Volume II Issue 2 (4) Winter 2011

91
Biannually
Volume II
Issue 2(4)
Winter 2011

ISSN 2068-696X
J
A
S
E
R
S

ournal of Advanced Research
in Law and Economics
Volume II Issue 2(4) Winter 2011
92

Contents:

Journal of
Advanced
Research in Law
and Economics is
designed to provide
an outlet for
theoretical and
empirical research
on the interface
between economics
and law. The
Journal explores

1
Why do French Civil Law
Countries have Higher Levels of
Financial Efficiency?

Simplice A. Asongu
University of Lige, HEC
Management School, Belgium 94
5
Churches and Private Educational
Institutions as Facilitator of Money
Laundering: the case of Nigeria

Kato Gogo Kingston
School of Law, University of East
London, United Kingdom 136

2
Economic Constitution in
Practice: the Enforcement of
Competition Law in Albania

Petrina Broka
University of Tirana, Faculty of Law,
Department of Civil Law, Albania,
Ermal Nazifi
Albanian University/Albanian
Competition Authority Albania 109
6
Common Law vs. Civil Law:
Which System Provides more
Protection to Shareholders and
Promotes Financial Development

Prabirjit Sarkar
Jadavpur University, Kolkata,
India 143
3
A Semantic Interpretation of the
Values of Shall in Economics
English as Target Language

Roxana GogaVigaru
Spiru Haret University, Faculty of Law
and Public Administration, Craiova,
Romania 120
7
Prohibition of Parallel Imports as a
Hard Core Restriction of Article 4
of Block Exception Regulation for
Vertical Agreements: European
Law and Economics

Nikolaos E. Zevgolis
Athens University of Economics and
Business, Athens, Greece,
Panagiotis N. Fotis
University of Central Greece, Athens,
Greece 163
4
On the Deterrent Effect of
Individual Versus Collective
Liability in Criminal Organizations

Laetitia Hauret
CEPS/INSTEAD, Differdange
Eric Langlais
EconomiX and CEREFIGE, Nancy
University
Carine Sonntag
ICN Business School,
Nancy 125

Winter 2011
Volume II, Issue 2(4)

Editor in Chief
Madalina Constantinescu
Spiru Haret University, Romania

Co-Editors

Russell Pittman
International Technical Assistance
Economic Analysis Group Antitrust
Division, USA

Eric Langlais
EconomiX CNRS and Universit
Paris Ouest-Nanterre, France

Editorial Advisory Board
Huseyin Arasli
Eastern Mediterranean University,
North Cyprus

Jean-Paul Gaertner
Ecole de Management de
Strasbourg, France

Shankar Gargh
Editor in Chief of Advanced in
Management, India

Arvi Kuura
Prnu College, University of Tartu,
Estonia

Piotr Misztal
Technical University of Radom,
Economic Department, Poland

Peter Sturm
Universit de Grenoble 1 Joseph
Fourier, France

Rajesh K. Pillania
Management Developement
Institute, India

Rachel Price-Kreitz
Ecole de Management de
Strasbourg, France

Andy Stefanescu
University of Craiova, Romania

Laura Ungureanu

Hans-Jrgen Weibach, University
of Applied Sciences - Frankfurt am
Main, Germany

ASERS Publishing
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ISSN 2068-696X

Journal of Advanced Research in Law and Economics
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Journal of Advanced Research in Law and Economics is designed to provide an outlet for theoretical and
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Summer_Issue 2012

94

WHY DO FRENCH CIVILLAW COUNTRIES
HAVE HIGHER LEVELS OF FINANCIAL EFFICIENCY?

Simplice A. ASONGU
University of Lige, HECManagement School, Belgium
asongusimplice@yahoo.com

Abstract
The dominance of English commonlaw countries in prospects for financial development in the legal
origins debate has been debunked by recent findings. Using exchange rate regimes and economic/monetary
integration oriented hypotheses, this paper proposes an inflation uncertainty theory in providing theoretical
justification and empirical validity as to why French civillaw countries have higher levels of financial allocation
efficiency. Inflation uncertainty, typical of floating exchange rate regimes accounts for the allocation inefficiency
of financial intermediary institutions in English commonlaw countries. As a policy implication, results support the
benefits of fixed exchange rate regimes in financial intermediary allocation efficiency.

Keywords: banking, allocation efficiency, exchange rate, inflation, economic integration.

JEL Classification: D61, G20, K00, P50, R10.

1. Introduction
Contrary to mainstream literature (Mundell 1972; La Porta et al. 1998; Beck et al. 2003), recent findings
have partially rejected the dominance of English commonlaw countries in prospects for financial development
(Asongu 2011). The overwhelming edge of French civillaw countries in financial intermediary allocation efficiency
has reignited the legalorigins debate in the lawfinance nexus. This paper cuts adrift the mainstream cross
country legalorigins approach and uses regionallegal origins to provide theoretical justification and empirical
validity as to why French civillaw countries exhibit higher levels of financial allocation efficiency. It is worth
noting that recent findings have stopped at if French legal systems provide for conditions that enhance financial
intermediary allocation efficiency. The issue of why has remained elusive hitherto, which is the concern this
work seeks to address. For the purpose of clarity and logical presentation of the paper, literature on the law
finance nexus could be clubbed into the following strands.
The first strand entails a growing body of work which suggests that crosscountry differences in legal
origin explain crosscountry differences in financial development. La Porta et al. (1998): hence LLSV (1998)
pioneered this strand and ever since many authors have taken to them in the assertion that English common
law countries provide for a legal atmosphere that fosters conditions for financial development than their French
civillaw counterparts. They postulate that countries with commonlaw traditions (French civillaw legacies)
express the strongest (weakest) legal protection to shareholders and creditors (LLSV 1998, 2000). The margin
English legal origin countries exert over countries with French civillaw origin has been generalized and
extended to many other aspects of management and government: more informative accounting standards
(LLSV1998), better institutions with less corrupt governments (LLSV 1999) and more efficient courts (Djankov et
al. 2003). While this strand has been focused on elucidating if legal origin matters in financial development, the
issue of why legal origin matters remained unaccounted for until Beck et al. (2003) assessed some theories to
address it.
In the second strand, Beck et al. (2003) account for why legal origin matters in finance by empirically
assessing two channelbased theories. The political channel underlines the importance of priorities legal
traditions attribute to the rights of individual investors visvis the state. It follows that championing of investors
rights should induce favorable conditions for financial development. The adaptability channel postulates that
legal traditions differ in their capacity to adapt to changing and evolving business circumstances. This implies
countries in which legal systems provide for adjustments in relation to changing and evolving circumstances
should have a higher propensity to financial development. Thus, this strand solves the why puzzle in asserting
that legal origin matters in financial growth because traditionally, legal origins differ in their ability to adapt and
adjust to changing and evolving economic conditions.
In the third strand we find literature boosting the nexus that financial development significantly contributes
to a countrys overall economic growth (McKinnon 1973). This optimism is shared and broadened empirically at
95

the country level (King, and Levine 1993; Levine, and Zervos 1998; Allen et al. 2005), as well as at industry and
firm levels (Jayaratne, and Strahan 1996; Rajan, and Zingales 1998).
The fourth strand addresses the lawfinancegrowth relationship. It theoretically and empirically provides
evidence of the link among law, finance and economic growth at firm, industry and country levels (Demirguc
Kunt, and Maksimovic 1998; Beck, and Levine 2002).
The fifth strand which is for the most part dedicated to subSaharan African countries was pioneered by
the Mundell (1972) conjecture, which emphasized that Anglophone countries shaped by British activism and
openness(to experiment) would naturally experience higher levels of financial development that their
Francophone neighbours (powered by French reliance on monetary stability and automaticity)
1
. Recent literature
on the African continent has either wholly (Agbor 2011) or partially (Asongu 2011) confirmed the edge of English
commonlaw countries in growth and finance prospects respectively
2
. Historically it should be noted that the
partition of subSaharan Africa into French and British spheres in the 19th century resulted in the
implementation of two distinct colonial policies
3
.
The unique contribution of this paper to the literature is to explain why French civil law countries
experience higher levels of financial intermediary allocation efficiency than English commonlaw countries. The
rest of the paper is organized in the following manner. Section 2 discusses the links among financial efficiency,
inflation and the lawfinance theory, and presents resulting testable hypotheses. Data sources and methodology
are discussed and outlined in Section 3 respectively. Empirical analyses and discussion of results are reported in
Section 4, followed by a conclusion in Section 5.

2. Financial efficiency, inflation and lawfinance theory
2.1 Inflation and regionallegal origin
We postulate that inflation is inherently associated with commonlaw countries than civillaw countries.
This is because countries with English legal tradition are inherently opened (to capital and trade) and
competitive. Trade (exchange rate) reflects inflation especially in floating exchange rate regimes. It follows that
inflation should be higher in floating (English commonlaw) rate regimes than in fixed (French civillaw)
exchange rate regimes (Mundell 1972)
4
.

2.2 Inflation, uncertainty and financial allocation efficiency
2.2.1 Inflation, noise and uncertainty
Quite often, inflation introduces noise into the price system and this noise leads to decisions that, expost
are mistakes that would not have occurred in the absence of inflationary noise. The famous island model of
Lucas (1972) elucidates this hypothesis. A condition for inflation to introduce noise into the system is that
inflation must carry with it some uncertainty about static and/or intertemporal relative prices. Evidence that
inflation and uncertainty travel together has been provided by many authors (Okun 1971; Logue, and Willet
1976; Foster 1978; Engle 1983; Evans, and Wachtel 1993). However these studies may disagree in some
details, there does appear to be a consensus that inflation and inflation uncertainty move hand in glove.

