Antitrust and Real Business Cycle Theory

Josh Wright —  25 September 2007

Andrew Young and William Shughart II have posted an interesting paper (forthcoming in Public Choice) entitled “The Consequences of the U.S. DOJ’s Antitrust Activities: A Macroeconomic Perspective.”  Here’s the abstract:

Do the antitrust law enforcement activities of the US Department of Justice act as exogenous “technology shocks”, an essential element of real business cycle theory that hitherto has eluded direct empirical corroboration, or as “markup shocks” limiting market power and promoting economic expansion? We analyze annual time series data from 1947 to 2003 on three measures of federal antitrust intervention: the ratio of the Antitrust Division’s budgetary expenditures to GDP as well as the numbers of civil and criminal antitrust cases instituted. The evidence suggests that changes in the levels of these policy variables act like negative technology shocks to productivity growth. Moreover, the negative effects are found to be transitory; antitrust policy generates no subsequent offsetting (net) increases in productivity.

This paper adds to a substantial literature attempting to quantify the impact of antitrust enforcement.  For a contrary perspective in favor of antitrust enforcement, see Jonathan Baker, The Case for Antitrust Enforcement (17 J. Econ. Persps. 27 (Fall 2003)).

6 responses to Antitrust and Real Business Cycle Theory


    Thanks for the clarifications. I don’t know that I agree that it is obvious that a decline in DOJ enforcement would result in an offsetting increase in, say, FTC enforcement rather than a simultaneous decline. Nonetheless, I don’t disagree that it would be even more interesting to look at the impact of all forms of intervention. I’m also not quite as concerned about the lag. In sum, I find the results pretty interesting even if they don’t raise to the level of proof that antitrust does not have positive macroeconomic effects.

    Thanks for the comments.

    market failure, right here 26 September 2007 at 1:10 pm

    You’re right, I think I was conflating a couple of thoughts in the first post.

    First, I don’t think that DOJ budgets are exogenous from GDP: budgets are driven by tax receipts, which in turn are intextricably linked to GDP as they represent a particular percentage of a taxpayer’s income.

    Second, I don’t think that DOJ budgets are a compelling proxy for levels of antitrust enforcement, because they neglect the other main federal antitrust agency, the FTC, all state AG enforcement, and all private enforcement. One would logically expect that when DOJ enforcement declines, these other entities would pick up the slack.

    Third, there’s a significant lag in terms of enforcement and its effects. DOJ or FTC brings an investigation, the investigation turns into a case, the case leads to a court judgment, the court judgment is interpreted by commentators, and leads to advice by in-house and outside counsel. So for the expenditures to have their full effect on the economy could take years or even decades.

    Any one of these problems would be problematic. Jointly, I believe they are fatal.


    No need to pull your punches here Market Failure…tell us how you really feel about the paper.

    I certainly agree that there is an open empirical question concerning the impact of antitrust enforcement (as the Baker survey cited above suggests). But I’m trying to understand your specific objections here.

    The first seems to be that the level of antitrust enforcement is endogenous. Are you arguing that DOJ enforcement is causally determined by GDP? I’m not sure I believe that, and wont argue with it here, but is that what you’re saying?

    The second is that the DOJ budget measure might not be a good measure of antitrust intervention because some benefits of antitrust enforcement (and costs, obviously) come not from the enforcement action itself but from counselors who advise clients to avoid liability risks (not to mention non-DOJ enforcement). Obviously true. But I would disagree that the problems raised by this rise to the level of describing the paper as intellectual dishonest relative to the cross-sectional approach (which has its own problems).

    Two thoughts. One is that those counselors probably do more of that advising where the federal agencies are more active such that the DOJ activity might capture that. Also, FTC and DOJ levels of intervention might well be correlated over time such that it would not be unreasonable to focus on the DOJ budget. Additionally, it might well be an interesting result in its own right to show that DOJ expenditures alone produced negative macroeconomic effects. One could obviously not then generalize to the antitrust mission as a whole … but still interesting I think.

    Third, you prefer the cross-sectional approach. Thats all well and good. You might enjoy Hylton & Deng’s study here:

    But these cross-sectional studies must tangle with some endogeneity issues of their own (and other problems that generally apply to this approach).

    What you really want is a nice natural experiment in the intensity of antitrust enforcement so that you can cleanly identify the effects. Unfortunately, this doesn’t happen in the real world too often and so we are stuck trying our best to measure these things with what we’ve got. I wouldn’t describe the effort as worthless at all.

    market failure, right here 26 September 2007 at 12:13 pm

    Oh yeah, and what kind of model just completely ignores enforcement by the FTC, state AGs, and private plaintiffs. It sounds like a worthless exercise.

    market failure, right here 26 September 2007 at 12:11 pm

    One of the many shortcomings with empirical work of this sort is that it treats antitrust enforcement as an independent variable. But anyone who has worked for any amount of time in antitrust knows that antitrust counseling by in-house and outside counsel has great ripple effect that wouldn’t be captured by the model. The best government investigation is one it never needs to bring, because the companies abandon the anticompetitive enterprise on their own from fear of enforcement.

    A far better, and more intellectually honest approach would be a cross-sectional analysis of different countries’ economies, comparing their market structures, level of competition enforcement, overall economic efficience, and levels of market and income concentration.


    If the legal world evolves toward plain english principles, perhaps economists should as well…