Endogenous antitrust: cross-country evidence on the impact of competition-enhancing policies on productivity

Abstract

This article presents empirical evidence regarding the effect of simultaneous antitrust and trade policy on productivity. We find that treating antitrust across countries as an exogenous policy overestimates the impact of competition on productivity by as much as 18%.

Acknowledgements

We thank the comments and suggestions from the members of the University of Barcelona research group on public policies and economic regulation (GPRE), particularly from Germà Bel, Joan Calzada and Christian Duran and also those from George Symeonidis. We gratefully acknowledge financial support from the Spanish Ministry of Industry, Turism and Trade (DG for Small and Medium Firms Policy). Remaining errors and omissions are the authors' sole responsibility.

Notes

¹ Openness to international trade is a close substitute to antitrust. Both are competition-enhancing policies in Aghion and Schankerman (2004) terms, both reduce ‘transport cost’ in a circular model of competition. In a seminal article, Eastman and Stykolt (1960) highlighted the importance of foreign competition to avoid collusion among domestic firms in industries where the number of firms permitted by economies of scale is more than one but small enough to allow effective collusion. So, governments might be less prone to open the economy when internal markets are already highly competitive. And, with openness playing channeling foreign competitive pressures, governments might be less active in enforcing antitrust.

² We will let the data talk on whether geographic and historical determinants affect productivity directly or just indirectly through policies as in Hall and Jones (1999) and in Persson and Tabellini (2003).

³ Increasing the average antitrust effectiveness in one SD (going from antitrust enforcement levels of Portugal or Poland to those of Sweden, New Zealand or Canada) would increase average total factor productivity by 23% (from its 4479 mean level in 1985 US Dollars to 5509). Increasing the average openness in one SD (going from the openness of Peru, Malta or South Korea to that of the Netherlands, Ecuador or Canada) would increase average total factor productivity by 32% (from its 4479 mean level in 1985 US Dollars to 5912).

⁴ By contrast, in the case of openness, the positive direct impact of productivity on openness is smaller than the negative indirect effect of productivity on antitrust that ends up affecting openness. In this case, the selection bias is negative: on average more productive countries are less open.

⁵ This is not a proof of validity of the instruments, but at least we are safe to say that our instrument choices are not violating the restrictions that more than two instruments are orthogonal with the error term in each equation.