1
The French and English traditions in monetary theory and history have been different The French tradition has
stressed the passive nature of monetary policy and the importance of exchange stability with convertibility; stability has been
achieved at the expense of institutional development and monetary experience. The British countries by opting for monetary
independence have sacrificed stability, but gained monetary experience and better developed monetary institutions.
(Mundell 1972, pp. 42 43).
2
While Agbor (2011) assesses how legal-origin affects economic performance, Asongu (2011) proposes four
theories in assessing why legal-origin matters in growth and welfare. Both studies are focused on the sub-Saharan part of
the African continent.
3
The British and French implemented two distinct colonial policies. While the French imposed a highly centralized
bureaucratic system that clearly underlined empire-building, the British on their part administered pragmatic decentralized
and flexible policies. Economic and business ambitions dominated British colonial activities who sought to transform their
colonies into commercially viable trading countries through the indirect-rule: producing raw material and consuming British
manufactures. The French on their part championed imperial ambitions through the policy of assimilation.
4
The French and English traditions in monetary theory and history have been different The French tradition has
stressed the passive nature of monetary policy and the importance of exchange stability with convertibility; stability has been
achieved at the expense of institutional development and monetary experience. The British countries by opting for monetary
independence have sacrificed stability, but gained monetary experience and better developed monetary institutions.
(Mundell 1972, pp.42-43).
96

2.2.2 Why inflation matters in financial allocation efficiency?
As we must have earlier observed, inflation injects noise into the smooth functioning of the price system
and thus influences decisions of banks and other financial institutions. This added noise comes with mistakes in
decision making that would not have been made without inflationinduced uncertainty. Banks end up holding too
much of mobilized funds. Inflation therefore leads to a different pattern (ratio) of bank deposits on bank credit
(allocation efficiency). In substance, inflation is like a distortionary tax that causes a reduction in the banks
allocation efficiency. Thus the allocative cost caused by inflationary noise quantitatively affects the ability of a
bank to lend mobilized funds because the lending price depends on perceptions of tomorrows value of money.
Since inflation adds noise to the lending price system and therefore affects perceptions of the time value of
money, the argument for misallocation of mobilized funds holds grounds as bank resources maybe shifted to
inefficient ends. As point out by Summers (1991) inflation and its accompanying uncertainty leads to resources
being devoted to dealing with inflation rather than the fundamental issues the banks really care
about(allocation of credit to economic agents). To put this in perspective, with inflation and corresponding
uncertainty financial institutions tend to employ more inflation forecasters and indexation specialists which diverts
some proportion of mobilized funds. Indeed financial institutions in economies associated with high levels of
inflation and uncertainty tend to see more recipients of cheques lobbying for faster chequeclearing services.
This constraint requires banks to retain a higher proportion of deposits (in a bid to meetup with the uncertainty
in demand for liquidity) and this affects their allocation efficiency (bank credit on bank deposits).
More so bankers( aware inflation will erode the time value of money) are slow to lendout mobilized funds
because of uncertainty in the increase of interest rate to compensate(associate) for(to) the inflationary noise It
follows that inflation affects financial allocation efficiency through misallocation of resources: on the one hand
more mobilized funds (deposits) are used to fight inflation and on the other hand a greater chunk of mobilized
funds is retained by banks to assuage the uncertainty of bankrun.

2.3 Testing the inflation uncertainty theory
In order to assess the inflation uncertainty theory we shall examining two testable hypotheses.
H1: Inflation is higher in commonlaw countries due to floating exchange rate regimes, in comparison to
French civillaw countries with fixed exchange rate regimes.
First and foremost, we shall have to cut adrift the legal origins debate that is based on colonial legacy at
crosscountry levels. A more convenient approach is the adoption of economic/monetary regionallegal origins.
Should we limit our empirical framework to crosscountry level analysis, the basis for exchange rate regimes (on
which the concept of inflation is founded; Section 2.1) will not be accounted for. Most French civillaw countries
are associated with monetary regions in which financial discipline and inflation are dictated and controlled
respectively by regional central banks.
Hypothesis 1 will be further elucidated by means of comparative statistics to be outlined in Section 3.1.5.
H2: Inflation reduces financial intermediary allocation efficiency.
Testing this hypothesis we entail four steps:
Firstly, we confirm that inflation is detrimental to banking system allocation efficiency (and robustly
financial system allocation efficiency), conditional on other exogenous determinants of financial
intermediary allocation efficiency;
Secondly, we assess if regionallegal origins explain regulation quality and the rule of law (which are
used as our endogenous explaining control variables at the secondstage of the TSLS approach);
Thirdly, we show that regionallegal origins (monetary/economic or both) which determine exchange
rate regimes are exogenous to inflation and financial intermediary efficiency, (conditional on other
potential determinants of inflation and financial efficiency);
Lastly, we examine if regionallegal origins explain banking system efficiency (and robustly financial
system efficiency) beyond their ability to explain crosscountry (crossregional) variations in inflation;
conditional on other potential exogenous determinants of financial intermediary efficiency (rule of law
and regulation quality)
5
.

5
As we have pointed-out in the second-step, other potential determinants of financial efficiency must have
theoretical basis and empirical validity. Thus, the instruments (regional legal-origin) must explain the rule of law and
regulation quality before they can be integrated at the second-stage of the TSLS approach as endogenous explaining
variables of control. This is the purpose of the second-step.
97

2.4 The concept of financial intermediary efficiency
Here we neither refer to the profitabilityoriented concept of financial efficiency nor to the production
efficiency of decision making units in the financial sector (through Data Envelopment Analysis: DEA). What we
seek to address is the ability of banks to effectively meet their fundamental role of transforming mobilized
deposits into credit for economic operators.

3. Data and Methodology
3.1 Data
Our data is obtained from African Development Indicators (ADI) of the Work Bank (WB) and the Financial
Development and Structure Database (FDSD). Due to limitations in time series properties of law and regional
indicators
6
, we are obliged to restrict our data span (madeup of 34 countries) from 1996 to 2008 (see Appendix
3). As we must have earlier emphasized we cut adrift the legal origins debate of crosscountry levels and focus
on crossregional levels
7
.
Inflation data based on Consumer Price Index is obtained from ADI of the WB.

3.1.1 Financial intermediary efficiency
Borrowing from Asongu (2011) countries with French civillaw legacy will turn to experience higher levels
of financial intermediary allocation efficiency both at bank (banking system efficiency) and economic (financial
system efficiency) levels. In accordance with the Financial Development and Structure Database (FDSD) we
measure banking system efficiency and financial system efficiency with bank credit on bank deposits: Bcbd and
financial system credit on financial system deposits: Fcfd respectively. Bcbd can robustly be checked by Fcfd as
it accounts for over 87% of its variations (see Appendix 4).

3.1.2 Instrumental variables
After scrutinizing all economic/monetary regions in Africa (Appendix 1), we narrow down member states
of regions with respect to constraints of data availability (Appendix 2) before selecting regions based on testable
hypotheses, legal origins and correlation analysis (Appendix 3). We choose two economic/monetary regions
dominated by French legal traditions (CEMAC and UEMOA) which constitute the CFA zone. We also select two
economic regions dominated by English commonlaw origin (SADC and COMESA). Beside the motivation of
testable hypotheses, the choice of these regions is also based on correlation analysis to avoid problems related
to overparametizing and multicolinearity (Appendix 4).

3.1.3 Control variables
In accordance with the literature (Levine, and King 1993; Hassan et al. 2011; Asongu 2011) we shall
control for trade, population growth, GDP per capita growth and government expenditure in the finance
regressions. The control variables are obtained from ADI of the WB.

3.1.4 Choice of endogenous explaining variables for control at the secondstage of the TSLS
a. Regulatory Quality
According to the World Bank the quality of regulation measures perceptions on the ability of the
government to formulate and implement sound policies and regulations that enable and foster private sector
development. The concept is appreciated by both representative and nonrepresentative sources. The indicator
is measured in percentile rank from 0 to 100.
b. Rule of Law
This indicator captures perceptions on the extent to which agents abide by and have confidence in the
rules of society, particularly the quality of property rights, contract enforcement, the courts, the police, as well as

6
For regional data, most economic regions in Africa were created in the 1990s in the heat of structural adjustment
policies imposed by the International Monetary Fund. For law data, the World Bank began collecting indicators on the quality
of law in Africa only after the pioneering work of LLSV (1998) was first published as working paper at the National Bureau of
Economic Research (NBER) in 1996.
7
A more convenient approach is the adoption of economic/monetary regional-legal origin. Should we limit our
empirical framework to country-level analysis, the basis of exchange rate regimes (on which the concept of inflation is
founded; Section 2.1) will not be accounted for. Most French civil-law countries are associated with monetary regions in
which financial discipline and inflation are dictated and controlled respectively by regional central banks.
98

the likelihood of crime and violence. It is appreciated in percentile rank from 0 to 100 from a plethora of criteria
with representative and nonrepresentative sources.
What is worth noting is that, these two measures incorporate the four indicators considered by Beck et al.
(2003) in theorizing the political and adaptability channels of law.
These endogenous explaining variables of control must be empirically verified at the secondstep of the
validation of hypothesis 2 before they can be used at the fourthstep (secondstage regressions in the Two
Stage Least Squares method).

3.1.5 Brief comparative analyses from Table 1
The last column of Table 1 depicts that relative to Frenchcivil law regions, commonlaw regions have on
average higher levels of inflation. This mean is 2.811% for the Franc zone and 52.188 %( 11.869%) for the
SADC (COMESA) region. The corresponding high uncertainty associated with inflation is measured by the
standard deviation. While on average the Franc Zone has an inflationuncertainty of 10.474% those of SADC
and COMESA are 367.38% and 13.647% respectively. Thus this is confirmation of Hypothesis 1
8
.
As expected, regulatory quality, trade and GDP per capita growth are higher in English commonlaw
regions than in French civillaw regions. This is consistent with the lawfinance literature (LLSV 1998; Beck et
al. 2003; Agbor 2011). Also the presence of higher levels of allocation efficiency in French civillaw regions
confirm recent findings (Asongu 2011) on which the object of our work is based.

3.2 Methodology
In accordance with the lawfinance literature (Beck et al. 2003; Agbor 2011) we use the TwoStage
LeastSquares (TSLS) with dummies of regional origins as instrumental variables.
Beside the many advantages of using TSLS, the object of our paper (which is to assess if regional origins
affect financial efficiency through inflation) requires an Instrumental Variable (hence IV) estimation technique.
This IV approach will entail the following steps:

justify the object of a TSLS over an Ordinary Least Squares (OLS) estimation method through the
Hausman test for endogeneity;
show that the instruments (regional origins) explain the endogenous components of the explaining
variable (inflation), conditional on other covariates (control variables);
assess the validity of the instruments through an OverIdentifying Restriction (OIR) test.
Above steps entail the following models:

First stage regression:

Inflation it =
0
+
1
(British) it +
2
(French) it + o
i
Xit (1)

Second stage regression:

Financialefficiency =
0
+
1
(Inflation) it + |iXit + (2)

In the two equations, X is the set of exogenous variables that are included in some of the secondstage
regressions. For the first and secondstage equations, v and u, respectively denote the error terms. Instrumental
variables are the five regional origin dummies.

