Tilburg Law and Economics Center

TILEC supports and stimulates academic research on the governance of economic activity. It fosters academically path breaking and practically relevant research and aims to be a leading center worldwide.

Research program 2012-2017 Tilburg Law and Economics Center

THE GOVERNANCE OF ECONOMIC ACTIVITY

Part 1: General Approach

1.1 Topic - The governance of economic activity

Our outgoing research program was entitled "market governance". TILEC's research program for the period 2012-2017 will focus on "the governance of economic activity". The new title makes explicit the absence of any ideological bias in favor of unregulated markets at the expense of other policy solutions: the emphasis is on governance as much as on markets. However, we maintain the same understanding of governance as an organizing or encompassing concept that includes various fields such as institutional analysis, political economy, organizational behavior, industrial organization, law and economics, economic law and regulatory systems.

We understand the new topic as the design, implementation and operation of the structures, legal or otherwise, needed to sustain economic activity, notably through contract law, corporate law, criminal law, investment law, competition policy or regulation. Thus, the overarching research question that constitutes the liaison among the various research interests of TILEC members boils down to the following:
Taking into account that State coercion is not always feasible, desirable or optimal and thus the cooperation of private parties often becomes essential for the achievement of public policy objectives, how should institutions and structures be designed, and what types of incentives can be adopted so as to ensure that these objectives are reached ?

Based on experiences with liberalization and privatization in the 1990s, and with the return of public policy concerns to the fore in the last decade (sustainability, investment, innovation, financial stability, to name but a few), policymakers have adapted their views and expectations about optimal regulatory design. The role of the State has changed, together with the instruments and institutions at its disposal. The governance of economic activity refers to the way the actions of private actors (individuals, firms, associations) as well as public actors (legislators, regulators, courts) interplay. Such interaction must be taken into account whenever designing and implementing economic policies, or assessing economic outcomes.

Thus, the interplay of economic forces and incentives takes centre stage. Within this framework, a sophisticated public entity pursues the policy objectives decided by the polity in a manner that is much different from the traditional command-and-control approach, typically in advancing some type of cooperation with private actors and at the very least in taking into account their reactions. The role of the State evolves towards harnessing, channelling, correcting or limiting market forces as the need may arise, whereas courts intensify judicial review and get involved into balancing of an ever-increasing complexity, whenever the legislative falls short of providing any ready answers to a given factual situation. Our understanding of governance takes due account of the changes in the role of the State and of the fact that we increasingly deal with a multiplicity of States, but also non-State actors which either seek an active role in global affairs or fail to address several challenges, thereby creating negative externalities vis-à-vis third countries. This raises significant challenges in terms of global cooperation and coordination within or outside formal structures such as international organizations or agencies.

The global financial turmoil of 2007-09 confirmed the need for public intervention, if markets are to serve their social function, and for strengthening global coordination in regulating financial markets, but also alluded to the possible danger of over- or mis-regulation. The State can deploy authorities that intermediate between the polity and the economy, such as agencies, supervisory authorities and regulators, or instruments, which traditionally include market design, regulation and spending, with their respective manifold variants. Within the realm of State activities as well, market-based instruments such as benchmarking or public procurement rules are also strengthened. In a framework of complex multi-layered governance at the international level, the actions of the State are subject to the disciplines imposed upon through European law and international trade law; or national constitutional and administrative laws. In addition, transnational private regulation in various areas of trade in goods and services flourishes, as it offers handy solutions through rule-making activities that take place "in the shadow of the law" and beyond the traditional forms of State regulatory making. In other cases, regulation of a given market is subject to a cooperative effort between public and private agents, thereby adopting a hybrid form which, on its own, constitutes an interesting aspect of modern governance structures.

Against this backdrop, TILEC prioritizes its research interests by focusing on the full use of the expertise of its researchers in the areas of institutions, competition, innovation, finance, and sector-specific regulation. It is our common belief that understanding the nature of the interactions among economic agents, institutions and policy instruments used to resolve complex economic problems within these areas may yield significant results in terms of improving the functioning of economic activity through the identification of appropriate governance structures. The research areas chosen are closely connected with one another and should generate results which will be relevant for more than one area. We provide details in the following section.


1.2 Research Areas

For the period 2012-2017, we intend to focus our research efforts on the following areas which are at the core of the governance of economic activity and fully exploit the expertise acquired within TILEC since its creation. In each area, two TILEC members, one from law, the other from economics, will take the lead in animating the group.

