Table of Contents

Law and the State

Law and the State

A Political Economy Approach

New Horizons in Law and Economics series

Edited by Alain Marciano and Jean-Michel Josselin

Law and the State provides a political economy analysis of the legal functioning of a democratic state, illustrating how it builds on informational and legal constraints. It explains, in an organised and thematic fashion, how competitive information enhances democracy while strategic information endangers it, and discusses how legal constraints stress the dilemma of independence versus discretion for judges as well as the elusive role of administrators and experts.

Chapter 13: Competition in banking: switching costs and the limits of antitrust enforcement

Donatella Porrini and Giovanni B. Ramello

Extract

Donatella Porrini and Giovanni B. Ramello* 1 INTRODUCTION A recurring theme in the analysis of competition in the banking sector is the problem of stability, and the regulatory constraints that are consequently imposed on economic agents operating in this particular market. Generally speaking, antitrust intervention in the banking is heavily influenced by considerations of stability, because although competitive processes are inherently selective, and presuppose the possible exit from the market of inefficient competitors, this is precisely the eventuality that economic policy decisions seek to avert. Therefore, as discussed in more detail in the paragraphs below, the regulation has historically given precedence to the stability objective, relegating competition to second place. This is borne out by the many structural and operational constraints imposed on the authorities and laws that ought to safeguard competition, and the elevation of administrative barriers to entry. Under a law and economics perspective, regulatory intervention in the market is justified as a means of counteracting the emergence of inefficiencies, and so we can apply this same justification to the banking sector, where a specific inefficiency arises from the macroeconomic and systemic repercussions of the normal workings of the competitive process. The central problem, in this case, is entrepreneurial risk, which must necessarily exist in any competitive market, and plays a decisive role in ordaining the entry and exit of competitors. However, in the specific case of banks, price competition tends to encourage overly speculative behaviours, which essentially entail acceptance...

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