8
H1: Inflation is higher in common-law countries
99

Table 1. Comparative Summary Statistics
Stats Legalorigin
Regional
origin
Efficiency Law Control Variables Instruments(Regions)
Inflation Bank Finance Reg.
Quality
Rule of Trade

GDPpcg

Pop.
Growth
Gov.
Exp.
French Civil Law Regions Commonlaw
Bcbd Fcfd Law CEMAC UEMOA CFA.ZONE SADC COMESA
Mean
French CEMAC 0.847 0.827 0.217 0.150 78.018 1.105 2.387 10.526 1.182
Civil UEMOA 0.831 0.832 0.323 0.283 60.377 0.889 2.906 12.676 3.957
Law CFA.ZONE 0.837 0.830 0.282 0.232 68.073 0.972 2.706 11.810 2.811
Common SADC 0.611 0.737 0.420 0.430 97.682 3.235 1.914 16.546 52.188
Law COMESA 0.645 0.681 0.326 0.352 80.773 2.112 2.289 14.443 11.869
Data 0.708 0.750 0.332 0.330 77.646 2.202 2.336 14.147 0.131 0.210 0.342 0.263 0.289 18.844
S.D
French CEMAC 0.316 0.297 0.124 0.122 39.014 5.202 0.614 3.860 13.456
Civil UEMOA 0.228 0.224 0.125 0.155 19.620 4.422 0.442 4.441 7.600
Law CFA.ZONE 0.265 0.252 0.135 0.157 30.841 4.723 0.572 4.335 10.474
Common SADC 0.289 0.607 0.194 0.205 45.132 3.436 0.767 6.086 367.38
Law COMESA 0.242 0.278 0.169 0.222 52.630 3.516 1.432 5.476 13.647
Data 0.301 0.409 0.171 0.211 39.886 4.246 1.023 5.418 0.338 0.408 0.474 0.440 0.453 193.57
Min
French CEMAC 0.188 0.178 0.078 0.019 25.710 11.137 1.555 2.650 100.00
Civil UEMOA 0.207 0.243 0.083 0.014 29.993 29.63 2.092 6.484 3.502
Law CFA.ZONE 0.188 0.178 0.078 0.014 25.710 29.630 1.555 2.650 100.00
Common SADC 0.133 0.137 0.044 0.024 33.491 7.797 0.548 6.331 100.00
Law COMESA 0.177 0.253 0.044 0.029 17.859 15.156 1.075 4.588 2.405
Data 0.133 0.137 0.044 0.014 17.859 29.630 1.075 2.650 0.000 0.000 0.000 0.000 0.000 100.00
Max
French CEMAC 1.718 1.646 0.580 0.457 156.86 29.062 3.826 24.196 12.431
Civil UEMOA 1.244 1.189 0.698 0.519 104.39 10.483 3.699 25.162 50.734
Law CFA.ZONE 1.718 1.646 0.698 0.519 156.86 29.062 3.826 25.162 50.734
Common SADC 1.400 2.606 0.792 0.810 209.41 17.114 3.165 35.138 4145.1
Law COMESA 1.413 1.615 0.792 0.810 255.01 10.655 10.564 31.237 132.82
Data 1.718 2.606 0.792 0.810 255.01 29.062 10.564 35.138 1.000 1.000 1.000 1.000 1.000 4145.1
Obs.

French CEMAC 65 60 50 50 65 65 65 65 64
Civil UEMOA 104 104 80 80 84 104 104 95 91
Law CFA.ZONE 169 164 130 130 149 169 169 159 155
Common SADC 130 126 100 100 130 130 117 115 128
Law COMESA 140 137 110 109 141 143 143 141 143
Data 489 477 380 379 472 494 481 454 494 494 494 494 494 465
S.D: Standard Deviation. Min: Minimum. Max: Maximum. Obs: Observations. Bcbd: Bank credit on Bank deposits. Fcfd: Financial system credit on Financial system deposits. Reg: Regulation. Popg:
Population growth. Gov.Exp: Government Expenditure. GDPpcg: GDP per capita growth. CEMAC: Economic and Monetary Community of Central African States. UEMOA: Economic and Monetary
Community of West African States. CFA ZONE: FRANC ZONE. SADC: Southern African Development Community. COMESA: Common Market for Eastern and Southern Africa.
100

4. Crossregion regressions
Section 3.1.5 has partially settled the first hypothesis of whether commonlaw countries exhibit higher
levels of inflation and inflation uncertainty. In this section we shall empirically confirm Hypothesis 1 and address
the second hypothesis.

4.1 Inflation, efficiency, law and regional origin
This section presents results for steps 1 and 2 of Hypothesis 2. We assess the importance of inflation in
explaining financial intermediary efficiency (Panel A of Table 2 for step 1 of Hypothesis 2). We unconditionally
regress banking system efficiency on inflation (Model 1) and test for the significance of inflation as a detriment to
banking efficiency. Next we control for other potential determinants of banking efficiency (Model 2) before
robustly validating our results with financial system efficiency regressions of the same order (Model 1* and Model
2*).
All results are significant both at coefficient (significance of tstatistics for the inflation variable) and
overall model (significance of Fisher statistics) levels. The negative sign of the significant inflation estimate point
to the detrimental effect inflation and corresponding inflation uncertainty xert on financial intermediary efficiency.
Panel B of Table 2 addresses the secondstep of Hypothesis 2. This step is essential for our choice of
endogenous explaining control variables at the secondstage of the TSLS estimation method. In practice and
fact, control variables must a priori be endogenous to (explainable by) instruments both from theoretical and
empirical perspectives. Literature has already addressed the theoretical foundation (LLSV 1998; Beck et al.
2003) where much emphasis is laid on the edge commonlaw countries have on the quality of regulation and
rule of law over French civillaw countries. The comparative summary statistics depicted in Table 1 justify this
assertion. But we cannot limit ourselves at those because our objective is not to prove the edge one legal system
has over the other. Our law variables are essentially control variables and therefore only their endogenous
quality with respect to regionallegal origins is of interest to us. In other words, we are interested in pointingout
that the endogenous components of the rule of law and quality of regulation can be explained by the instruments.

Table 2. Regressions for First and Second steps of Hypothesis 2

Panel A :FirstStep of Hypothesis 2

Banking System Efficiency Financial System Efficiency
Model 1 Model 2 Model 1* Model 2*
Bcbd Bcbd Fcfd Fcfd
Constant 0.722*** 1.070*** 0.768*** 1.165***
(51.50) (15.41) (39.35) (11.49)
Control
Variables

Inflation 0.0001** 0.005*** 0.0001* 0.007***
(2.448) (4.962) (1.820) (3.668)
Trade 0.002*** 0.003***
(5.154) (6.027)
GDPpcg 0.007* 0.010*
(1.965) (1.860)
Pop. Growth 0.032** 0.056***
(2.185) (2.684)
Gov. Exp. 0.003 0.006
(1.404) (1.481)
Fisher test 5.993** 11.321*** 3.313* 10.579***
Adjusted R 0.010 0.112 0.005 0.107
101

Observations 460 409 450 399
Panel B: SecondStep of Hypothesis 2
French Civil
law regions
(Instruments)
Regulatory Quality Rule of Law
Model 3 Model 4 Model 3* Model 4*
UEMOA 0.323*** 0.283***
(12.29) (9.364)
CEMAC 0.217*** 0.150***
(6.527) (3.927)
CFA.ZONE 0.282*** 0.232***
(13.59) (9.698)
English
Common
law
regions
(Instruments)
SADC 0.339*** 0.339*** 0.339*** 0.339***
(13.34) (13.24) (11.58) (11.48)
COMESA 0.203*** 0.203*** 0.227*** 0.227***
(8.375) (8.318) (8.114) (8.045)
Fisher test 145.87*** 189.76*** 105.43*** 135.77***
Adjusted R 0.605 0.599 0.525 0.517
Observations 380 380 379 379

*, **, ***: significance levels of 10%, 5% and 1% respectively. Student tstatistics are presented in brackets. Ftest: Fisher
test. Bcbd: Bank credit on Bank deposits. Fcfd: Financial system credit on Financial system deposits. Pop: Population.
Gov.Exp: Government Expenditure. GDPpcg: GDP per capita growth. CEMAC: Economic and Monetary Community of
Central African States. UEMOA: Economic and Monetary Community of West African States. CFA ZONE: FRANC ZONE.
SADC: Southern African Development Community. COMESA: Common Market for Eastern and Southern Africa.

Panel B of Table 2 therefore assesses the importance of regionallegal origin in explaining crossregional
variances in the rule of law and regulation quality. We regress our law indicators on the UEMOA, CEMAC, CFA
ZONE, SADC and COMESA regional origin dummy variables and also test for their joint significance (Fisher
test). Results show that distinguishing regions by legal origin helps explain crossregional differences in the rule
of law and quality of regulation. These findings are in accordance with the literature as pointedout above.
Therefore in this secondstep of Hypothesis 2, we have empirically justified the law variables we shall use as
endogenous explaining variables of control at the secondstage of the TSLS methodology.

4.2 Regional origin, inflation and financial allocation efficiency
In this section, results in Table 3 present crossregion regressions to assess the importance of regional
legal origin in explaining crossregional differences in financial system efficiency on the one hand and inflation
on the other hand. Thus the thirdstep of Hypothesis 2 is looked at. Results for model 7(7*) confirm Hypothesis 1
in asserting that commonlaw regions exhibit higher levels of inflation than French civillaw regions. It is also
worth notice that these results confirm the first condition for the TSLS methodology whereby, the instruments
(regions) must explain the endogenous explaining variable (inflation) conditional on other potential determinants
of inflation (control variables). Results for UEMOA and CEMAC are robust to that of the CFAZONE.
Models 5(5*) and 6(6*) assess the importance of legal origin in explaining crossregion variances in
financial efficiency. Banking system efficiency results are robust to those of financial system efficiency both in
terms of estimated coefficients and joint significance of regional instruments (Fisher statistics).

102

Table 3. Allocation efficiency, inflation and regional origin regressions

ThirdStep of Hypothesis 2
Efficiency and Inflation(FirstStage regressions)
Banking Syst. Efficiency Financial SystEfficiency Inflation
French Civillaw
regions
(Instruments)
Model 5 Model 6 Model 5* Model 6* Model 7 Model 7*
Bcbd Bcbd Fcfd Fcfd Inflation Inflation
UEMOA 0.661*** 0.669*** 1.433
(14.10) (10.74) (0.787)
CEMAC 0.556*** 0.550*** 3.468*
(10.13) (7.321) (1.862)
CFA.ZONE 0.545*** 0.549*** 5.449***
(13.65) (10.49) (3.912)

English
Commonlaw
regions
(Instruments)
SADC 0.105** 0.119*** 0.260*** 0.274*** 4.433*** 4.501***
(2.332) (2.513) (4.304) (4.408) (3.015) (3.002)
COMESA 0.286*** 0.284*** 6.260***
(7.169) (5.312) (4.392)

Trade 0.003*** 0.004*** 0.003*** 0.004***
Control
Variables

(9.928) (13.62) (7.069) (10.07)
GDPpcg 0.014*** 0.014*** 0.012** 0.011*
(3.311) (3.001) (2.094) (1.902)
Pop.growth 2.252*** 3.124***
(4.598) (6.820)
Gov. Exp 0.084 0.013
(1.141) (0.181)
Ftest(for Instruments) 234.67*** 303.37*** 139.60*** 189.63*** 30.77*** 39.53***
Adjusted R 0.750 0.722 0.647 0.624 0.296 0.266
Observations 467 467 455 455 428 428

Bcbd: Bank credit on Bank deposits. Fcfd: Financial system credit on Financial system deposits. Pop: Population. Gov.Exp:
Government
Expenditure. GDPpcg: GDP per capita growth.*, **, ***: significance levels of 10%, 5% and 1% respectively. Student t
statistics are presented in brackets. Ftest: Fishertest. Syst: System. CEMAC: Economic and Monetary Community of
Central African States. UEMOA: Economic and Monetary Community of West African States. CFA ZONE: FRANC ZONE.
SADC: Southern African Development Community. COMESA: Common Market for Eastern and Southern Africa.