  1. Institutions and Incentives (Eric van Damme; Agnieszka Janczuk-Gorywoda)
  2. Competition Policy (Damien Geradin; Cédric Argenton)
  3. Innovation (Pierre Larouche; Florian Schütt)
  4. Health Care Markets Regulation (Jan Boone; Wolf Sauter)
  5. Regulation of Network Industries (Leigh Hancher; Bert Willems)
  6. Finance, Trade, and Investment (Panagiotis Delimatsis)

Our decision to conduct research in these areas as a matter of priority is not only driven by their high academic relevance but also by current policy developments. We thereby hope to maintain the societal relevance of our research at a high level. Indeed, these areas are at the heart of current policy discussions and will most likely dominate the political agenda in the near future. In the EU, ambitious plans are once more set out: the 2020 Strategy for smart, inclusive and sustainable growth; the Single Market Act; the implementation of the EU financial regulation reform package; the Innovation Union initiative; and the challenge of moving towards a low-carbon, green economy, as laid down in energy efficiency and renewable energy action plans in Europe and worldwide. In the US, the implementation of the Dodd-Frank Act and the American Recovery and Reinvestment Act with its focus on sustainability and clean energy also constitute significant political initiatives. At the global level, the biggest challenges remain the fate of the Doha Development Round of multilateral trade negotiations within the World Trade Organization (WTO) and, in case of failure, the identification of viable possibilities in a changing landscape with an ever-increasing shift of power towards emerging economies; the proliferation of regionalism: and the conclusion of a climate change agreement which will promote energy security, efficiency and clean technologies in a coordinated manner worldwide.

Interesting future academic or policy developments may lead in due course to a re-orientation of research efforts. At the same time, the areas chosen are fairly broad to accommodate the diverse research interests of TILEC researchers. Indeed, some topics naturally intersect with the research conducted by some of the other research institutes at Tilburg University such as the European Banking Center (EBC), the Tilburg Sustainability Center (TSC) or the Tilburg Institute for Law, Technology and Society (TILT), to name only a few. Although the focus of each center is often clear to the researchers involved so that few boundary issues arise, TILEC welcomes cooperation on specific projects, as has happened in the past, and will continue to explore possible synergies.

The above-mentioned research areas are described in greater detail in Part 2 of this document.

1.3 Methods - Interdisciplinarity

Interdisciplinarity is a key distinctive feature of TILEC, widely recognized and valued inside and outside Tilburg University. From the outset, TILEC took a different approach from most other institutes that pertain to law and economics. In terms of substance, law and economics is frequently one-sidedly identified with economic analysis of law. While some of the work at TILEC falls into this category, a greater part of our economic research can better be described as using law to enrich economic analysis. Conversely, the legal work done at TILEC is informed by, or even builds upon, economic analysis. Our model is not one-sided, but one of interaction between the two disciplines.

TILEC was conceived as an interdisciplinary, inter-faculty institute. In the USA, "law and economics" is typically associated with the work of economics-trained faculty (usually holders of a PhD in economics) within law schools. In Europe, law faculty members usually hold a PhD in law, but few are also trained in economics (and hardly any at PhD level): "law and economics" is therefore carried out mostly by legal academics with limited economics training, working within law faculties. TILEC aims to combine the best of both formulae and push scholarship to new frontiers. It brings together academics trained at PhD level in their respective disciplines, coming from their respective mono-disciplinary schools.

Members come to TILEC with the methods from their respective disciplines. Throughout our activities, we enable TILEC members to enrich their respective disciplinary research with a rich and scientifically sound understanding of the other discipline. By the latter, we mean that the other discipline is understood dynamically as a lively scientific endeavor, and not statically as a mere source of immutable answers. TILEC members turn to TILEC to improve their contributions to their own discipline. They test their knowledge and output by exposing themselves to the critical eye of researchers from the other discipline, which most of the times leads to questioning various aspects of one's research and significant improvements in the final draft of a given publication. When the opportunity arises, we also foster joint research efforts across disciplines. To make this work, TILEC brings together lawyers and economists who are willing to work on specific problems within the context of TILEC research program. The TILEC management takes advantage of policy or scientific developments, as well as the opportunities offered by contract research or sponsorship agreements, to guide members towards the production of output that will ultimately contribute to both disciplines.

TILEC has established an inspiring and internationally-oriented research environment. Narrow boundaries among disciplines have been transcended by means of regular communication of informal nature, especially among young scholars. Both legal scholars and economists within TILEC dare to question the limits of their knowledge and enrich their writings by becoming acquainted with the corresponding scholarship of the other discipline. This environment has led to the delivery of innovative and fundamental research output of high caliber, while allowing TILEC to inform policy discussions. We intend to continue on this path.



