Competition policy, procurement, and regulation: From theory to practice – POLICRE

Task 1: Design “applied theoretical models”. The question here is to separate the regulatory tools that are currently well understood by the regulators from those that require unrealistic levels of regulatory sophistication. We propose to reduce the degree of sophistication/benevolence of the regulator who is in charge of the procurement or regulation process to construct theoretical models.
Task 2: Constructing databases. A first database will gather information on the regulation of transport operators and regulators in the French urban transportation industry. A second one gathers a set of public procurement contracts awarded in the construction sector in France. A third one will be a database of political data with electoral results. Finally, we have in mind a database of the European and French competition authorities decisions on mergers in regulated industries.
Task 3: Write structural econometric models. The structure of the model to be estimated depends closely on how the strategic interactions between the economic agents occur. These structural functions need to be at the same time reliable in the sense that they provide a good picture of the economic forces at stake, and they also need to be flexible enough so that they can be estimated.
Task 4: Evaluate the welfare gains once normative analysis is implemented. Once the positive model is identified, we will be able to simulate the welfare levels that could be obtained if optimal mechanisms were implemented.
Task 5: Write policy recommendations. After having estimated or calibrated our models on data from industries, we can run counterfactual experiments to evaluate the changes in different exogenous parameters or regulatory constraints whose impact is theoretically undefined or indeterminate. From these experiments, we will design policy recommendations that will confront with the present practices in the industries under investigation.

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Contemporary economies in Europe are constantly seeking ways to accelerate growth and achieve sustainable economic development. In this context, public policies play a crucial role: Among them are competition policy to monitor the behavior of firms, and procurement and regulatory policies which are designed to organize specific sectors. Recognizing the importance of public intervention as a major determinant of growth is only a starting point. Achieving good public policies requires the supervision of a public authority which implements efficient mechanisms in order to regulate the corporate behavior in firms. How these tools should be designed and implemented is subject to economic debate.
Over the last 30 years, the literature focusing on industrial economics has proposed theoretical rules to researchers on how markets should be organized and regulated in order to maximize social welfare. Very few empirical tests of these theories have been proposed however. The aim of this research project is to attempt to bridge the gap between theory and reality, so that the tools of the economists can be understood and used by practitioners. This project has four main objectives: (i) To propose guidelines that help separating regulatory models that represent the economic reality of an industry from those that describe the optimal mechanisms to which the organization of the industry should aim to (positive versus normative analysis), (ii) to propose original microeconomic, statistical and econometric methodologies which allow representing the characteristics of the markets under scrutiny, (iii) to collect data and construct original databases that will be run in this current project and could be useful in future research, and (iv) to derive results that are useful for practitioners.
To illustrate the variety of issues within the general theme of the project, we can raise the following questions: To what extent do the rules of competition in the markets affect the decisions of firms to improve their productivity and efficiency? Does competition guarantee low prices to consumers? Do the liberalization of utility industries and the search for new provision modes by public authorities accelerate the use of outsourcing? What are the efficiency conditions of competition for the market? How should the relationships between the governments and firms be organized in public-private partnerships? How should optimal regulatory rules be designed in order to maximize social welfare? Are regulators competent, sophisticated and benevolent enough to implement optimal regulatory rules? Should mergers between firms be allowed in industries where competition for the market is organized?
These are just some examples of issues where an approach involving economists working in different fields such as industrial organization, contract theory, competition policy, and applied econometrics is of major interest. The Université Paris 1, Paris School of Economics, and GREMAQ offer a set of recognized talent in these disciplines and the first objective of this project is to unite the forces inside a team around these issues, which we think are important both in terms of research and public policy.