4. 2 Secondstage inflation and financial efficiency regressions
This section presents results on the fourthstep of Hypothesis 2. Table 4 addresses two main issues: (1)
the concern of whether the exogenous components of the inflation indicator explain financial intermediary
efficiency; (2) the issue of if regionallegal origin explains financial intermediary efficiency through some other
mechanisms beside the inflation channel.
To make this assessment we use the TSLS regressions. The significance of the estimated coefficient of
inflation in Model 8(8*) addresses the first issue. The second issue is addressed by the test for the
overidentifying restrictions (OIR). The null hypothesis of the OIRtest is that regionallegal origin dummies
(instruments) are not correlated with the error term in the equation of interest (equation 2). Thus the rejection of
null hypothesis of the OIRtest is the rejection of the view that regionallegal origin explains financial
intermediary efficiency only through the inflation channel. Thus when other potential exogenous determinants of
financial efficiency are controlled for, the OIRtest becomes a general specification test for the validity of
instruments (regionallegal origin).
103

Although the first issue is addressed in Model 8, rejection of the null hypothesis of the OIR test shows that
regionallegal origin explains banking system efficiency through some other mechanisms than the inflation
channel. Models 9(9*) and 10(10*) address the second issue with regard to regulation quality and the rule of law
respectively. Model 9 on banking system efficiency (that is robust to Model 9* on financial system efficiency)
attest to the fact that regionallegal origin does not explain crosscountry differences in financial intermediary
efficiency beyond the inflation channel when the law channel of regulationquality is controlled for. Evidence of
this is provided by the result of the OIRtest which fails the reject the null hypothesis. On the other hand, when
the rule of law channel is controlled for, as expressed in Model 10(10*) for banking system efficiency (financial
system efficiency), there is failure to reject the null hypothesis (rejection of the null hypothesis) of the OIRtest.
What do these results tell us; they point to the fact that regionallegal origin does not explain banking system
efficiency through some other mechanisms other than the inflation channel when the rule of law channel is
controlled for (Model 10). However, from a financial system perspective, even when the rule of law channel is
controlled for, regionallegal origin still explains financial system efficiency through some other mechanisms than
the inflation channel (Model 10*). This could be explained by the complexity of the financial system in developing
countries which entails much more implicit variables of law (in micro financial institutions and local co
operatives) than in the formal banking sector (banking system) regulated by the governments and central banks.
Another crucial aspect worth noting is the sign of the estimated coefficients. In the absence of other
potential determinants of financial efficiency (absence of endogenous variables of control) the inflation
coefficients reflect a wrong positive sign (Models 8 and 8*). However, when law is controlled for, the inflation
coefficients have the right negative signs (Models 9(9*) and 10(10*)). The validity our TSLS estimation method is
justified by the rejection of the null hypothesis of the Hausman test in all 6 regressions. This rejection suggests
estimates by OLS are not consistent due to endogeneity.

Table 4. Allocation efficiency and inflation channel regressions

FourthStep of Hypothesis 2
Financial Allocation Efficiency(SecondStage regressions)

Banking System Efficiency Financial System Efficiency
Model 8 Model 9 Model 10 Model 8* Model 9* Model 10*
Bcbd Bcbd Bcbd Fcfd Fcfd Fcfd
Inflation
Channel
Inflation 0.013*** 0.007* 0.007* 0.015*** 0.005* 0.005
(3.180) (1.835) (1.745) (3.227) (1.749) (1.627)

Control
Variables
Reg. Quality 2.581*** 2.554***
(6.183) (8.274)
Rule of Law 2.515*** 2.494***
(5.811) (7.624)
Hausman test 172.674*** 302.729*** 359.423*** 200.7*** 116.208*** 197.262***
OIR(Sargan) test 9.299* 1.587 4.236 6.729 2.225 6.427**
Pvalues [0.054] [0.662] [0.120] [0.150] [0.526] [0.040]
Adjusted R 0.012 0.019 0.005 0.007 0.026 0.008
Observations 460 353 352 450 345 344
Instruments
(Economic/
Monetary
Regions)
French Civil
Law
UEMOA UEMOA CFA UEMOA UEMOA CFA
CEMAC CEMAC ZONE CEMAC CEMAC ZONE
English
CommonLaw
SADC SADC SADC SADC SADC SADC
COMESA COMESA COMESA COMESA COMESA COMESA

*, **, ***: significance levels of 10%, 5% and 1% respectively. Bcbd: Bank credit on Bank deposits. Fcfd: Financial system
credit on Financial system deposits. Reg: Regulation. . (): zstatistics. Chisquare statistics for Hausman test. LM statistics
for Sargan test. [ ]: pvalues. OIR: Overidentifying restriction test. CEMAC: Economic and Monetary Community of Central
African States. UEMOA: Economic and Monetary Community of West African States. CFA ZONE: FRANC ZONE. SADC:
Southern African Development Community. COMESA: Common Market for Eastern and Southern Africa.

104

5. Conclusion
While recent literature (Asongu 2011) has debunked the dominance of English commonlaw countries in
prospects for financial development, it has failed to establish empirically why French civillaw countries exert
such overwhelming dominance in financial intermediary efficiency over their counterparts with commonlaw
origin. In this paper, we have presented an inflation uncertainty theory in providing theoretical validity and
empirical justification as to why countries with French legal origin have an edge in financial allocation efficiency.
In cementing the Asongu (2011) hypothesis we have cut adrift the legal origins debate at crosscountry level by
using exchange rate regimes and economic/monetary integration oriented hypotheses. This shift in approach is
premised on the fact that the concept of inflation expressed by exchange rate regimes cannot be accounted for
at countrylevel because most French civillaw countries are associated with monetary regions in which financial
discipline and inflationary targets are dictated and controlled respectively by the regional central banks.
Our results show that inflation uncertainty that is typical of floating exchange rate regimes accounts for
the allocation inefficiency of financial intermediary institutions in English commonlaw countries when other
potential determinants of financial allocation efficiency are controlled for. As a policy implication, results support
the benefits of fixed exchange rate regimes in financial intermediary allocation efficiency.

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106

APPENDICES

Appendix 1. Presentation of Economic and Monetary Regions

Regions Definition Member states Num.
ECOWAS
(CDEAO)

Economic Community of
West African States

Benin, Burkina Faso, Cape Verde(1976), Cte dIvoire, Gambia, Ghana,
Guinea, GuineaBissau, Liberia, Mali, Niger, Nigeria, Senegal, Sierra
Leone, Togo, Mauritania (2000). (5/1975)
15
UEMOA

West African Economic
and Monetary Union
Benin, Burkina Faso, Cte dIvoire, GuineaBissau (5/1997) , Mali, Niger,
Senegal, and Togo. (1/1994)
8

ECCAS
(UDEAC)*
Economic Community of
Central African States
Angola(1999), Burundi, Cameroon, Central African Republic, Chad,
D.R.Congo, Equatorial Guinea, Gabon, Congo, Rwanda, Sao Tom and
Principe.(1985)
11

CEMAC

Economic and Monetary
Authority of Central Africa
Cameroon, Central African Republic, Chad, Congo, Equatorial Guinea,
and Gabon. (1999)
6
CFA
ZONE

CEMAC plus UEMOA

Cameroon, Central African Republic, Chad, Congo, Equatorial Guinea,
Gabon, Benin, Burkina Faso, Cte dIvoire, GuineaBissau, Mali, Niger,
Senegal, and Togo (9/1939)
14

SADC

South African Development
Community

Angola, Botswana, D.R Congo(1997), Lesotho,Malawi, Mauritius(1995),
Mozambique, Namibia (1990), Swaziland, Tanzania, Zambia, Zimbabwe,
South Africa(1990), Seychelles(20042007) and Madagascar(2005)
(1980)
15
SACU South Africa Customs Union South Africa, Botswana, Lesotho and Swaziland. (1970) 4
EAC East African Community Burundi (2007), Kenya, Rwanda (2007), Tanzania and Uganda. (2001) 5
COMESA

Common Market for
Eastern and Southern
Africa
Burundi, Comoros, D.R Congo, Djibouti, Egypt(1999), Eritrea, Ethiopia,
Kenya, Libya(2006), Madagascar, Malawi, Mauritius, Rwanda,
Seychelles(2001), Sudan, Swaziland, Uganda, Zambia,
Zimbabwe.(1994)
19

IGAD

Intergovernmental
Authority on Development
Djibouti, Ethiopia, Eritrea (1993), Kenya, Somalia, Sudan, Uganda.
(1986)

7

UMA Arab Maghreb Union Algeria, Morocco, Tunisia, Libya, Mauritania (1989) 5

Countries with dates in brackets are nonfounding members. Date of entry into regional community. Bold dates in
brackets represent creation dates. Countries in Italics have withdrawn their membership. * Founded in 1985 but became
effective only by 1999. Num: Number.

Appendix 2. Selected regions and countries(based on data availability)

Regions Member states Number
ECOWAS
(CDEAO)
Benin, Burkina Faso, Cape Verde(1976), Cte dIvoire, Gambia, Ghana, Guinea, GuineaBissau, Mali,
Niger, Nigeria, Senegal, Sierra Leone and Togo.(5/1975)
13

UEMOA Benin, Burkina Faso, Cte dIvoire, GuineaBissau (5/1997) , Mali, Niger, Senegal, and Togo. (1/1994) 8
107

ECCAS
(UDEAC)*
Angola(1999), Burundi, Cameroon, Central African Republic, Chad, Gabon, Congo and Rwanda.( 1985)

8

CEMAC Cameroon, Central African Republic, Chad, Congo and Gabon. (1999) 5
CFA ZONE

Cameroon, Central African Republic, Chad, Congo, Gabon, Benin, Burkina Faso, Cte dIvoire, Guinea
Bissau, Mali, Niger, Senegal, and Togo.(9/1939)
13

SADC

Angola, Botswana, Lesotho, Malawi, Mauritius (1995), Mozambique, Swaziland, Tanzania, Zambia and
South Africa(1990). (1980)
10

SACU South Africa, Botswana, Lesotho and Swaziland. (1970) 4
EAC Kenya and Tanzania. (2001) 2
COMESA
Burundi, Egypt(1999),Kenya, Madagascar, Malawi, Mauritius, Rwanda, Seychelles(2001), Sudan,
Swaziland and Zambia.(1994)
11

IGAD Kenya and Sudan. (1986) 2
UMA Algeria, Morocco and Tunisia. (1989) 3

Countries with dates in brackets are nonfounding members. Date of entry into regional community. Bold dates in
brackets represent creation dates.