Part 2: Research Areas

2.1 Institutions and Incentives

Within this research cluster TILEC researchers investigate formal and informal institutions that underlie and govern the production and exchange of goods or services, and contribute to other public policy objectives. Formal institutions, in this sense, comprise the legal regime including substantive contract, criminal and competition law as well as administrative and judicial institutions entrusted with the task of enforcing these substantive rules. Informal institutions include social norms and private networks. TILEC researchers specifically focus on the functioning of existing institutions as well as innovative institutional design that would reflect and tackle the complexities arising from changing economic forces and, thus, achieve the desired policy goals. Such institutional design requires that the incentives and behavior of individuals who are subject to the policy in question be carefully analyzed, including, whenever desirable and possible, in the laboratory or in the field. Research results within this area are expected to constitute inputs and inform TILEC research in all other clusters.

With regard to institutional design, TILEC researchers analyze the design of formal or informal institutions and propose changes that improve the effectiveness and efficiency of policy outcomes under changing economic forces. A prime research objective is the identification of policy instruments that allow for deterring socially undesirable behavior.

Secondly, TILEC researchers conduct comparative institutional analysis, studying the relative costs and benefits of various institutions. Focusing on key institutions for the operation of markets, TILEC researchers address questions such as: what are the underlying conditions for rule adherence in a certain society or community? Which type of institutions is best suited to support certain transactions? What are the underlying mechanisms that determine whether rules and norms will be obeyed? Such questions have been traditionally at the heart of law and economics analysis.

Finally, TILEC researchers study the impact of institutions on incentives of individuals who are the subject of the policy produced by the institution in question and of institutionalized objectives of organizations on economic and policy outcomes. For example, it is investigated whether and to what extent the market integration-oriented approach to competition law enforcement in Europe can be reconciled with the so-called "more economic approach" in the protection of consumer welfare. How do for-profit, not-for-profit, and public organizations act differently in regulated industries such as the healthcare sector? How have changes in the various ways to fight crime affected its prevalence?


2.2 Competition Policy

In industrialized countries, it is now undisputed that a solid competition policy framework is essential to reap the full benefits of (relatively) free markets. However, the design and the application of such a framework are far from being uncontroversial. To the contrary, they are the subject of sparking debates in Europe and abroad (notably the US). TILEC researchers investigate the design and application of competition policy, paying special attention to the way in which economics can be integrated into the competition policy framework, while retaining the prime features of a sound legal system. At a fundamental level, the translation of analytical insights from economic literature into the normative content of competition law remains an open issue, which TILEC is ideally equipped to address. While studying this problem in its generality, TILEC researchers will include in their work the comparative analysis of competition policy regimes and solutions or the experimental investigation of substantive or procedural law.

As regards substantive competition law, TILEC research deals with basic issues such as the integration of dynamic efficiency concerns (including long-term investments and innovation) into competition policy. Competition policy does not seem yet to be based on a clear view of the trade-offs that need to be made regarding innovation: it is not always possible to design and implement competition policy so as to foster any and all innovation. Based on that work, TILEC researchers will also seek to refine the models used in the analysis of dynamic markets, including the "competition for the market" model, which is perceived to imply successive monopolies. Similarly, the research work on innovation and competition policy allows revisiting the ever-present tension between the various objectives of competition policy - including market integration, consumer welfare, the protection of competition as a process, and perhaps even some other policy concerns such as sustainability. TILEC will also continue investigating the various aspects of the debate about the legal and regulatory treatment of large-scale investments in innovative infrastructures. Indeed, whether in energy or communications networks, enormous investments into next-generation equipments lie ahead. Regulatory schemes which focus on cost incentives sometimes fail to generate the correct incentives, but reliance on interventions by competition authorities is often criticized for creating an environment that is not conducive to investment. TILEC researchers will continue investigating the validity of such claims. This topic naturally lends itself to collaboration with researchers taking in part into the 'regulation of network industries' cluster.

TILEC researchers will also investigate the new types of anticompetitive practices that are susceptible to emerge. Here, the control of dominant players under Article 102 TFEU will remain an important research topic (e.g. the use of reverse payments to buy-out rivals in the pharmaceutical sector or the influence of buyer power), all the more given its link with sector-specific regulation. In a game where public authorities often play catch-up with firms, it is important that academic research keeps afloat with the latest developments and attempts to come up with the necessary analytical tools.

At the institutional level, TILEC researchers will continue to analyze the consequences of the new enforcement system put in place since 2004, for instance as regards the functioning of the network of competition authorities (ECN) and its implications for accountability and legitimacy, or the use of fines, their amount and their addressee (firms or individuals). Furthermore, the increased level of private enforcement of competition law will also be examined, especially in connection with Article 102 TFEU.

