Wolfgang Kerber

Institutional Competition among Jurisdictions: An Evolutionary Approach

The purpose of this paper is to outline an evolutionary approach to the process of competition among institutions. We shall focus, in particular, on two issues: first, the role of the competitive process as a knowledge-creating process; and, second, the issue of what inferences, if any, can be drawn from the nature of this process regarding the desirability of its outcomes. In discussing both issues we will draw a parallel between ordinary market competition and competition in the realm of institutions. Some clarifying comments in order to narrow down what we mean by “evolutionary approach” and “institutional competition” precede the analysis.

Policy Learning in Europe: The Open Method of Coordination and Laboratory Federalism

ABSTRACT This paper analyses the potential of the open method of co-ordination (OMC) and of laboratory federalism for policy innovation and learning in a multi-level system of jurisdictions. Our analysis shows that both can be seen as institutions that establish processes of generating and spreading new knowledge about appropriate public policies. However, the respective learning mechanisms are very different: in laboratory federalism learning takes place through a purely non-centralized process of experimentation with different new policies. In comparison, the OMC relies on a benchmarking process carried out on a higher-level jurisdiction from which, in a rather centralized way, policy recommendations are derived. In both cases, serious learning problems resulting from limited transferability of experiences gained with policies and from lacking or distorting incentives arise. We find that to fully use their potential the OMC should become an integral part of laboratory federalism, thus supporting the smooth working of yardstick, interjurisdictional and regulatory competition.

European Corporate Laws, Regulatory Competition and Path Dependence

Beyond the well-known discussion in regard to the Cassis de Dijon of the European Court of Justice, implying the mutual recognition of national product regulations, the topic of mutual recognition and regulatory competition has emerged again in the realm of European corporate laws (“Centros” of the ECJ in 1999). Can effective competition among European corporate laws be expected? In the US a broad discussion has developed whether the existing competition process among US corporate laws leads to permanent legal improvements by legal innovations or to a race to the bottom. Beyond this discussion a new point has been raised recently: the possibility and importance of path dependence as a potential problem for the efficacy of competition among corporate laws (lock-ins). For the analysis of this problem we apply the concept of technological paradigms and trajectories to legal rules in corporate law and introduce “legal paradigms,” which direct the search for better legal solutions in certain directions and might be stabilized by certain factors (esp. complementarities to other legal rules) leading to considerable path dependence effects. Our results show that path dependence might play a crucial role for competition among European corporate laws, even if the principle of mutual recognition would be introduced to corporate laws in the EU, implying that competition among European corporate laws might be difficult and sluggish. Consequently the question arises whether additional meta-rules should be established that might mitigate the problem of path dependence and lock-ins in regulatory competition in corporate law.

Party autonomy and the role of information in the internal market

Examination of Party Autonomy and its limits has always raised fundamental questions in national contract and private law. The concentration on information solutions which enhance and leave more space to party autonomy is a fundamentally new approach to this core issue and is typical of Community legislation. With the Sales Directive of 1999 and its art. 7 which seems to impose all parts of the new sales law on the parties in a mandatory way, the question has entered day to day business practice. This inquiry surrounds the issue how much variety in the design of products and conditions is left to the parties or how much protection is needed. The complexity of the question made it advisable to have the different aspects treated and discussed by specialists in different areas: by legal scholars and economists, by EC law and by contract law specialists, by scholars from different jurisdictions with different regulatory approaches and backgrounds. The four parts deal with (1) the economic and constitutionell foundations of the question, with (2) the framework to be found in EC treaty law, with (3) the fundamental and more general aspects relating to substantive EC contract law legislation, and with (4) the most important individual legal measures. The book covers both general contract law (with consumer contracts) and labour contract law.

Competition among Institutions: Evolution within Constraints

Competition among institutions is a wide topic with many different aspects and problems to discuss. The purpose of this paper is to outline an evolutionary approach to the process of competition among institutions. For a more thorough analysis we will draw a parallel between ordinary market competition and the subject of our interest, competition in the realm of institutions. We shall focus, in particular, on two issues. First, the role of the competitive process as a knowledge-creating process. In this respect, we will show that institutional competition leads to the creation and spreading of new institutions. Secondly, we ask what inferences, if any, can be drawn from the nature of this process of competition among institutions to the desirability of its outcomes. Here we will argue that in the same way that competition on ordinary markets has to take place under certain rules, which ensure the desirability of these competitive processes, competition among institutions also requires a framework of rules channelling the competitive processes into desirable directions. Before we begin our discussion on these issues, however, some clarifying comments are in order to narrow down what we mean by ‘evolutionary approach’ and ‘competition among institutions’.

Should Competition Law Promote Efficiency? Some Reflections of an Economist on the Normative Foundations of Competition Law

The discussion on the normative foundations of competition law is not well-developed. Economic efficiency cannot be the final answer to this normative question. There are different concepts of efficiency with their specific problems and deficits. The discussion in economics, which is narrowed down to total welfare standard vs. consumer welfare standard, does not sufficiently grasp the complexity of the normative problems. In the paper the normative key concepts are clarified, which economists use in regard to competition policy - such as static and dynamic efficiency as well as the problem of redistribution through market power. Afterwards an alternative approach is briefly presented, which - based on constitutional economics - allows for a broader normative discussion of the goals of competition law. The decisive difference is that here the preferences (and values) of the citizens of a society are the relevant normative criterion, from which the goals of competition laws should be derived. From that perspective it is argued that it is unlikely that the citizens would agree on a total welfare standard or a pure consumer welfare standard. It might also be possible to defend the protection of certain rights of market participants as a goal of competition law as well as the consideration of notions of fairness, as long as these normative notions reflect widely-held values of the citizens. Most important is that a broader interdisciplinary discussion on the goals of competition law is necessary.