Appendix 3. Selected regions based on testable hypotheses and correlation analysis

LegalOrigin Regional Origin Type of Integration Number
French CivilLaw
Regions

CEMAC
UEMOA
CFA ZONE
Monetary and Economic
Monetary and Economic
Monetary
5
8
13
English CommonLaw
Regions
SADC
COMESA
Economic
Economic
10
11

108

Appendix 4. Correlation Analysis

Financial Intermediary Development Law Control Variables Instrumental Variables
Depth Efficiency Activity Size Reg.
Qua

Rule
of
Law
Infl.

Tra
de

Popg
Gov.
Exp.

GDPg
GDP
pcg

ECO
WAS

UE
MOA

EC
CAS

CE
MAC

CFA
Zone

SA
DC

SA
CU

E
A
C
CO
ME
SA
IGAD

UMA M
2
Fd
gdp
Bc
bd
Fcfd Pcrb
Pcrb
of
Dba
cba
1.00 0.97 0.07 0.00 0.74 0.59 0.39 0.40 0.63 0.06 0.30 0.46 0.33 0.05 0.05 0.14 0.20 0.34 0.28 0.37 0.03 0.00 0.02 0.21 0.07 0.35 M2
1.00 0.04 0.06 0.80 0.68 0.46 0.48 0.68 0.05 0.32 0.49 0.37 0.01 0.10 0.21 0.27 0.34 0.29 0.44 0.07 0.10 0.01 0.25 0.05 0.31 Fdgdp
1.00 0.87 0.40 0.42 0.25 0.19 0.00 0.11 0.23 0.01 0.07 0.09 0.08 0.08 0.21 0.15 0.18 0.31 0.19 0.07 0.09 0.13 0.03 0.03 Bcbd
1.00 0,53 0.67 0.28 0.30 0.10 0.08 0.23 0.04 0.04 0.09 0.07 0.00 0.10 0.08 0.07 0.14 0.01 0.27 0.09 0.13 0.05 0.02 Fcfd
1.00 0.93 0.51 0.61 0.62 0.06 0.10 0.41 0.24 0.02 0.07 0.16 0.16 0.27 0.24 0.31 0.10 0.20 0.03 0.10 0.04 0.34 Pcrb
1.00 0.45 0.57 0.53 0.05 0.05 0.35 0.26 0.03 0.05 0.18 0.16 0.23 0.21 0.29 0.18 0.34 0.03 0.04 0.04 0.25 Pcrbof
1.00 0.48 0.45 0.09 0.21 0.29 0.27 0.06 0.13 0.14 0.01 0.25 0.23 0.18 0.23 0.32 0.11 0.04 0.06 0.29 Dbacba
1.00 0.79 0.09 0.04 0.27 0.19 0.02 0.08 0.05 0.02 0.43 0.26 0.20 0.30 0.32 0.09 0.02 0.10 0.16 Reg.Qua
1.00 0.09 0.23 0.34 0.34 0.00 0.08 0.05 0.11 0.47 0.33 0.33 0.28 0.30 0.03 0.06 0.24 0.16 Rule of L
1.00 0.10 0.03 0.14 0.07 0.07 0.04 0.03 0.10 0.03 0.05 0.10 0.02 0.01 0.02 0.00 0.02 Inflation
1.00 0.40 0.37 0.01 0.08 0.16 0.20 0.43 0.26 0.20 0.31 0.35 0.15 0.05 0.19 0.02 Trade
1.00 0.33 0.22 0.01 0.30 0.29 0.15 0.01 0.26 0.23 0.29 0.08 0.02 0.03 0.30 Popg
1.00 0.02 0.06 0.11 0.13 0.19 0.27 0.31 0.25 0.50 0.00 0.03 0.03 0.08 Gov. Exp.
1.00 0.97 0.03 0.09 0.02 0.09 0.14 0.10 0.04 0.00 0.01 0.03 0.00 GDPg
1.00 0.09 0.15 0.01 0.10 0.20 0.14 0.02 0.01 0.01 0.02 0.06 GDPpcg
1.00 0.71 0.37 0.28 0.41 0.43 0.24 0.17 0.46 0.17 0.21 ECOWAS
1.00 0.26 0.20 0.71 0.30 0.17 0.12 0.32 0.12 0.15 UEMOA
1.00 0.75 0.30 0.16 0.17 0.12 0.04 0.12 0.15 ECCAS
1.00 0.53 0.23 0.13 0.09 0.24 0.09 0.11 CEMAC
1.00 0.43 0.24 0.17 0.46 0.17 0.21 Fr. ZONE
1.00 0.57 0.12 0.14 0.14 0.17 SADC
1.00 0.08 0.02 0.08 0.10 SACU
1.00 0.10 0.47 0.06 EAC
1.00 0.36 0.18 COMESA
1.00 0.06 IGAD
1.00 UMA

M2: Monetary Base. Fdgdp: Financial system deposits. Bcbd: Bank credit on Bank deposits. Fcfd: Financial system credit on Financial system deposits. Pcrb: Private domestic credit by deposit
banks. Pcrbof: Private domestic credit by financial institutions. Dbacba: Deposit bank assets on central bank assets plus deposit bank assets. Reg.Qua: Regulation Quality. Infl: Inflation. Popg:
Population growth. Gov.Exp: Government Expenditure. GDPpcg: GDP per capita growth. CEMAC: Economic and Monetary Community of Central African States. UEMOA: Economic and
Monetary Community of West African States. CFA ZONE: FRANC ZONE. SADC: Southern African Development Community. COMESA: Common Market for Eastern and Southern Africa.
ECOWAS: Economic Community of West African States. ECCAS: Economic Community of Central African States. SACU: Southern African customs Union. EAC: East African Community.
IGAD: Intergovernmental Authority on Development. UMA: Arab Maghreb Union.

109

ECONOMIC CONSTITUTION IN PRACTICE:
THE ENFORCEMENT OF COMPETITION LAW IN ALBANIA

Petrina BROKA
University of Tirana, Faculty of Law, Department of Civil Law, Albania
petrinabr@gmail.com
Ermal NAZIFI
Albanian University/Albanian Competition Authority Albania
1

enazifi@gmail.com

Abstract:
Proper enforcement of competition rules is one of the pillars of the free market economy of Albania. It is
also a very important factor for the integration of Albania in the EU. Therefore these rules have been considered
as an economic constitution. The effective enforcement of competition rules can be done by public institutions
via administrative procedures (public enforcement) or directly by the parties affected from breaches of
competition law by actions in courts (private enforcement). In the case of Albania, public enforcement has been
in a process of continuous evolution. On the other hand there have been no cases of private enforcement so far
despite the potential of such cases especially in actions for damages following on the decisions of the Albanian
Competition Law. However more effort is needed in such areas as the collection of fines, acceptance of
recommendations from the part of the government, etc. For a fully effective implementation of competition rules
all institutional stakeholders, the courts and businesses should be engaged in order to contribute positively for
the development of the Albanian economy.

Keywords: Albanian Competition Authority, competition law and policy, private enforcement, public
enforcement, advocacy.

JEL Classification: K21, L40.

1. Introduction
Competition rules have been considered as one of the most important aspects of the economic
constitutional law in the EU
2
. Indeed they have been considered as an economic constitution
3
. The Albanian
lawmakers seem to agree with this idea, since in the preamble of the law On protection on competition they
refer specifically to Article 11 of the Constitution
4
. This article establishes that the Albanian economy is based on
a market economy and on freedom of economic activity. Therefore effective enforcement of competition law is to
be considered as a crucial element for the development of Albania as a new market economy. Enforcing
institutions of competition rules are like the referee in a football match to make sure that the players stick to the
(competition) rules of the game. In the competition law the aim of the game, is the establishment of a free and
efficient market. In the case of Albania the rules of the game are prescribed in the law On protection of
competition
5
and the referee is the Albanian Competition Authority (ACA) as well as the court in the private
enforcement cases.
Another strong motivation for implementing competition law in Albania is the European integration
process which is based in Stabilization and Association Agreement (SAA)
6
. This agreement, aims to support

1
Disclaimer: The views, opinions, positions or strategies expressed by the authors in this paper, are theirs alone,
and do not necessarily reflect the views, opinions, positions or strategies of Albanian Competition Authority.
2
For a detailed analysis of Competition law as economic constitution law See (Cruz 2002)
3
(Kllezi 2004) page 3.
4
(Qendra e Publikimeve Zyrtare 2009)
5
The law no. 9121, dated on 07.28.2003 On competition protection, Fletorja Zyrtare No. 71, (2003), pages 3189-
3211.
6
Albania has signed the SAA, in June 2006. On 1 April 2009, the SAA has entered into force after the ratification of
this agreement, from the Albanian Parliament, European Parliament and the Parliaments of all member states of the
European Union.
110

Albanias economic transition, and integration into the EUs single market. A very important part of the SAA is the
implementation of a competition law and policy based on EU standards
7
.

2. The competition rules
Competition in Albania is regulated by the law no. 9121, dated 28.07.2003 On Protection of Competition
(LPC). It is enforceable on all sectors of the economy and for all undertakings, private and public, that exercise
their activity in the territory of the Republic of Albania. This law is applicable as well, for enterprises that exercise
their activity outside the territory of Albania but their activity affects the Albanian market.
8

An effective enforcement of competition rules can be achieved mainly in two ways. One way is through
the enforcement of competition rules from a public body. In the case of Albania, this is done from the Albanian
Competition Authority. It is an independent body composed of two organs the Competition Commission the
decision making body and the Secretariat the executing and investigative body. The Authority can be
considered successful on its enforcement activities. It has conducted many investigations and fined different
companies for breaches of competition law in considerable amounts. It has also conducted sectorial inquiries
9

and reviewed from the competition law point of view many laws in the light of its competition advocacy duties
10
.
The second possibility is the private enforcement of competition law from the courts. The law On
protection of competition has established the right of individuals and companies to file a suit if they can be or
have been harmed from anticompetitive behavior of other players in the market. This can be done independently
from the public enforcement procedures started from the Albanian Competition Authority.
11
Unfortunately to the
best knowledge of the authors
12
there has not been any case of private litigation in Albania despite the potential
for such cases following on the decisions for breach of competition rules stipulated from the Albanian
Competition Authority.
In this article we will focus on the analysis of both aspects of competition law enforcement and analyze
some of the key cases on competition law from the Albanian Authority and the Courts.