Furthermore, TILEC will work on the interplay between product markets and financial markets. The financial crisis of 2008 only put a momentary stop to the exponential development of financial instruments in general, and derivatives in particular. The availability of such instruments in industries where a number of firms are dominant is problematic, as those firms might be tempted to use them to affect the equilibrium on the product market, decrease the intensity of competition, exclude rivals or escape competition or corporate governance rules. TILEC researchers will devote some efforts to the identifying the possibly anticompetitive schemes.

TILEC will continue investigating the specifics of competition policy in multi-sided markets. Those markets are characterized by the presence of intermediaries or platforms which cater to the needs of at least two categories of consumers that care about the presence of one another. Media, credit cards, directories or search engines spring to mind as relevant examples. Assessment of market power, dominance, and mergers is particularly delicate on those markets because of the links between the various sides. It requires high-level expertise of the type which TILEC researchers can develop.

Finally, given the strong expertise of TILEC in sector-specific regulation (in network industries, in health care and in the financial sector), TILEC researchers will continue to work on the interaction between competition policy and sector-specific regulation, including regulatory gaming and abuse of regulatory procedures. More generally, TILEC researchers will push forward their investigation of how, in both competition policy and sector-specific regulation, more formalistic regulatory models are being replaced with more integrative models ('managed competition'), where many policy objectives must be reconciled through an inter-disciplinary analysis.


2.3 Innovation

Within this research cluster, TILEC researchers specifically investigate the dynamic dimension of markets and regulation, and innovation in particular. Creating a favorable regulatory framework to enhance innovation has been a central policy concern within the EU for several years, although satisfactory results were not always obtained, as the failure of the Lisbon Strategy amply demonstrated. Within the new EU 2020 strategy, the EU advances a more strategic and integrated approach to the promotion of innovation, which, according to the EU, shall deliver more tangible results, notably through the implementation of the policies set out within the 'Innovation Union' flagship initiative.

Given that quite many legal institutions have an impact on innovation, directly (for example intellectual property law, R&D policy) or indirectly (competition law, state aid regime, standardization practices), an integrated innovation policy within an ever-increasing integration area is indeed quintessential. Often, the corresponding legal instruments are aimed at a single objective (say, more competition in the case of competition law, fair competition in the case of state aid, innovation or patent protection in the case of IP law, etc) and follow a special legal regime. It has become clear that this piecemeal approach does not properly take into account the various linkages between competition, innovation and growth, as they are now known from the economic literature.

Therefore, a first theme of TILEC research in this area relates to the shortcomings of the piecemeal approach and the coherence (or absence thereof) of the EU innovation policy. In this respect, comparative analysis may be undertaken notably in order to identify best practices in other jurisdictions. Indeed, initiatives similar to the Innovation Union initiative have been endorsed in several parts of the world in the wake of the recent economic meltdown and as a result of increasing demand for energy-efficient innovations. In this respect, our research will be informed by research in other areas such as in network industries or in financial markets.

Second, the interaction of competition policy and innovation remains at the heart of TILEC's research interests. Aiming to address the importance that policymakers attribute to innovation, the core question raised is whether more intense competition among rivals stimulates firms to innovate more or less. Approaching these questions from a theoretical point of view, where there is still no consensus in the literature, TILEC researchers focus not only on the positive effects of competition on innovation but also on the normative effects, so as to derive robust results that can be applied in competition cases in the real world. Complementing the theoretical analysis, TILEC researchers conduct empirical research on the impact of competition and regulation on innovation in order to find robust measures of innovation and competition and stable relations between these measures. Indeed, existing and widely used measures of competition and innovation, such as the price-cost margin and patent counts, respectively, are unsatisfactory as they are not typically consistent with the two ways in which competition can be increased and do not reflect innovation output across industries. Driven by this observation, TILEC researchers focus on finding measures of competition and innovation that unambiguously pick up the relevant effects.

Third, TILEC researchers continue conducting research on the interplay between competition policy and intellectual property. The traditional view on the role of intellectual property rights is that it is a just reward for the efforts of the inventor, author or trader. However, economic scholarship has shown that intellectual property is not the only possible regime to foster innovation and may have negative side effects. Issues of disclosure, compatibility, standardization, or patent abuse that arose in a number of prominent competition law cases force a re-assessment of the traditional attitude towards the protection of innovation by a property regime. Indeed, subsidies, prizes, and other mechanisms can incentivize inventors without exposing society to the negative consequences brought about by the creation of exclusive rights. However, the benefits from alternative regimes must be carefully studied. To name only one example, the use of open source and open standards require a particularly well-designed environment in order for overall welfare to be increased.

