Volume 19, Number 2 Summer 2002

Essay

Barbara J. Safriet

Closing the Gap Between Can and May in Health-Care

Providers’ Scopes of Practice: A Primer for Policymakers

A gap has developed within the United States health care industry between the abilities of non-physician care providers and the activities government regulation allows them to perform. Dominant provider groups extensively lobby state legislators in order to obtain scope-of-practice monopolies, which confer exclusive control over their areas of interest and exclude other equally-capable groups from performing such services. As a result, the excluded providers’ skills are under-used, creating a systemic inefficiency. This Essay explores the development of the current scope-of-practice system and discusses possible solutions, including a review of current reforms in Colorado and Ontario, Canada.

Robert W. Crandall

J. Gregory Sidak

Is Structural Separation of Incumbent Local Exchange

Carriers Necessary for Competition

Although competitive local exchange carriers (“CLECs”) collectively have gained considerable market share since the passage of the Telecommunications Act of 1996, many entrants into local telecommunications have stumbled or failed. Some argue that competitive local telephony will eventuate only if the incumbent local exchange carriers (“ILECs”) place their wholesale and retail operations in structurally separate subsidiaries. By mid-2001, several states began proceedings on mandatory structural separation, and influential members of Congress introduced legislation mandating structural separation. In this Article, we analyze, and reject as unpersuasive, the putative benefits of mandatory structural separation. Such regulatory intervention is unnecessary to prevent discrimination against unaffiliated retailers of telecommunications services. Nor would mandatory structural separation lower wholesale discounts or increase the CLECs’ market share. Plausible hypotheses for the CLECs’ problems do not require the assumption of anticompetitive behavior by the ILECs. Apart from producing no discernable benefits to consumers, mandatory structural separation would entail a substantial social cost in terms of forgone coordination of investment and production and forgone economies of scope. Moreover, mandatory structural separation would harm consumer welfare and reduce resources for investment by facilitating an anticompetitive strategy by the ILECs’ largest rivals to raise the ILECs’ costs of providing local telecommunications services. Policy makers should reject proposals for mandatory structural separation of the ILECs.

Minh Van Ngo

Agency Costs and the Demand and Supply of

Secured Debt and Asset Securitization

Current accounts of the demand and supply of secured debt and asset securitization are in stark contrast with observed debtor behavior. Whereas current theories predict a strong preference for secured debt, debtors borrow on an unsecured basis whenever possible. In addition, the purported theoretical similarities between secured debt and asset securitization, that both forms of financing generate savings by pledging collateral, conflict with the significant disparity in the popularity and signals associated with use of asset securitization and secured debt. This Article addresses the disconnects between current theories and observed practices by considering the effects of the agency costs associated with corporations and the risk-aversion associated with non-corporate forms of business enterprises on the demand for secured debt. Integrating agency costs and risk-aversion into the debtor decision between secured and unsecured debt suggests a strong bias against secured debt because free assets serve as a safety mechanism for managers similar to Jensen's theory with respect to free cash flow. An analysis of the supply of secured debt and asset securitization illustrates that a significant, if not primary, element of both species of financing is the radically different way in which secured debt and asset securitization attempt to decrease the likelihood of debtor insolvency. Focusing on this crucial difference explains the disparity in popularity between the forms of financing by suggesting that secured debt is ideally suited for financially marginal debtors but ill-suited for financially healthy debtors.

Timothy P. Duane

Regulation’s Rationale: Learning from the California

Energy Crisis

Further deregulation of energy markets has been challenged by the California energy crisis of 2000-2001 and the collapse of Enron. Many observers have argued that these events are unrelated, and, therefore, deregulation itself should not be questioned. Each disaster is just a symptom, however, of something more fundamental and structural: the failure of modern American political discourse to appreciate regulation’s rationale. In particular, both the California energy crisis and Enron’s collapse were caused by legislative and administrative failures to design regulatory institutions that adequately constrained opportunistic behavior. This Article challenges the conventional wisdom about what happened in California and therefore challenges the conventional wisdom about what should be done to avoid similar problems. This inquiry has relevance both for other states considering deregulation (or its euphemistic cousin, “restructuring”), as well as how the federal government approaches its role in a partially-deregulated electricity market. The dominant story of what happened in California is riddled with both factual and conceptual errors, and those errors engendered a series of policy responses that exacerbated, rather than alleviated, the underlying causes of the crisis. Political discourse on the Bush Administration’s National Energy Plan suffers from similar problems. Our nation, therefore, runs a serious risk of repeating the conditions that gave rise to the California energy crisis, rather than learning from them.

President’s Council of Economics Advisers

Economic Organization and Competition Policy

A version of this Article appeared as a Chapter of the 2002 Economic Report of the President, prepared by the Council of Economic Advisers. The Council was established by the Employment Act of 1946 to provide the President with objective economic analysis and advice on the development and implementation of a wide range of domestic and international economic policy issues. The Council also prepares the Economic Report of the President for Congress on an annual basis. One of the goals of this year’s report was to examine closely the institutional foundation for the economic growth of the last two decades. This period saw private sector technological advances and entrepreneurial innovation that fueled productivity growth and improvements in our standard of living. The 2002 Report analyzes this economic success and proposes strategies for carrying sustained growth and broadened prosperity into the future.

One source of the United States’s superior economic performance over the past decade has been the success of its institutions in promoting open, competitive markets. The task of competition policy, as detailed in this Article, is to promote competition in a way that ensures the efficient allocation of resources and serves the interests of consumers. In doing so, however, competition policy must walk a fine line: efforts to prevent anticompetitive changes in the behavior and organization of firms may inadvertently stifle efficient innovation and so harm consumers rather than benefit them.

The first three parts of this Article survey the landscape of modern business and the policy lessons to be taken from recent experience. A recurrent theme is that insights can be gained by combining the corporate governance and antitrust literatures. Part I describes contemporary developments in the organization of firms—emphasizing mergers, joint ventures and partial equity stakes—and analyzes the motivations for such changes in terms of their capacity to lower transaction costs in general, and agency costs in particular. Part II describes the evolution of public policy toward mergers through the last three decades, paying particular attention to the growing influence of economic analysis. A number of more specific policy lessons figure into Part III. Partial equity stakes and joint ventures are reconsidered, as are traditional views in evaluating the efficiencies of corporate reorganization. Throughout, the emphasis is on using real-world experience and contemporary scholarly insights to recommend policies that promote and do not hinder competitive efficiency.

Parts IV and V treat two issues increasingly at the forefront of competition policy today: global enterprise and dynamic competition. The former is gaining in importance and attention as world markets grow increasingly integrated and firms respond by changing their organizational forms. Our competition policy must take international business into account, both in formulating an appropriate domestic policy framework and in encouraging competition policy convergence around best practices among the various national jurisdictions. Part V, dealing with dynamic competition, discusses policy responses to sectors in which firms compete not just for increments of market share but for absolute (if temporary) market dominance through rapid innovation. Competition authorities must recognize that, at any given moment, high profits and substantial market share—indicators that might warrant concern about competition in some industries—need not preclude vigorous dynamic competition among firms in industries undergoing rapid technical change.