Economics at DG Competition 2006–2007

This paper discusses a number of significant developments in the enforcement activities of the Directorate General for Competition at the European Commission, during 2006–2007. It covers a selection of investigations as well as policy initiatives that have triggered a debate in terms of the underlying economics.     

Costs and benefits of Danish active labour market programmes

Since 1994, unemployed workers in the Danish labour market have participated in active labour market programmes on a large scale. This paper contributes with an assessment of costs and benefits of these programmes. Long-term treatment effects are estimated on a very detailed administrative dataset by propensity score matching. For the years 1995 – 2005 it is found that private job training programmes have substantial positive employment and earnings effects, but also public job training ends up with positive earnings effects. Classroom training does not significantly improve employment or earnings prospects in the long run. When the cost side is taken into account, private and public job training still come out with surplusses, while classroom training leads to a deficit.     

Reforming Social Security in a Transition Economy: The Case of Lithuania

This paper points out a number of problems associated with the existing pension system in Lithuania. Reforms are proposed, including (i) a substantial increase in the basic pension benefit rate, financed on a pay-as-you-go basis, provided universally, and regulated according to wage/price indexation; (ii) a significant cut in the tax contribution rate to the public pension system matched by a rise in the VAT; (iii) a rise in the retirement age to 65 for both men and women; and (iv) a gradual conversion to a private, funded, mandatory pension system to replace the earnings-related part of the current pension system.     

The European economy at the cross roads: Structural reforms, fiscal constraints, and the Lisbon Agenda

This paper studies the incentives to sustain and extend a monetary union under alternative assumptions about the extent of market reform within the union and accession countries. Lack of labour mobility, or wage/price flexibility, or fiscal reform, brings costs for both new entrants and in the existing union. Countries will therefore want a union where there has been sufficient reform, and also one where markets are more flexible than their own. But existing members will want the same properties of their partners. Fiscal restrictions may exaggerate this incentive mismatch and could therefore delay the necessary reforms. Similarly, too large costs up front may also delay those reforms.     

One Cow,One Vote?

We study investment decisions in a farmers' cooperative. Farmers sell their products through the cooperative. Before production takes place the cooperative has to decide on an investment. We study whether voting on investment leads to efficient investment decisions. The answer depends on how the number of votes and the cost of the investment are distributed among the farmers. It is shown that in a variety of settings, there is no reason to suppose that voting rules favoring large farmers —"one cow, one vote" rules — are more efficient than simple majority rule.     

Government-Assisted Oligopoly Coordination? A Concrete Case

In 1993 the Danish antitrust authority decided to gather and publish firm-specific transactions prices for two grades of ready-mixed concrete in three regions of Denmark. Following initial publication, average prices of reported grades increased by 15–20 percent within one year. We investigate whether this was due to a business upturn and/or capacity constraints, but argue that these seem to have little explanatory power. We conclude that a better explanation is that publication of prices allowed firms to reduce the intensity of oligopoly price competition and, hence, led to increased prices contrary to the aim of the authority.     

Regime-switching purchasing power parity in Latin America: Monte Carlo unit root tests with dynamic conditional score

We suggest a Monte Carlo simulation-based unit root test of the purchasing power parity theory for Latin American countries. Under the null hypothesis, we use a Markov regime-switching (MS) model with unit root in the conditional location and MS volatility dynamics. Under the alternative hypothesis, the proposed test incorporates Markov regime-switching autoregressive moving average (MS-ARMA) plus MS volatility dynamics. Under both the null and alternative hypotheses, one of the volatility models estimated is Beta-t-EGARCH, which is a recent dynamic conditional score volatility model. We use data on real effective exchange rate time series for 14 Latin American countries. For each country, we estimate by Monte Carlo simulation the critical values of the unit root test. We provide an economic discussion of the unit root test results and also study the robustness of MS-ARMA plus MS volatility with respect to smooth transition autoregressive models with Fourier function.     

Stable and enforceable: a new fiscal framework for the Euro area

Since the great financial crash, the need for new fiscal rules to prevent unsustainable fiscal policies is universally recognised. In practice such rules, including those in the Stability and Growth Pact, have proved to be impossible to enforce. Thus, to avoid unsustainable fiscal policies reappearing, and to prevent monetary policy from being undermined by undisciplined governments, there is a need for a framework capable of imposing fiscal discipline. This paper considers an intertemporal assignment, where fiscal policy focuses on long-term objectives and monetary policy on short-term stabilisation. We argue for public sector debt targets as a practical way to achieve such a set up, and an excess debt protocol is constructed to give enforceable form to those targets. The ideas of “fiscal space” and optimal debt levels are used to provide a mechanism for identifying a stable region within which the debt targeting regime should operate. Making these factors explicit would both improve the credibility of planned fiscal policies and reduce risk premia on borrowing costs. We finally show how Europe’s competitiveness pact, and debt restructuring operations, can be used to maximise the available fiscal space.     

Antitrust Update: DG Competition 2007–2008

This article discusses some significant developments in the enforcement activities of the Directorate General for Competition at the European Commission, during 2007–2008, focusing on two main themes: non-horizontal mergers and two-sided markets.