (University of Pennsylvania) Nico van Eijk (University of Amsterdam) and Rachael Craufurd Smith (Edinburg Law School). A call for papers is open until 29 March 2009.

Renewable energy sources, renewed concerns

Energy has come to the forefront of the public debate in the past decade. Renewable energy certificates (RECs) are instruments that allow countries to promote energy generation from renewable sources and can be part of domestic policies aimed at climate change mitigation and adaptation. In a recent TILEC discussion paper TILEC member Panagiotis Delimatsis
discusses the issues raised by the nature of RECs, which can be traded in secondary markets. Concerns arise from the General Agreement on Trade in Services (GATS) and the multilateral regulation of trade in financial services, notably in the case where World Trade Organization (WTO) Members undertook sweeping commitments in financial services which equally apply to trade in RECs. The alleged dichotomy between trading in emission allowances and trading in RECs may also be problematic. The paper argues that WTO Members may be interested in considering whether a unified approach regarding energy-related services and trading of related financial instruments (such as RECs or emission rights) makes sense in the medium term. Indeed, as things now stand with the current classification system, Members may ultimately realize that they have already undertaken commitments in energy-related sectors,
e.g. in financial services, that they had not intended to liberalize. The paper is to appear in the World Trade Review.

Settling scores with financial markets

Do financial markets properly price new information? This question has taken on renewed relevance since the outburst of the financial crisis. Soccer clubs listed on the London Stock Exchange provide a unique way of testing stock price reactions to different types of news, as showed by TILEC member Luc Renneboog and co-authors Frédéric Palomino (ENSAE) and Chendi Zhang (Warwick) in a recent discussion paper. For each firm, two pieces of information are released on a weekly basis: experts' expectations about game outcomes through the betting odds, and the game outcomes themselves. The stock market reacts strongly to news about game results, generating significant abnormal returns and trading volumes. There is evidence that the abnormal returns for the winning teams do not reflect rational expectations but are high due to overreactions induced by investor sentiment. This is not the case for losing teams. In contrast, there is no market reaction to the release of new betting information although these betting odds are excellent predictors of the game outcomes. The reasons for this discrepancy are thoroughly investigated by the authors. The paper is forthcoming in the Journal of Corporate Finance.

Entrepreneurship and consumer interests in healthcare markets

On 6 February 2009, TILEC hosted a double inaugural lecture by Professors Wolf Sauter and Marcel Canoy. A workshop on "Competition in healthcare markets", opened by Frank de Grave (Dutch health care markets regulator, NZa) focused on the right standard for merger control and the influence of EC law on healthcare markets. In his lecture, Wolf Sauter emphasised the importance of putting the consumer interest at the forefront of enforcement of regulation. This consumer interest can be characterised in terms of quality, accessibility and affordability; elements that can in principle be measured and henceforth be weighed against each other. Sauter suggested to quantify these public interests as much as possible to achieve sound regulatory decision-making in the future. In addition, he paid attention to how the European concept of service of general economic interest can be used by Member States to ensure provision of essential services in competitive conditions. Marcel Canoy highlighted the importance of making room for entrepreneurship in healthcare markets. Two additional, intermediate goals of healthcare regulation he identifies are the minimization of information rents and the motivation of healthcare workers. He argued that when competition is properly implemented, these three goals will reinforce each other. The lectures are available in Dutch:
Lecture Wolf Sauter
Lecture Marcel Canoy

The theory and practice of auctions

Due to advances in theory as well as in technology, the importance of auctions has increased significantly in the past years. They are routinely used on the internet (eBay) but have been also considered by the US government to buy banks' toxic assets as a means of reviving credit markets. Auctions of telecommunication frequency bands have caused stirs in recent years. In the Netherlands, a new auction of this type, which will be conducted over the internet this time, is coming up in the second quarter of 2009. The outcome of such auctions is greatly influenced by their design. On 27 February 2009, a one-day workshop on this topic will take place at Tilburg University. This meeting is organized jointly by the Royal Dutch Mathematical Society (KWG), section Industrial and Applied Mathematics (ITW), and TILEC, and is co-sponsored by the Department of Econometrics and Operations Research of Tilburg University. Four well-known experts will discuss the design of auctions from several perspectives: Eric van Damme (Tilburg), Jean-Jacques Herings (Maastricht), Emiel Maasland (Rotterdam) and Sven de Vries (Trier). The programme includes an auction under laboratory conditions, run by CentERlab, in which workshop participants will play a role as bidders. Registration is free but required by 15 February 2009.

