Assessing Competition Policy Performance Metrics: Concerns about Cross-Country Generalisability

Article excerpt

Abstract

Recent interest in competition policy performance has typically relied on subjective performance metrics that have undergone little direct scrutiny by users. We examine the quality of the popular World Economic Forum's antitrust performance metric and assess whether it is immune from perception-bias. A bias-free metric is required to ensure cross-country consistency in its intended performance assessment.

We note various instances where the WEF's competition policy performance survey was completed but where there existed neither competition legislation nor an associated enforcement agency at the time. This seeming inconsistency is neither amenable to traditional econometric heterogeneity treatment nor instrumentable; importantly, it is likely to embed non-random error onto the WEF antitrust survey.

We test and discuss some possible explanations for the observed bias: we find that both halo effects and a nation's modest experience with market institutions may be responsible for the bias. Underscoring these results may be the fact that survey respondents may not share a common understanding of competition policy. We offer some discussion supporting this latter point.

The presence of these biases may invalidate the usefulness of cross-nationally valid rankings of competition policy performance. On the bright side, however, the results suggest that efforts aimed at enhancing stakeholders' understanding of the objectives and limitations of competition policy might in turn enhance competition policy's impact as well as perceptions of performance.

Keywords: International Competition Policy, Performance Index, World Economic Forum Survey

JEL Classification: C81, K21, L40, L44, F53

I. INTRODUCTION

"... the efficiency and stability of an economy requires that all consumers be part of the franchise, in reality and in perception, so that good economic policies, including privatizations and free markets when they make sense, receive broad support."

Daniel McFadden, American Economic Association Presidential Address (2006)

Are competition policy programs in developing economies accomplishing what they set out to do? Appraising the effectiveness of a policy is of fundamental importance if a nation is to formulate the most cost-effective policy instrument for disciplining anticompetitive behavior. Answering such a question requires an unbiased measure of the quality of competition policy performance in a cross-nationally valid way.

Existing examinations of competition policy performance have varied in their choice of performance metric: some have relied on traditional industrial organization structural measures and variables (Tavares de Araujo 1996; Hayri & Dutz 1999; Dutz & Vagliasindi 1999; Kee & Hoekman 2003; Rodriguez 2006), on qualitative assessments (Fingleton, Fox, Neven & Singleton 1996), on idiosyncratic surveys (Serbrisky 2004). Still other studies have relied on subjective, perceptions-based surveys of performance (Lee 2004; Krakowski 2005; Nicholson, Sokol & Stiegert 2006; Sokol & Stiegert 2007; Rodriguez & DeNardis 2007). This perceptions-based, competition policy survey measure also figures prominently as an original source in the World Bank's composite measures of governance database (Kaufmann, Kraay and Zoido-Lobaton 1999) and the WEF Competitiveness Rankings, databases that have been richly mined by researchers and practitioners.

The practice of using perceptions-based surveys either individually or as an input into a composite measure has raised a number of concerns including the basic validity of the surveys and their sensitivity to external biases (Rodrik 2004; Van De Walle 2005; Knack 2006; Thomas 2006; Arndt & Oman 2006; Kurtz & Schrank 2007a, 2007b; Kaufmann, Kray & Mastruzzi 2007a, 2007b, 2007c). In this paper, we examine whether the WEF's perceptions-based survey measure of performance reflects measurement error. …