Grasping Europe's innovation policy

The European Commission does not have a directorate-general responsible for innovation as such. This is not surprising as many legal interventions (in addition to many budgetary interventions) have an impact on innovation, directly (e.g. intellectual property law, R&D policy) or indirectly (competition law, state aid regime, standardization practices). Thus, one wonders: Does Europe have the right innovation policy? Does it have a coherent innovation policy to start with? How do various policy interventions affect the growth rate of the economy? Those are the questions that TILEC will be investigating in the coming years as part of a larger research effort undertaken with researchers at CEPR, Université Libre de Bruxelles, DIW Berlin, Bocconi University and University of Oslo, and funded by the European Commission under its 7th framework program under the name of GRASP. This project, led by TILEC director Pierre Larouche, will allow TILEC to increase the breadth of its already sizable research on innovation as well as further the links between economists and legal scholars throughout Europe. Along Pierre Larouche, Cédric Argenton, Bert Willems and Eric van Damme were involved in the preparation of the research program, which will run for 4 years starting in 2010.

Competition and the public interest

For more than a century, the Royal Netherlands Economic Association (KVS) has published a yearly report containing the recommendations ('preadviezen') of Netherlands-based economists to the Dutch government. The subject of this year's report, presented to the public on 11 December 2009 in The Hague, is "competition and the public interest". TILEC director Eric van Damme acted as editor-in-chief along with Maarten Pieter Schinkel from ACLE, TILEC's partner in the Competition Law and Economics European Network (CLEEN). The report highlights that good competition requires a vigorous government. As exemplified by the recent financial meltdown, when the government doesn't come up to the mark in regulating and managing markets, it risks market failure. Yet, at the moment not enough measures are taken to prevent bad outcomes in many markets. For instance, TILEC member Bert Willems and TILEC extramural fellow Machiel Mulder, who co-wrote a chapter about the energy sector, argue that, although there is limited room for effective government intervention to secure energy supply, the need for government action is more acute when it comes to tackling environmental externalities.

Emerging banks in foreign markets

As the recent financial crisis exemplified, the allocation of credit is a central determinant of economic growth. Entry by foreign banks into emerging markets could be beneficial if those banks are superiorly managed and extend loans to all borrower types, triggering a decrease in lending rates ("performance hypothesis"). Foreign banks however are often accused of "cherry picking" the best borrowers, and in general, of lending more to large transparent firms at the expense of small and medium sized enterprises (SMEs), implying a different portfolio composition ("portfolio composition hypothesis"). In a recent TILEC discussion paper, TILEC-AFM chairholder Hans Degryse and co-authors Olena Havrylchyk (CEPII Paris), Emilia Jurzyk (IMF), and Sylwester Kozak (National Bank of Poland) use a unique data set containing bank-specific information to explore this issue. The authors investigate the impact of the mode of foreign entry (greenfield or takeover) on banks' portfolio allocation to borrowers with different degrees of informational transparency, as well as by maturities and currencies. Their results are broadly in line with the portfolio composition hypothesis, showing that information about borrowers' type determines bank credit allocation.

Microsoft supports Tilec Research

Microsoft has decided to make a significant contribution to support the research of TILEC in the coming four years. The contribution will enable TILEC to expand its research in the area of competition policy and innovation, and in particular to investigate the legal and economic aspects of key technical and policy developments in the ICT sector. TILEC is honoured to count among the very few top European research centres which Microsoft has decided to support financially. It is a recognition of its achievements since its creation in 2003. In the broad area of innovation (competition law, regulation and intellectual property), TILEC is already benefiting from the generous support of Qualcomm and PWC as well as grants from NWO and the EU 7th Framework Programme. The research activities will be led by Professors Damien Geradin, Pierre Larouche and Wolf Sauter, working with a team of TILEC researchers including, among others, Lapo Filistrucchi, Tobias Klein, Matteo Negrinotti, Emanuele Tarantino, Jens Prüfer and Jasper Sluijs (and others who may join). The research made possible through this contribution will be carried out pursuant to the terms of the Declaration of Academic Independence of the Royal Netherlands Academy of Arts and Sciences.

Manufacturing the EU energy markets

Manufacturing the EU Energy Markets: The Current Dynamics of Regulatory Practice. Since the coming into force of Regulation 1/2003 the Commission has made vigorous use of its power to conduct sector inquiries. In its sector inquiries the Commission has targeted liberalised network industries in particular and utilised the information gathered strategically to inject more competition to those industries either through sector specific regulation or through proactive enforcement of the EU competition rules. In a recent TILEC Discussion Paper, TILEC Member Leigh Hancher and Adrien de Hauteclocque (EUI, Florence) analyse the aftermath of the Commission's sector inquiry in the energy sector and the resulting 'Third Legislative Package' from an institutional and substantive perspective. From the institutional perspective, the creation of the 'Agency for the Cooperation of Energy Regulators' does not appear to change the regulatory structure substantially due to the limited decision-making powers of the new Agency. From the substantive perspective, the limited legislative powers of the EU in the energy sector and the unwillingness of Member States to design strong regulatory policies to inject more competition into these markets result in the enhanced use of competition policy by the Commission for regulatory purposes. The paper emphasises several risks arising from this strategy, including diminished judicial control and accountability and the lack of a consistent regulatory approach to market design.

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.