Institutions

Formal institutions, in this sense, comprise the legal regime including substantive contract, criminal and competition law, private standard-setters 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 powered by technological advances, that would reflect and tackle the complexities arising from changing economic forces. 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 under all three research themes.

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, and for fostering socially desirable, behavior. TILEC researchers address questions such as: what are the underlying conditions for rule adherence in a certain society or community? Which type of institution 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.

Secondly, TILEC researchers study the impact of institutions on the incentives and behavior of individuals who are the subject of the policy produced by the institution in question. We are also interested in the effects of institutionalized objectives of organizations on economic and policy outcomes, for example, whether the policy objectives of the European Commission and National Competition Authorities are aligned and whether misalignment yields significant compliance costs. We also investigate how far the objectives pursued in applying antitrust remain sustainable in light of digitalization and ongoing social concerns about market concentration and inequalities. Furthermore, the provision of public services is increasingly opened to market forces. In this context we inquire how for-profit, not-for-profit, and public organizations act differently in regulated industries such as the healthcare sector.

Thirdly, TILEC researchers will study market design, which consists in the design of rules and institutions that ensure the proper functioning of markets. Market design issues are likely to play an important role in new digital markets (for instance online auctions), but also in creating new markets for flexibility in energy systems. Importantly, new digital markets can complement existing traditional “markets” and enhance the functioning of these. Here one can think, for example, of transport markets, where rights of use can be traded on digital markets, so as to use the network more efficiently. A question then is how the digital market should be designed in order to meet both efficiency and fairness objectives. Sometimes market functioning can be enhanced through product design. For example, to ensure internalization of externalities, new market products (such as emission rights) can be created; to improve liquidity, products might be bundled or standardized. Sometimes improving the functioning of markets will require rewriting the market rules and the market micro-structure, i.e., the rules that specify which actions are allowed for market players, how much information is provided to them, and in which order players interact with each other. TILEC researchers will study different set-ups: single buyer systems like tenders, centralized market structures, in which a single market maker clears markets, and decentralized markets where several market makers compete.

Fourthly, TILEC researchers will dedicate more efforts and resources to the study of the fundamentals of private collective action. We are interested in understanding the strategies of resilience and transformation used by private rule-making bodies to remain relevant and powerful despite exogenous episodes and shocks which may call for or justify shifts of prevailing regulatory paradigms. This will include a thorough look at rule-making and standard-setting activities in certain sectors of the economy such as manufacturing and finance but also other sectors. In this respect, TILEC researchers will analyze the types of interaction to be observed between public authorities and non-state bodies and how the former impact on the functioning of the latter. When appropriate, an analysis of external forces such as the European Commission, hybrid regulatory institutions such as standard-setting organizations or the World Trade Organization (WTO) that may shape such interactions will also be part of TILEC research.

TILEC researchers will further work specifically on the governance of data-driven markets, contributing to TiU’s impact theme of ‘Creating Value from Data’. Here the overarching approach is a thorough analysis of the economic characteristics of data-driven markets – for instance, the clear distinction of direct and indirect network externalities that are unavoidably connected to big data. Additionally, we study how certain desired or undesired effects of digital technologies can be steered, supported, or mitigated with regulation, competition law, and alternative economic governance institutions, including private ordering. In this respect, we examine the fundamentals but also normative questions on data-related issues such as algorithms, data-sharing and data portability. We use the lens of institutional economics, but also law, political economy and sociology. For instance, there is currently a debate as to the adequate way to regulate algorithms, with some opting for data-protection-related methods, and others arguing that auditing should be a sufficient, cost-effective and less burdensome way to regulate algorithms. By the same token, data sharing has recently become a conundrum for regulators but also regulatees (depending on the approach), who realize the pros and cons of enforcing data portability rights or of enforcing data sharing among competitors.