Fourthly, a key element of innovation policy is the patent system. For the patent system to perform its function of fostering innovation, an adequate process of patent review must be in place. Failure of the patent offices and courts to weed out low-quality patents leads ex post to deadweight loss and costly litigation. If anticipated by firms, it may lead ex ante to an inefficient allocation of resources by diverting funds that would otherwise go into R&D towards wasteful rent-seeking activities. Understanding the incentives of the various market actors involved in the process of patent review, and the constraints under which the relevant institutions operate, is essential for designing a better patent system, and TILEC researchers will continue working on this problem.


2.4 Regulation of Health Care Markets

Within this research cluster, TILEC researchers expand their groundbreaking research with regard to healthcare market regulation. TILEC researchers focus on the interaction of competition and solidarity against the backdrop of an increasingly liberalizing environment.

Rhyming cost containment and solidarity in health care is a key social and political issue in all developed countries. In this context, introducing competition to enhance efficiency often raises concerns about diminished solidarity, which can be expressed in terms of physical access to health supply for all (spatial solidarity), financial solidarity (income transfers from rich to poor), age solidarity (between old and young) or health solidarity (solidarity from healthy to ill), each with different interactions with competition.

However, the link between competition and solidarity is not so straightforward. Rather, a key question is whether (and when) the two are at odds and under which conditions they can be made compatible. Competition is typically a means of improving efficiency. Publicly funded systems of free health care are often introduced with solidarity in mind, but may play out as less equal than insurance-based systems if waiting lists and low quality prompt rich patients to go to the private sector (leading to further degradation of the public system). Risk equalization between health insurers is another example where competition and solidarity may be compatible: without evening out the risk profile of the respective insured populations (a solidarity measure) competition on the merits will not take place.

Within this framework, TILEC researchers investigate the different ways that solidarity and competition play out, focusing in particular on long-term care, supervision, vertical relations, budgets and competition in health care and transparency. More specifically, research is focused, first, on long-term care (which is a topical issue in the Netherlands where system changes are presently being developed), addressing questions, such as: What are the key similarities and differences in the approach required compared to the curative care model applied so far? How can we find a fair balance between long-term care needs and financial sustainability? What can we learn from international experiences with different models of long-term care delivery in order to improve the design of the Dutch system?

Secondly, TILEC researchers study the supervisory mechanisms of healthcare markets. Looking at how to design effective institutions and regulatory frameworks conducive of liberalization, or regulated competition in healthcare, they address various questions, for instance, relating to the particular role that independent authorities and/or self-regulation can exert and the limits thereof.

Thirdly, TILEC researchers focus on vertical relations, which are relevant in the context of the healthcare triangle (consumers, insurers and providers), with relation to mergers, and to referrals inside and outside networks of preferred providers, or within fully vertically integrated entities.

Fourthly, TILEC researchers investigate whether competition can be combined with budgets for healthcare providers that are set for a certain period, which is an instrument that some countries have introduced, or are thinking of introducing to limit health care expenditure.

Fifthly, TILEC research focuses on the interaction between transparency and information flows as well as between transparency and quality of healthcare services. As information asymmetry is one of the key problems in healthcare markets, and at the same time consumers are characterized by bounded rationality, the question that arises is whether there is a need for public involvement in information flows and, if so, how they should be managed. Moreover, with respect to quality and transparency, specific topics of interest are: What is the role of incentives, on the one hand, and standards, on the other hand? What is the role of quality information in the interaction of supply and demand? (How) does transparency contribute to better quality of care? What factors influence consumers' choices for health care providers?


2.5 Regulation of Network Industries

The government intervenes extensively in many markets. In fact, an important policy matter is whether to allow the market to operate at all, and if so, how. For markets to serve certain public policy objectives, experience shows that proper institutional market design is essential. Furthermore, the appropriate governance arrangements have to be determined. In sectors where competition is introduced gradually, deciding on the elements of timing and degree so that negative side effects are avoided takes centre stage in policymaking. Another question regarding the interaction between sector-specific regulation and competition law is when competition has developed sufficiently to rely exclusively on it rather than regulation. National governments and EU authorities have done significant efforts to liberalize network industries, such as telecommunications, postal services, energy, and transport. Similar efforts were made at the global level, e.g. within international organizations such as the WTO. These efforts have had a major impact on the structure of these sectors and, given the importance and international orientation of such sectors, to the global economy. At the EU level, they have also influenced the shape of the administrative and legal systems of the Member States.

Against this backdrop, TILEC researchers focus primarily on the regulation of energy and communications markets.


