Antitrust Policies and Profitability in Nontradable Sectors†

AER: Insights 2021, 3(2): 251–265 https://doi.org/10.1257/aeri.20200316 By Timothy Besley, Nicola Fontana, and Nicola Limodio* Firms in tradable sectors are more likely to be subject to external competition to limit market power, while nontradable firms are more dependent on domestic policies and institutions. This paper combines an antitrust index available for multiple countries with firm-le vel data from Orbis covering more than 12 million firms from 94 countries, including 20 sectors over 10 years and finds that profit margins of firms operating in nontradable sectors are significantly lower in countries with stronger antitrust policies compared to firms operating in tradable sectors. The results are robust to a wide variety of empirical specifications. (JEL D22, E02, L44 ) This paper examines how institutions designed for enforcing competition in mar - kets affect economic performance. A central role of the state in building a market economy is to guarantee that there are benefits of competition to ensure static and dynamic efficiency. But the way that this is done varies across sectors of the econ- omy. Those sectors that are subject to international competition have natural expo- sure to competition if trade is liberalized, while those that are not are more dependent on domestic policies that encourage entry and limit the abuse of market power. The core empirical implication that we explore here is that the institutions that affect competition policy should have a heterogenous effect on tradable and nontradable sectors. To investigate this, we require firm-le vel data. Hence, we have assembled a dataset of 12 million firms covering 20 sectors across 94 countries over a period of 10 years 2006–2015 ( ) based on Orbis (2016). To measure antitrust pol- icy, we exploit the total scope index score constructed by Hylton and Deng (2007), which is based on assessments of competition law made by legal experts and practi- tioners. This is available...