2.1. A short history of competition rules in Albania
During the communist regime (1944 1900), Albania has witnessed one of the most controlled and
planned economies in Europe. According to Amik Kasoruho
13
, a famous Albanian writer and translator:

the key methods of this novelty [communism], that it was using to impose itself were not
inferior to medieval methods, such as; disappearance of the freedom of speech and
thought, elimination of any movement outside the framework of the communist party,
nationalization and prohibition of private property, prohibition of any economic activity
outside the frame of state production, canalization of societal production on the benefit of
the state..

It is needless to say that during these years there was no room for free and effective competition and
therefore there was no need on protecting it. After the 1990s Albania started its transition phase to a fully
functional market economy. In the end of 1995 the first law on competition was approved from the Albanian
Parliament
14
. This is the first, most significant step forward in the field of competition law in Albania. This law
established the first competition protection institutions that were the Directorate of Economic Competition and the
Competition Commission. These two institutions were not independent bodies. The Directorate
15
was part of the

7
See (Broka, and Lai, The evolution of Albanian Competition Law and Policy and its implementation, as a
challenge for the EU integration 2010) for a detailed analysis of the importance of competition rules for the EU integration of
Albania.
8
LPC, Article 2.
9
Based on Article 41 of the LPC the ACA, can start a general investigation procedure.
10
See (Autoriteti i Konkurrencs 2006) pp. 33-40 as well as (Autoriteti i Konkurrencs 2011), pp. 26-31, for the 2010
advocacy activities.
11
LPC, Article 65(2).
12
No information neither on the site of the Albanian Competition Authority www.caa.gov.al nor in the site of the
Tirana District Court http://www.gjykatatirana.gov.al .
13
(Kasaruho n.d.)
14
The law no. 8044, dated on 07.28.2003 On competition, Fletorja Zyrtare No. 27, (1995), page 1153.
15
Albanian Council of Ministers, Decision No. 248, date on June 14, 1997, For the functioning and organization of
the Directorate on Economic Competition.
111

Ministry of Trade and Economy structure while the members of the Commission were appointed from the
minister in charge for trade. The law included provisions on both antitrust issues and unfair competition.
This law was in force for almost 8 years but its implementation in practice was not considered enough to
fulfill the European standards in the field of competition law and the law was not properly enforced in practice
16
.
The bodies that were in charge of implementing it were considered weak in order to implement the duties that
came from the stabilization and association process
17
.
In a report of the European Commission
18
it was stated that:

The development of competition policy in Albania remains at its initial stage, despite the
existence of basic legislation since 1995. Implementation is extremely weak, due in
particular to the clearly insufficient resources devoted to this area.
A serious effort will be necessary in this field if Albania is to be able to take on and
implement obligations under an SAA. The de facto situation in Albania, where the grey
economy remains very important, does not allow fair competition between companies
belonging to the formal and the informal economy. This has a serious detrimental effect on
companies willing to invest and legally operate in Albanian. Albania will need to make
considerable efforts in this area in order to be able to properly implement the provisions of a
future SAA..

It was clear that was a pressing need for a deep reform on competition law in Albania, this not only in
order to cope with the obligations deriving from the relations with the European Union but, most importantly, to
improve the situation of business entities willing to play by the rules. This reform needed to reflect the acquis
communautaire, and create an independent body in charge for the implementation of the law. The new law On
protection of competition, was approved from the Albanian Parliament in 2003. As mentioned before, it created
an independent authority in charge of the implementation of the law
19
. It was focused only on prohibited
agreements, abuse of dominance and merger control. It does not contain provisions on unfair competition
20
and
state aid
21
.
The LPC was amended in 2010
22
, in order to improve its application and to bring it more in line with the
EUs acquis. Different amendments were done in the field of agreements and exemptions, abuse of Dominance,
merger control, fines, procedures, etc
23
. A major novelty was the introduction of liberalization clauses similar with
article 106 of the Treaty on the Functioning of the European Union. In this way the LPC is applicable in cases of
public undertakings, as well as undertakings that have exclusive or special rights.

2.2 The Albanian Competition Authority
The Authority is structured in two parts:
the executive and investigative part which is the Secretariat of the Authority,
the decisionmaking body which is the Competition Commission.

16
See Weishaar, and Milaj 2007, p. 19 and (Kllezi, Albania: Introducing competition law 2009)
17
See (Nair 2006) p. 31
18
See (Commision of the European Communities 2001) p. 24-25.
19
The details of the stipulations of the law in the fields of prohibited agreements, abuse of dominance, merger
control etc fall outside the scope of this article. For more information please refer for example to (Dajkovic 2004), (Lekaj, and
Skendaj 2009), etc.
20
Unfair competition is regulated by Article 638 of the Albanian Civil Code. The law no. 8044 On competition (now
abolished and replaced by the LPC) also contained provisions on unfair competition.
21
The law no. 9374, dated on 21.04.2005 and approved on 21.04.2005 On State Aid, Fletorja Zyrtare No. 36,
(2005), page 1311.
22
The law no. 10317 dated on 16.09.2010 On some amendments in the law no. 9121, dated on 28. 07. 200 3 On
Competition Protection.
23
For a brief review in English of the amendments See (Gruda, Melani, and Bushati, Application of Competititon
Policy and Law in Small and Transition economies- Albanian Case 2011), for a detailed analysis in Albanian, See (Broka,
and Nazifi, Risit n t drejten shqiptare t konkurrencs 2011)
112

The structure of the Secretariat is approved by the Parliament of Albania
24
. All members of the secretariat
are civil servants and their status is regulated by the law on civil servants
25
. This assures a greater level of
stability and independence of the staff.
On the other hand the independence of the commission is a question of an utmost importance. The law
states, that the members of the commission should be elected from the Parliament by a simple majority. The
parliament will consider two candidates for each position of the commission and chose one of them. In order to
have a politically balanced Commission one member is nominated from the president of Albania, two members
are nominated from the Council of Ministers and two members are nominated directly from the Parliament. In the
practice of the Parliament, the two nominations have been proposals from the opposition party. In order to be a
member of the Commission, a minimum of 15 years of experience is needed. The law also requests that the
candidate should be a lecturer at university or hold an academic degree in the fields of law or economics
26
.
Actually the members of the commission are three economists and one lawyer. One of the positions is still
vacant.
The actual formula has been criticized because of the possibility of control over the majority the
parliament by the government. In (Project against corruption in Albania (PACA) 2010)
27
is stated that:

Given the appointment process for the CC [Competition Commission], in the Albanian
context the effective control of the Parliament by the Government raises some doubts over
the Commissions real independence. In theory at least, the ability of the government
majority to determine four of five CC members may create potential for decisions that favor
business interests close to those that control the government, or conversely damage
business interests close to opposition forces.

In order to ensure a better independence of ACA, it is proposed that other institutions should be included
in the process of the proposing of the members of the Commission. Also more lawyers should be included in the
Commission.

To ensure the operational independence of ACA, it may be wise to consider an
appointment process that is broader in the sense of the institutions proposing members (for
example including the Constitutional Court or other institutions of key importance), and in
which the required education and professional experience of the CC members is made more
stringent. The expert believes specifically that the law should alter professional
requirements of members to try and ensure a higher representation of lawyers in the
Commission, and to require an educational background on European competition law. This
would enhance the ACAs ability to defend its decisions (if necessary in court and against
enterprises enjoying the services of the best lawyers), as well as assisting communication
with other regulatory bodies, as well as with other the countries counterparts institutions
28
.

3. The activity of ACA: achievements and challenges
We have seen that the most important player in the field of competition law is the Albanian Competition
Authority. Its activity is very important for the whole functioning of the competition protection system. Since the
establishment of the ACA, the Albanian Competition Commission has taken a total of 210
29
decisions and it has

24
In the law it was foreSeen that the structure of the authority, is approved by the commission. But this provision
was amended by the law No. 9584 dated 17. 07. 2006 On salaries, reward and structures of Constitutional independent
institutions and other independent institutions established by law.
25
The law No.8549, dated on 11.11.1999 Statusi i npunsit civil, Fletore zyrtare No.36, page 1381.
26
This was a new criterias were introduced with the law no.9499, dated 03.04. 2006, on Some amendments in the
law 9121, date 28.7.2003 on the protection of competition, Fletore Zyrtare Nr.37, page: 1160.
27
(Project against corruption in Albania (PACA) 2010).
28
Ib id.
29
According to the website of the Albanian Competition Authority the latest decision is decision no. 210, Dated
21.12. 2011.
113

fined 30 undertakings and one individual with a total level of fines of 1.093.263.130 lek (approximately 7.5 million
Euros)
30
.

Table 1. Number of decisions of ACA

Year
T
o
t
a
l

N
o
.

o
f

d
e
c
i
s
i
o
n
s

C
o
n
c
e
n
t
r
a
t
i
o
n
s

A
b
u
s
e

o
f

d
o
m
i
n
a
n
c
e

P
r
o
h
i
b
i
t
e
d

a
g
r
e
e
m
e
n
t

(
c
a
r
t
e
l
s
)

E
x
e
m
p
t
i
o
n

o
f

a
g
r
e
e
m
e
n
t
s

B
y

L
a
w
s

R
e
c
o
m
m
e
n
d
a
t
i
o
n
s

F
i
n
e
s

d
e
c
i
s
i
o
n
s

O
t
h
e
r

2004 13 2 6 1 4
2005 17 2 3 1 11
2006 14 4 1 1 8
2007 25 9 1 3 4 2 5 2
2008 29 11 1 1 4 5
2009 36 8 1 2 1 2 10 2 10
2010 34 6 3 2 7 5 2 9
2011 42 10 1 6 5 1 20
Total 210 50 6 8 2 31 31 12 71

Source: (Autoriteti i Konkurrencs 2011) up to the year 2010.The analysis of decisions during the year 2011 was
done from the authors)

The public enforcement of competition law has been evaluated very positively from the European Union,
in the progress reports of recent years. The EU has declared that Albania has done some progress
31
,
progress
32
or good progress
33
, scoring high compared to other institutions. In the Transitions Report 2011
34
, it
is stated that the implementation of competition law has been strengthened. Also locally the Albanian
Consumers Protection Office (ZMQ), a consumers association has awarded twice the Albanian Competition as
best public institution in consumer protection.
However despite this success in the public enforcement of competition law, there are different problems
that need to be addressed. The main problem remains the (non) collection of fines imposed from the Albanian
Competition Authority
35
. These fines are to be collected from the Bailiffs office.
As mentioned below one of the duties of the ACA is the so called competition advocacy
36
. The Albanian
Competition Authority has reviewed different legal acts in order to exam their effect on the competition in the
market. After reviewing these acts, ACA issues a decision on recommendations that is directed to different
institutions such as the government, the Parliament, regulatory bodies, etc. These recommendations are not
obligatory. Unfortunately these institutions can simply ignore those recommendations.
According to the PACA assessment
37
:

30
See (Autoriteti i Konkurrencs 2011) p.52. ACA can put fines to a level of up to 10% of the previous year annual
turnover of the companies.
31
See (European Commision 2007)p. 29, and (European Commision 2011), p 35.
32
See (European Commission 2005), p. 42, (European Commision 2006) p. 27, and (European Commison 2008) p.
30,
33
See (European Commision 2009) p. 29.
34
See (European Bank For Reconstruction and Development 2011), p. 111.
35
See (Autoriteti i Konkurrencs 2011), page 52. According to ACA officials declarations during personal interviews
the situation hasnt changed in 2011.
36
See footnote no. 9 of this article.
37
(Project against corruption in Albania (PACA) 2010), p.18.
114

The ability of the Government to ignore Commission recommendations entirely in such
cases appears to imply wide space for corruption in the form of collusion of persons that
control the government with business interests to ensure unfair favorable market conditions
for the latter. The weakness of the Commission in this respect appears to have led to its
resignation from attempts to assert itself, most recently relating to the recent Government
decision to issue only one 3G mobile license

Another major issue is the length of judicial review proceedings. Although ACA has issued some
important decisions against major companies, they are still being reviewed from the courts of different levels. In
one case although the decision has been taken from the court, the text of the decision and the arguments are not
yet available after more than a year. This situation can be improved by the reform on the administrative system
of justice in Albania which will establish a specialized Administrative Court system and new, faster procedures
for judicial review
38
. Unfortunately, it is still a draft and due to political conflicts, its voting has been blocked
because it is required that it has to be approved by a qualified majority of 3/5 of the Albanian Parliament
Members
39
.
Despite the fact that anyone, even anonymous complainants, can address the Competition Authority, still
there is a lack of complaints from individuals or companies, on matters of competition law and many important
investigations start ex officio. This shows that there is a little awareness on the importance of the issues that can
be tackled through the competition law and the instruments of the ACA can use for an effective enforcement of
the law. Therefore further steps are to be taken in order to improve the competition culture in Albania. Another
important aspect of the work of the ACA should be the promotion of the leniency program
40
. Despite the success
that these programs have in other jurisdictions, in Albania there is not yet any application for leniency. This must
be connected to the general economic climate in Albania and the fear of retaliation from competitors and
business partners alike.
Representatives of ACA have always declared that the main objective of their work is not to protect the
competitors but competition and therefore in order to limit the harm of companies and consumers they are
interested to see more cases of commitment decisions. One of these cases is the TBills market case
41
when
Raiffeissen Bank (RZB) offered commitments after the allegations for a possible exploitative abuse case in the
commissions for the purchase of Tbills through this bank. This was a winwin decision since the Authority
could not prove these allegations and accepted the commitments offered from RZB, to cap the commission and
to promote the investment on tbills alongside the investment on deposits.
The Albanian lawmakers should consider the introduction of more sanctions of personal nature such as
directors disqualification or even criminal sanctions
42
. And the ACA should consider using more often the
individual sanctions based on article 78 of the LPC.
Of course these measures should be accompanied with further practical and theoretical training and
motivation for the staff of ACA as well as an increase of the staff.
43
More financial resources from donors as well
as from the government should be used to promote scholarly studies of competition law in Albania. In EU
countries and US, the gap between the practical application of competition law and scholarly research is not
problematic since both practitioners and academics publish widely on competition law and economic issues. In
many occasions they switch from one position to the other and in this way they can better contribute to this
discourse from both sides. But in the case of Albania there are few academics that have as a main research area
competition law or competition policy
44
.

38
See (Ministria e Drejtsis 2010)
39
Article 81 of the Albanian Constitution. See (Qendra e Publikimeve Zyrtare 2009), p. 19
40
The word leniency program is used to describe all programs that offer either full immunity from sanctions incurred
for the involvement in a cartel or a significant reduction of their scope or level in exchange for a freely volunteered disclosure
of information on the cartel. See inter alia (Autoriteti i Konkurrencs 2006) p. 56.
41
See decision of ACA no.142, dated on 15.03.2010.
42
For more discussion on this topic See (Broka, and Nazifi, Are criminal punishment necessary for proper
enforcement of comnpetition law in Albania? 2010).
43
See (European Commision 2011), p. 35.
44
According to (Colino 2011): The gap between the academic study of competition law and the practical
application of the law is a narrow one, and many practitioners contribute regularly to the literature of the subject, p.
18. On the other hand, there is still no proper book on competition law or in industrial economics in Albanian language. It is
studied in bits and pieces in Microeconomics books, EU Law and Business Law books. There are also few articles
115

4. Private enforcement of competition rules
Another major problem of the public enforcement of competition law is that the ACA cannot offer any
compensation to competitors or the consumers from damages suffered as a consequence of a breach of
competition law. But as mentioned before, the law, in principle, establishes a system of private enforcement of
competition law, in parallel with the public system of competition law enforcement. Based on the Article 65 of the
LPC, a person impeded in its activity, by a prohibited agreement as referred in Article 4 of this law, or by an
abusive practice as referred in article 9 of this law, may take an action in court and request:
a. removal or prevention of the practices restricting competition which risks to be carried out or are carried
out in contradiction of these articles;
b. reparation or compensation from damages caused by these practices, in accordance with relevant
provisions of the Civil Code of the Republic of Albania.
The case can start even if a public enforcement procedure is ongoing (the ACA is investigating in the
same case). The parties have two options: In the first place they can wait for the ending of the investigation of
the authority and then proceed with the private action in the court (follow on actions). Secondly, they can go
directly to court and submit their evidence on breaches of competition law that have affected them or their
business (stand alone action). Usually, it will be easier to bring a case following on a decision of the Authority
which can be obliged by the court to disclose all information that they have on the case even if it constitutes
commercial or trade secret
45
. But on the other hand it might take different months even years before a final
decision of the competition authority. This aspect should be taken in account when considering which strategy to
follow (stand alone vs. follow up suits).
In order to ensure removal or prevention of the obstacle to competition, the District Court of Tirana may
rule, at the petitioner's request, in particular, that:
a. contracts are null in whole or in part, with a retroactive effect;
b. the undertaking at the origin of the obstacle must conclude contracts on market terms with the
undertaking impeded under the conditions usually pertaining to the business concerned.
The successful party may recover attorney fees and other expenses made for the trial. This might be an
incentive to start private actions. However this might turn to a negative aspect if the respondent has deep
pockets, and can hire best law firms and consultancies and threat the plaintiff that it will suffer a lot of damages
from the recovery of the attorney fees.
To date, there is no information available on any action brought forward based on the Article 65 of the
LPC (no information from ACA as well as the Tirana District Court). This comes from several reasons especially
the lack of awareness of the legal community as well as lack of awareness from the public about this tool. Other
factors are length of proceedings, lack of credibility of the judiciary
46
, etc.
Even some judges do not have enough knowledge about this topic.
47
Specific training on competition law
should be provided for judges in order to improve the situation.
On the other hand also the civil procedures do not facilitate this process. For example there are no clear
provisions for class or representative actions
48
.

5. Case study: The investigation in the wheat flour market
After major public concern the Albanian Competition Authority Started an ex officio investigation in the
Wheat flour production and grain import destined for the production of bread.

published in international journals. See for example (Dajkovic 2004), (Kllezi, Albania: Introducing competition law 2009)
(Gruda, and Milo, SMEs development and competition policy in Albania 2010), etc.
45
See article 224 of the Albanian Civil procedure Code.
46
According to Business anti corruption portal: Corruption in the Albanian judicial system is widespread, as
assessed by several sources See, http://www.business-anti-corruption.com/ar/country-profiles/europe-central-asia/albania-
version-3/corruption-levels/judicial-system/
47
For more See Decision of the Hight Court No.337, dated on 29.07.2010. http://www.gjykataelarte.gov.al/. In this
case Gjirokastra District Court and the Supreme Court of Albania apparently have no knowledge of the fact that unfair
competition is out of the scope of the LPC which deals only with prohibited agreements, abuse of dominance, merger
control and liberalization. See also footnote 19 of this article.
48
Currently this issue is under discussion in EU level. It is expected that the Commission will adopt a communication
in regard of collective redress in EU, after the public consultation held in 2011. For more information on the initiatives of DG
Competition in the field of actions for damages check http://ec.europa.eu/competition/antitrust/actionsdamages/index.html
116

During the years 20052006, the wheat market sale has been very concentrated. From the analysis of
market shares results that for the years 20052006, the five main competitors, altogether own almost 100% of
the market.
The HHI index in the year 2005 was 2,765, following a decrease in the year 2006 and again falling to
2,036 during the year 2007. The level of concentration has decreased from year to year by achieving a
proportional share during the first eight months of the year 2008 between two enterprises. However, the level of
market concentration at 1,842 in that year is still high.
From the analysis of wheat flour sales market for bread production resulted that this market presents the
character of an oligopolistic market with three enterprises with consolidated market shares during the years
20052008.
From the down raids, performed by the Secretariat of the Competition Authority on date 22.01.2009 at the
premises of one of the enterprises (Alpha Company
49
) it resulted that in the computers of the finance
department, various files containing info about transactions running between Alpha Company and another
company (Beta Company). These companies were the largest players in the market. They contained data on
joint imports during the year 2008, such as: quantities, prices, costs, custom taxes, VAT, custom clearance
payments.
The main findings of the investigation were:
These two enterprises that have a significant economic strength in the market of flour production and
sale for bread production, exchange information on the offer, therefore are knowledgeable on each
others offering strength,
These enterprises maintain accurate data on eachothers, quantities, prices, costs, custom taxes,
VAT, custom payments, custom clearance payments, etc.,
Share customs expenses, spedition expenses and other expenses,
Maintain accurate data on eachothers obligations (cashins and debit situations), data on amount of
wheat purchased and customs expenses,
Jointly own a very high percentage of the wheat import and sales as well as wheat production market,
own high technology and processing capacities, thus becoming a powerful factor in limiting free and
effective market competition,
These enterprises have sufficient market power to cause restrictions of competition, because the
degree of concentration, stemming from the considerable market shares. The countervailing power of
all the other competitors is smaller than that of Alpha and Beta. The countervailing power of the client
(small mills and bread producers) is very small. The enterprises have created stability over the years
regarding the market share and represent two of three main competitors (CR3) in all the markets
concerned.
What is more important, during the period of the agreement, the enterprises Atlas Sh.a and Bloja Sh.a,
have not demonstrated a competitive behavior in the flour production and sales market, because:
Referring to the tax bills of flour sales of the companies during one month, results that both companies
have applied the same price of the sale of flour,
These two companies follow the same trend of the sales price of flour for the period March to August
2008. On February 25 and 27 of 2008, these companies have increased the sales price of the flour
with the same index of 1.2613,
The written records of the estimates derived from tax authorities, turned out that these two enterprises
often applied the same sale price for the flour product during February 2008.