2.5.1 Energy Markets

The energy industry is a very important economic sector with high societal relevance, both at the European and at national level. The main objectives of both European and Dutch energy policies are: (1) to secure a stable energy supply for Europe, promoting energy efficiency, broader mix of energy sources, and diversity in suppliers, transport modes and routes; (2) to meet current environmental challenges, cutting greenhouse gas emissions, reducing energy consumption by improvement in energy efficiency and increasing the share of renewable sources in Europe's energy mix; and (3) to give consumers a chance to buy electricity and gas at affordable prices. These objectives are also part of the Europe 2020 flagship initiative which aspires to lead to sustainable, smart and inclusive growth, by putting energy policy at the heart of this initiative, in terms of both energy efficiency and secure energy supply.

The transition to a secure, affordable, low-carbon economy is expected to have significant effects on the organization of the current energy systems. Renewable energy sources such as wind and solar energy are intermittent generation sources, which put additional strains on the energy supply system, as supply and demand needs to be balanced in each moment of time. The greater reliance on small, renewable energy resources spread out in the network causes a shift in the market setting from a centrally controlled system with large-scale generation plants to a system of distributed generation. Those changes will require the presence of back-up generation in the system, demand which is more responsive to changing market conditions, and a more robust and dynamic network that will allocate scarce energy resources in an optimal way. This poses manifold challenges for all parties involved.

Addressing these challenges, TILEC researchers investigate the institutional framework and the role of the relevant market participants, focusing on market design, regulation and competition against the background of global challenges such as climate change and security of energy supply. More specifically, to start with, TILEC researchers study the organization of the wholesale energy markets, discussing what comprises an adequate regulatory framework that promotes transparency, removes entry barriers and creates investment incentives in renewable energy sources. Further, they examine the role and powers of European and national energy regulators and competition authorities in order to tackle successfully anti-competitive behavior or practices taking place on these markets.

Secondly, TILEC researchers critically review the regulation of essential bottleneck infrastructure (networks and storage systems), addressing questions that the new regulatory framework for Transmission System Operators (TSOs) and Third Party Access (TPA) leaves open such as: How can one ensure that firms have the right incentives to invest in large innovative projects in a regulated market? How are the risks and profits shared between shareholders, end-users, competitors and the government? Should access to the network discriminate between different types of users and types of service that is being offered?

Thirdly, TILEC researchers examine questions relating to retail competition and consumer protection in the energy sector. In order to understand better the premises upon which retail markets operate more efficiently, key questions should be answered such as: How should competition be created at the retail level? What is the role of competition policy and consumer protection? Do final consumers act fully rationally, or are there behavioral biases? Should contract terms become standardized? Can different services be bundled?

Fourthly, TILEC researchers focus on the promotion of green energy and energy savings. The achievement of these policy goals relies on different market mechanisms such as the auctioning of subsidies, minimal requirements or feed-in tariffs. Research is focused on the different effects these mechanisms may have on the effectiveness of subsidies, the competition within the sector and the competitiveness of the European industry as a whole.

Fifthly, TILEC researchers focus on the institutional aspects of energy market regulation. Particular emphasis is placed on the European energy market and the attempts for international coordination, such as the new European Network for Transmission System Operators (ENTSO), which is entrusted with the development of common technical codes and security standards, and the Trans-European Networks (TENs) programs, which promote interconnection and the interoperability of national networks and energy infrastructure. Moreover, specific attention is paid to the intersection of competition and regulation, and in particular, where the appropriate balance between sector-specific regulation and competition policy lies, given the increasing powers of energy regulatory bodies and the Commission's vigorous enforcement of competition rules.


2.5.2. Communications Markets

Communications markets, especially in their more advanced form, are complex markets to regulate. In these dynamic markets there is uncertainty about the evolution of future demand, particularly in emerging communications markets such as (next generation) broadband. Moreover, these markets depend on innovation and large fixed cost investments, and are prone to externalities. This means that the likelihood of regulatory errors is greater than average in communications markets, while the negative effects of these regulatory errors will be larger. Unjustified intervention can have a direct effect on firms' willingness to invest and innovate, while unjustified non-intervention can lead to consumer harm through negative externalities.