The Case of Ryanair - EU State Aid Policy on the Wrong Runway

Summary For the European Commission the case of Ryanair is a precedence decision about the application of state aid policy to agreements between regional airports and airlines. In a long-term contract with the regional airport of Charleroi (near by Brussels), the Irish low-cost airline Ryanair received better conditions than other airlines. In return, it committed itself to transport a certain number of passengers to this airport for a period of fifteen years. This alleviates considerably the entry of the so far non-established Charleroi Airport into the market for international airports. The Commission interprets these better conditions as a discrimination, which distorts competition among airlines. Contrary to that, a thorough economic analysis shows that these conditions must be regarded as a normal form of price differentiation in effective competition. Any airlines would have received similar conditions, if they have offered similar advantages to the airport. Consequently, the decision of the Commission in the Ryanair case is wrong. Additionally, the principles of the Commission, which entail the danger of an allencompassing regulation of prices for airport services, are misleading from an economic point of view, because they tend to impede effective competition in the aviation sector. The real state aid problem is, however, whether and under what conditions the public funding of airports leads to a distortion of competition among airports. This problem remains unsolved. This is also true for the problem of the slot-allocation on airports. Zusammenfassung Im Fall Ryanair hat die Europäische Kommission eine Grundsatzentscheidung über die Anwendung der Beihilfenkontrolle bei Vereinbarungen zwischen regionalen Flughäfen und Fluglinien getroffen. Die irische Billigfluglinie Ryanair erhielt in einem langfristigen Vertrag mit dem regionalen Flughafen Charleroi (nahe Brüssel) wesentlich bessere Bedingungen als andere Fluglinien. Sie verpflichtete sich aber im Gegenzug, über 15 Jahre eine hohe Mindestmenge an Passagieren über diesen Flughafen zu transportieren, und erleichterte damit wesentlich den Eintritt des bisher unbedeutenden Flughafens Charleroi in den Markt für internationale Flughäfen. Im Gegensatz zur Kommission, die in diesen besseren Bedingungen eine wettbewerbsverzerrende Diskriminierung anderer Fluglinien sieht, ergibt eine genauere ökonomische Analyse, daß nur eine in funktionsfähigen Wettbewerbsprozessen unproblematische Form der Preisdifferenzierung vorliegt. Auch andere Fluglinien hätten diese Bedingungen erhalten können, wenn sie dieselben Vorteile angeboten hätten. Insofern wurde der Fall Ryanair falsch entschieden. In gleicher Weise wirken die von der Kommission aufgestellten Prinzipien, die die Gefahr einer umfassenden Regulierung von Preisen für Flughafendienstleistungen beinhalten, in eine ökonomisch grundsätzlich falsche Richtung, da sie den wirksamen Wettbewerb im Luftfahrtsektor eher beeinträchtigen werden. Das eigentliche Beihilfeproblem, nämlich ob und unter welchen Umständen die öffentliche Finanzierung von Flughäfen zu einer Verzerrung des Wettbewerbs zwischen Flughäfen fuhrt, bleibt dagegen ebenso ungelöst wie das Problem der Vergabe von Start- und Landerechten (Slots).

The Rise and Fall of the German Miracle

The fast recovery of Germanys economy after World War II the so-called German miracle can be explained by the market-oriented economic policies pursued in the 1950s, based upon the ideas of Ordoliberalism. The slowing growth rates and increasing economic difficulties since the 1970s seem to have resulted from the extension of interventionist and redistributionist policies beyond those sanctioned by Ordoliberalism. The roots of the German economic decline are political: already in the 1950s, a broad consensus existed about the need to integrate market-oriented economic policy with a highly redistributory welfare state in a social market economy.

Policy Innovation, Decentralised Experimentation, and Laboratory Federalism

Decentralised experimentation and mutual learning of public policies is seen as one of the important advantages of federal systems (Oates: laboratory federalism). Based upon Hayekian ideas of the advantages of decentralised experimentation (as a discovery procedure), we analyse the long-term benefits of parallel experimentation in a federal system from an evolutionary economics perspective. We present a simulation model in which the lower-level jurisdictions in a federal system experiment with randomly chosen policy innovations and can imitate the relatively best solutions. The simulations confirm our hypotheses that a higher degree of decentralisation has positive effects on the long-term accumulation of knowledge of suitable policy solutions and also limits risks through better protection against erroneous policies. Also problems of policy learning and trade offs with (static and dynamic) advantages of centralisation are taken into account.

Competition, Innovation and Maintaining Diversity Through Competition Law

The analysis of the advantages of competition as a process of parallel experimentation is a neglected dimension of competition. Innovation competition as a trial and error-process can be analyzed as an evolutionary process of variation and selection of new problem solutions, which allows to apply arguments and models of evolutionary innovation economics. Both through the analysis of the general benefits of diversity as well as from the analysis of the advantages of parallel research, it can be shown that a larger number and diversity of independently experimenting competitors can have a positive effect on innovation. Since there might be also advantages of a larger firm size, a trade off might occur leading to the notion of an optimal number of parallel experimenting firms. From this perspective, mergers and R&D agreements, which might reduce the number and diversity of parallel experiments, might have a negative impact on the effectiveness of competition as a knowledgegenerating process of parallel experimentation. Therefore the question arises whether competition law should also protect this dimension of competition. The Innovation Market Analysis in US antitrust policy already developed interesting criteria and policy conclusions for maintaining competition between parallel research projects and protecting diversity - but without an appropriate theoretical reasoning about the benefits of protecting parallel research.