How European Markets Became Free: A Study of Institutional Drift

Germán Gutiérrez, Thomas Philippon

NBER Working Paper No. 24700
Issued in June 2018, Revised in August 2020
NBER Program(s):Economic Fluctuations and Growth, Industrial Organization, Law and Economics, Political Economy

Over the past twenty years, Europe has deregulated many industries, protected consumer welfare, and created strongly independent regulators. These policies represent a stark departure from historical traditions in continental Europe. How and why did this turnaround happen? We build a political economy model of market regulation and we compare the design of national and supra-national regulators. We show that countries in a single market willingly promote a supranational regulator that enforces free markets beyond the preferences of any individual country. We test and confirm the predictions of the model. European institutions are indeed more independent and enforce competition more strongly than any individual country ever did. Countries with ex-ante weaker institutions benefit more from the delegation of competition policy to the EU level.

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Acknowledgments

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Document Object Identifier (DOI): 10.3386/w24700