Given this regulatory complexity, TILEC researchers focus on new developments in the communications sector that warrant further study. More specifically, an important aspect of communications markets that TILEC researchers investigate is that many of these markets are two-sided, with a central platform that caters different services to two different types of consumers, such as broadband providers who interact both with online application providers, and with end-users (leading to issues such as network neutrality), and media companies who do business with advertisers and audiences. It is by now well-recognized that the two-sided aspect of these markets is key in understanding their functioning. In the past years TILEC researchers have focused on how competition policy should be adapted to two-sided markets in order to foster static efficiency. Considering that technical developments are leading to two-sided markets that are growingly intertwined, the main focus of TILEC research is to understand how the two-sidedness of the market will interact with technical progress to influence the development of communications markets. On the one hand, questions are addressed such as to what extent, in practice, the two-sided nature of the market does indeed play a role and also which are the key features to look at in such complex markets. On the other hand, the focus should shift from static to dynamic efficiency in an attempt to redefine the trade-off between the two when dealing with two-sided markets.

Secondly, TILEC researchers examine questions related to broadband. This is a dynamic market in many respects. Many broadband providers have a background of more traditional (and often former State-owned) communications services such as telephony and cable television, and are now confronted with online applications and services of third parties cannibalizing on their core business, such as VoIP telephony and online video-on-demand portals. At the same time, the surge in consumer demand requires broadband providers to keep innovating their networks, and discover new revenue sources, because broadband rapidly commoditizes. As broadband providers and sectoral regulators struggle with these developments, important questions arise regarding, for instance, the organization of tender procedures; State aid rules related to the roll-out of next-generation networks; and the development of mobile broadband and its capacity constraints.

Thirdly, TILEC researchers focus on content regulation. In addition to the traditional but still open debate on the role of the media in guaranteeing a well functioning democratic system, TILEC researchers address the question of how the changing boundaries between media products and the new forms of broadcasting or transmitting data should affect regulation. For instance, questions arise such as whether advertising restrictions on TV should be extended to Internet as video-on-demand becomes more and more widespread or whether instead advertising restrictions should be lifted also from traditional TV in order not to distort competition with the video-on-demand. New services such as cloud computing also pose new challenges to content regulation, both at the conceptual and practical level.

Fourthly, on a broader level, TILEC researchers examine ever-lasting questions in the communications sector relating to the interface between regulation of communications markets, innovation and consumer welfare. The large start-up costs that typically come with (infrastructure) innovation in this sector require an equally large return of investment, which negatively affects market entry and potentially leads to natural monopolies. Therefore, often few firms are active on these markets, so that (tacit) collusion looms. All this is detrimental to consumer welfare. Too strong regulation may however deter firms from innovation altogether, which also harms consumer welfare. There is no simple solution for this trade-off, but TILEC research aims to contribute to objectively identify these trade-offs in different markets, so that policymakers can come to rationally informed conclusions.

2.6. Finance, Trade, and Investment

Under this cluster, TILEC researchers focus on well-determined institutional and substantive questions of cross-border nature that are destined to determine the governance of economic activity at the international level in the aftermath of the most severe financial crisis after the Great Depression. This cluster focuses on the international dimension of economic governance in a multi-layered international environment, whereby public and private actors compete for authority. In this sense, it inevitably draws links and complements TILEC research in the previous clusters.

2.6.1. Financial Markets Regulation

With respect to the regulation of financial markets, important policy challenges lie ahead. Streamlined financing of economic activity is essential for the recovery of the global economy. In Europe, small and medium businesses are at the core of the new European strategy for economic recovery, as exemplified in the Small Business Act and the Single Market Act, which raises thorny issues regarding access to capital, entrepreneurship or venture capital, for instance. The financial sector is now called upon to serve sustainable growth through flexible ways of financing with a view to achieving the objectives of the new Europe 2020 agenda. In the US and elsewhere, financial innovation is re-evaluated with a view to restoring its socially valuable function. So are loose corporate governance practices which may have contributed to excessive risk-taking on the part of many institutions. Globally, cross-border regulation and coordination under the auspices of G20, the Basel Committee on Banking Supervision (BCBS) and the Financial Stability Board (FSB) raise institutional and substantive issues for both law and economics that call for in-depth analysis.

Against this backdrop, TILEC researchers continue conducting research on the smooth functioning and optimal regulation of financial markets and financial intermediaries, notably by focusing on issues relating to corporate governance, financial innovation, institutional design and prudential supervision. Furthermore, they fully exploit synergies and linkages with other areas of TILEC research such as energy and the innovative financing of energy projects to combat climate change, including renewable energy.

The recent financial upheaval has raised serious doubts about the correctness of the deregulatory practices of three decades in the banking sector, mostly hailed by developed countries for their innate virtues. In the aftermath of the crisis, a reassessment of several foundational principles and crucial practices in financial policymaking is warranted, which inevitably leads to important changes in the structure and supervision of the global financial system.