Coming conference on 'Patent Reforms'

'Patent reforms' is the central theme of an international conference organized by TILEC on 26 and 27 March 2009 in Amsterdam. During one and a half day, fifteen internationally renowned scholars, judges, and practitioners shall discuss hotly-debated issues, such as the question whether patents contribute to, or restrict, innovation; whether patents under- or over-compensate innovators, whether trivial patents and the alleged laxity of some patent offices amount to a serious problem, whether intellectual property licensing in standard-setting organizations deserves a special regime, whether patent law is open to abuses, or the problem of effective enforcement, or uncertainty in patent law. The conference intends to foster an informed discussion on patents, innovation and competition policy between lawyers and economists, academics and market participants. Registration is now open and early booking is advised. For a full description of the programme and registration, please click here

Setting the right standard

Many recent competition law cases (Microsoft, Rambus, Qualcomm) revolve around standard-setting issues. Standardization is generally seen as a good thing. It may be the natural outcome of market interaction, perhaps following the outburst of a 'standard war'. It can also arise from a so-called cooperative procedure in a standard-setting organization (SSO), where interested parties negotiate the technological boundaries of the standard-to-be-adopted. On 23 January 2009, TILEC devoted a seminar to this topical issue. Heike Schweitzer (European University Institute, Florence) described the European regime currently applied to SSOs. This regime is characterized by near-complete immunity under article 81 EC but allows for the prosecution of various conducts under article 82, sometimes on grounds of otherwise rarely-invoked exploitative abuses. This combination apparently favors cooperative standard-setting over competition in the market. Jorge Padilla (LECG) exposed the various economic issues at stake, among which the determination of the prices paid to technologies considered for inclusion in a standard stands out. Although various proposals have been made to set them at the right level, it was argued that a lot of them disregard the recent appearance of pure (i.e. non-vertically integrated) innovators, whose interests may not be sufficiently protected by the current regime.

Network-based governance: something for everyone?

TILEC member Maartje de Visser was awarded her doctorate 'cum laude' at Tilburg University on 23 January 2009. Her thesis engages in the debate on the better application of European law. Network-based governance was introduced in the European Union for the application and enforcement of EC competition and EC communications law. The networks comprise the European Commission and national authorities, and create a sophisticated web of rights and obligations between these actors. Maartje argues that networks foster cooperation amongst national authorities and with the European Commission. Furthermore, participation in networks 'europeanizes' otherwise nationally-focused authorities when they apply EU law. At the heart of Maartje's analysis is a critique of the wider normative attractiveness of the network model. It is kaleidoscopic, engaging with a wide variety of notions including legitimacy, judicial review, subsidiarity, institutional balance and efficiency. Maartje's research demonstrates that network-based governance deserves careful consideration as a model that is able to mediate the competing concerns of coherence for internal market reasons, and diversity and respect for local autonomy. This makes it much more attractive than existing enforcement regimes and worth serious consideration for extension into other policy areas. Maartje's thesis will soon be published by Hart Publishing (Oxford).

A choice-based approach to European banking supervision

he financial crisis that has started in August 2007 has unveiled deficiencies in the regulation and supervision of banks, leading to calls for institutional changes and there with providing the opportunity to suggest an alternative approach. The main institutional reforms currently being proposed —including the establishment of a 'global' regulatory body, of 'European' supervisory colleges, or of a European system of financial supervisors — are likely to fail, and it is thus worth considering alternatives. In a recent TILEC DP, TILEC-AFM chairholder Joseph A. McCahery and co-authors Gerard Hertig (ETH Zurich, ECGI] and Ruben Lee (Oxford Finance Group) explore the merits of a choice-oriented approach. Individual Member states have the option to delegate prudential supervision of their largest banks to the European Central Bank, while still retaining the right to re-assume such a role for themselves at a later date. Responsibilities, commitments and costs are allocated by means of a binding agreement with the ECB that can be tailored to Member states' circumstances, to the extent permitted by supervisory coherence and equal treatment. While the authors admit that their approach is not perfect, they believe it to be the best feasible choice in the current circumstances