One of the many useful lessons that the crisis learnt to regulators and governments was that nationally-focused regulatory models are doomed to fail in an integrated and interconnected global financial system, whereby financial institutions and the "shadow banking system" know no borders. More crucially, the crisis cast doubt on the abilities of cooperation and coordination among national supervisors. It even led to a reappraisal of the mutual recognition tradition on which the EU financial system has been built on under the aegis of the EU single market. Importantly, the enhanced role of the State (as a regulator, supervisor and shareholder) in financial market regulation has become more intrusive as a result of the crisis, while the danger of overregulation is evident in the manifold regulatory initiatives undertaken by regulatory authorities worldwide. Take the case of the legislative proposals of the European Commission or the competent authorities in the US, following the Dodd-Frank Act relating to financial reform and prudential supervision. The adoption of higher capital requirements and countercyclical buffers, or the stricter regulation of the shadow banking system has raised concerns as to the possible negative effects on the further growth of financial markets and the financing of the real economy, especially to small and medium businesses.

More interestingly, financial innovation, while in theory having a socially valuable function of managing risk and allocating capital, has been demonized and regarded as one of the main causes of the crisis. For instance, securitized credit has been at the epicenter of the crisis. Indeed, securitization is deemed to have been an important component of the so-called "shadow banking system" where market-based intermediaries, which resembled traditional banking institutions without however been regulated in a similarly heavy way, became a source of high leverage and systemic risk. However, innovative instruments such as securitization were created to allow financial institutions diversifying funding sources. On the other hand, it was suggested that, by extending their exposure into non-traditional bank activities, banks have become much more vulnerable. Studying the effects of non-traditional bank activities on bank behavior but also the macro-economy appears opportune to allow a more informed observation of the tangible impact of some of the most criticized innovative financial instruments of late.

More generally, TILEC researchers discuss the impact of different methods of risk transfer without losing sight of the fact that the creation and use of innovative financial instruments take place in order to allow for streamlined funding. Thus, issues relating to the law and economics of regulating financial innovation are at the heart of this research cluster, which, through theoretical and empirical work combining both legal and economic analysis, intends to ameliorate policy choices.

2.6.2 International Trade and Investment Regulation

Within this research sub-cluster, TILEC researchers focus on the international regulation of trade and investment. Due to links with the other areas of TILEC research, notably those relating to the health sector and the regulation of network industries, the regulation of international services trade has been at the heart of TILEC's research output. This focus makes sense from an economic viewpoint: Services represent 70% of world output, while all developed-country economies are predominantly services economies. In addition, services are essential inputs for a well-functioning global manufacturing supply chain. As supply chains get increasingly globalized, the calls for higher levels of services liberalization intensify. In this respect, issues relating to investment regulation worldwide are integrated in TILEC research plans.

The EU aspires to play a leading role in international trade matters. This is exemplified by the growing eagerness and capacity of the EU to act in the international trade arena in a coherent and effective manner. This does not come out of the blue; rather, for an economic integration area such as the EU, it is a rational policy choice. Indeed, the proper functioning of the EU internal market presupposes, inter alia, increased market access in foreign markets for EU exporters and streamlined trade liberalization based on multilaterally agreed rules. Internal market integration and external trade liberalization, based on some type of reciprocity, are complementary and must progress in parallel.

Accordingly, TILEC researchers focus on legal, economic and policy questions relating to trade issues, with a particular emphasis on the international regulation of services trade and investment. Following the overall TILEC topic, a flexible, inclusive approach is adopted, which is justified by the multiplicity of actors - be it public, private or hybrid - that are active in areas that may have an impact on trade. Traditional international trade regulation, as represented by the WTO, may sometimes fail to capture the activities of these actors. Thus, particular emphasis is placed on the new governance structures and global networks that are emerging in response to societal needs or driven by transnational opportunities, viewed both from a positive and normative viewpoint. Hence, the key question addressed is how to regulate best economic behavior in areas, such as international standardization and investment promotion and protection, where markets are globalized and the rigid public versus private divide has collapsed. These developments generate further questions regarding the appropriateness of existing and emerging institutional structures, regulatory objectives and approaches to liberalization.

Turning to the institutional design of international economic regulation, TILEC researchers also focus on regionalism and the possibilities that it offers in identifying optimal ways of regulating trade and investment and experimenting with market openness. Mushrooming preferential trade agreements (PTAs) have been demonized for the current stalemate in multilateral trade negotiations and for the increased fragmentation in regulating trade and investment. In order to address questions related to the impact of PTAs, such as trade diversion and concession erosion, as well as proliferation of adjudicative mechanisms, particular emphasis is placed on the diverse regulatory models promoted and especially, whether and when they are able to generate real liberalization and increase the movement of capital and labor.