49
The two companies will be called Alpha and Beta
117

Figure 1. Level of prices of wheat flour during 2008

Source: Albanian Competition Authority.

The communication between the competitors followed by coordinated pricing strategies was considered a
prohibited agreement from the Albanian Commission. The Competition Commission concluded that the
enterprises did not compete in the relevant market, as the evidence and the analysis of relevant markets shows,
these enterprises coordinate market behavior terms of determining the sales price of the relevant products, and
by sharing the sources of supply (wheat imports).
Obviously both companies appealed this decision in Tirana District Court. In the case of one company,
he court decided on April 2010 to accept the action and the revocation the Decision of the Commission of
Competition Authority by a two to one majority. Up to now, this decision has not been yet finalized from the judge
although the dissenting opinion has been prepared.
In the case of the other company, Tirana District Court decided to accept the action and the revocation of
the Decision of the Commission of Competition Authority. The argument of the court was that there was no
forbidden agreement between the parties, the electronic evidence did not constituted an agreement and data
was kept for accounting purposes. The decision did not give detailed argumentation on these issues and it did
not say anything about the identical prices and the identical increase of the price index.
This case is important because of two main reasons. Firstly it showed that the court is facing a lot of
difficulties in analyzing competition cases because of the lack of skills or will to argument their decisions
thoroughly. Secondly, this case had enormous potential for private actions for damages suffered from clients and
competitors. But of course as mentioned before their countervailing power is low and they still have to cope with
the power of these two big players in the market.

6. Conclusions
Albania has entered in the free market system after suffering from one of the most planned and closed
economies in Europe for almost 50 years and a long transition period afterwards. One of the pillars of the
economy is a market characterized from free and effective competition. Albania has put in place a system of
competition protection combining public enforcement and private enforcement of competition law. The legal
framework is based in EU competition rules.
However in order to have a really free and effective competition much more efforts are needed. In the first
place all fines imposed from the ACA, should be collected. This would be a great tool for the advocacy of
competition. This will increase also the number of leniency applications. However it is important to issue
commitment decisions whenever it is possible. The penalties imposed should be more personal. They should not
only be directed to the company but to the individuals behind breaches of competition law. The introduction of
directors disqualification as well as criminals sanctions should be explored.
But it is very important for the work of the competition Authority to focus on Advocacy issues. The
government and other public institutions are not obliged to follow the recommendations of the ACA. But anyway
they should do their best in order to respect these recommendations. Commitment decisions should be used
whenever it is possible instead of only penalties decisions. This is very important in order to create a positive
image for the ACA. In this way, competition advocacy targeted to the public and the businesses would be easier.
Judicial review of competition decisions is a very important part of the puzzle. Judges need to be trained
in order to issue more argumented decisions that will help building on the jurisprudence of competition law in
30 , 0
35 , 0
40 , 0
45 , 0
50 , 0
55 , 0
60 , 0
Jan - 08 Shk - 08 Mar - 08 Pri - 08 Maj - 08 Qer - 08 Kor - 08 Gsh - 08
Level of prices of the sale of wheat flour 2008
ALPHA BETA
118

Albania. The new administrative justice system that is expected to be established in Albania will help for a faster
and more effective judicial review.
An important factor is the encouragement of private litigation in Albania. This requires a full study of the
legislative and policy issues in order to determine the necessary steps to be taken and the role of public
institutions in order to enhance this process.
Finally it is very important that research and study of competition law and competition policy in Albania is
encouraged. It will help to narrow the gap between theory and practice and it will involve all actors form public
and private sector, academia and judiciary. Only by joint efforts of all actors Albania will have a fully free and
effective competition and a developed economy where better products with cheaper prices can be delivered to
all consumers.

References
[1] Autoriteti i Konkurrencs. Fjalorth terminologjik i konkurrencs. Tirana: Aferdita, 2006.
[2] Broka, P., and Lai, A. 2010. The evolution of Albanian Competition Law and Policy and its implementation,
as a challenge for the EUintegration. Challenges of Albania's integration in European Union. Tirana: U.F.O.
University Press, 7589.
[3] Broka, P., and Nazifi, E. 2010. Are criminal punishments necessary for proper enforcement of competition law
in Albania? Crimminal law and economy. Tirana: University of Tirana.
[4] Broka, P., and Nazifi, E. 2011. Risit n t drejtn shqiptare t konkurrencs. Studime Juridike.
[5] Colino, S.M. 2011. Competition Law of the EU and UK. 7th edition. Oxford: Oxfor University Press.
[6] Commision of the European Communities . Report from the Commision to the Council On the work of the
EU/Albania High Level Steering Group, in preparation for the negotiation of a Stabilisation and Association
Agreement with Albania. Brussels, 2001.
[7] Cruz, J.B. 2002. Between Competition and free movement: the economical constitutional law of the European
community. Oxford Portland Oregon: Hart Publishing.
[8] Dajkovic, I. 2004. Competing to Reform: An Analysis of the New Competition Law in Albania. European
Competiiton Law Review, 2004: 734 740.
[9] European Bank For Reconstruction and Development. Transitions Report Crisis in Transition: The People's
Perspective. 2011.
[10] European Commision. Commision Staff working Paper Albania 2006 Progress Report. Brussels, 2006.
[14] European Commison. Commision Staff working Paper Albania 2008 Progress Report. Brussels, 2008.
[15] European Commission. Commision Staff working Paper Albania 2005 Progress Report. Brussels, 2005.
[16] Gruda, S., and Milo, L. 2010. SMEs development and competition policy in Albania. PECOB's Paper
Series.
[17] Gruda, S., Melani, P., and Bushati, B. 2011. Application of Competition Policy and Law in Small and
Transition economies Albanian Case. EuroEconomica, no. 4 (2011).
[18] Kasaruho, A. Albanian American Freedom House. http://www.aafhsite.com/apps/blog
/entries/show/6296704faraeligesisenukeshtezhdukur (accessed November 15, 2011).
[19] Kllezi, P. 2009. Albania: Introducing competition law. Concurrences, 2 (2009).
[20] . E drejta e Konkurrencs: Kurs pr shkolln e Magjistraturs. Geneve , 2004.
[21] Lekaj, R., and Skndaj, J. 2009. Albania. Enforcement of Competition Law.
119

[22] Ministria e Drejtsis. Relacion mbi projektligjin pr gjykimin e konflikteve administrative dhe organizimin e
drejtsis administrative. Report on Draft law, 2010.
[23] Nair, A. 2006. Albania. In Competition Regimes in the World: A Civil Society Report, edited by Pradeep S.
Mehta. Jaipur: Consumer Unity & Trust Society.
[24] Project against corruption in Albania (PACA). Preliminary assessment of the Albanian competition authority
for the purpose of anticorruption risk assessment. Technical Paper, Department of Information Society and
Action Against Crime, Council of Europe, 2010.
[25] Qendra e Publikimeve Zyrtare. Kushtetuta e Republiks s Shqipris. Tirana: Qendra e publikimeve
zyrtare, 2009.
[26] Weishaar, S.E., and Milaj, J. 2007. Ligji pr konkurrencn n Shqipri dhe koherenca e tij me acquis
communautaire: zbatimi i prbashkt i neneve 3(g), 10(2), 81 dhe 82 t Traktatit t Komunitetit Europian. E
drejta parlamentare dhe ligjore (Qendra e studimeve parlamentare), no. XL (2007): 428.

***

[27] Politika Kombtare e Konkurrencs. Tirana: Aferdita, 2006.
[28] Raporti Vjetor 2010 dhe Synimet Kryesore t Puns Pr Vitin 2011. Tirana, 2011.

120

A SEMANTIC INTERPRETATION OF THE VALUES OF SHALL IN
ECONOMICS ENGLISH AS TARGET LANGUAGE

Roxana GOGAVIGARU
Spiru Haret University, Faculty of Law and Public Administration Craiova, Romania
roxy_vigaru@yahoo.com

Abstract:
The aim of this paper is to quantify and analyse the meanings of shall in point of deontic and epistemic
values in a corpus of economics texts made up of financial issues of the Sectorial Operational Programme
Human Resources Development 20072013October 2007: Strategy, Financial Plan, Implementation, and
Partnership. Since modal verbs express the speakers attitude towards the utterance, it is very interesting to
investigate the occurrences of shall and analyse its values in the above mentioned corpus.

Keywords: deontic, epistemic, modal verbs, meaning, functional interpretation.

JEL Classification: G28, G00,

1. Introduction
Modals are a feature of English that makes it possible for speakers and writers to fit their statements to
the style required by particular settings. Words, sentences and phrases acquire content when we utter them on
particular occasions and what that content is may differ from one context to the next one, so it is the task of
semantics to describe all those features of the meaning of a linguistic expression that stay invariable in whatever
context the expression may be used. This category of verbs needs to be studied and understood by nonnative
speakers, as their use could be very problematic because they vary in form and type and they are among the
most challenging concepts.
Modals are very important because they involve communication about advice, about obligation or
permission and also about our interpretation of events, our judgments about what we think happened or is
happening, and modals also help us to express our decisions about what we think, about what we know and how
strongly we believe that our knowledge is correct.
The present study focuses on the uses of the modal verb shall in English as target language in point of
deontic and epistemic meanings. The corpus consists of economics texts made up of financial issues of the
Sectoral Operational Programme Human Resources Development 20072013October 2007: Strategy,
Financial Plan, Implementation, Partnership. Shall appears in our Economics corpus 63 times out of which 40 of
its occurrences with epistemic meaning and 23 with deontic meaning, although, according to Stefanescu it is
generally assumed that shall does not occur with epistemic meaning. In some of its appearances, depending on
the context and on the readers perspective upon the text, it may appear that instead of epistemic meaning, shall
is used deontically. Although traditional grammarians specify that shall is used to express simple futurity or
unstressed intention in the first person, and in the second and third person to express command, obligation,
promise we have come across a few examples that show exactly the opposite. In our corpus, the most frequent
construction containing shall is that in which the modal is followed by a bare infinitive (60.31% of all the cases
where shall appears), followed by the construction shall + passive infinitive (39.69%).
The fundamental problem of shall is that it can take on a number of meanings and in our case shall is
mostly used with three meanings: to describe present action, to impose obligation and to describe future actions,
where it may be replaced by will.
Used with third person subjects, shall suggests the speakers volition to give an order and it is stronger
than must as it does not only express an obligation, but also a guarantee that the action will occur (Maurizio
Gotti 2003:275). However, this use is considered archaic and authoritarian by Quirk and Palmer (Quirk et al.
1985:230; Palmer 1990:74).
In this matter we may consider the examples:

The Competition Council, acting as the Contact Point as regards State 1 aid, between the
European Commission on one side and Romanian authorities, State aids grantors and
beneficiaries on the other side, shall ensure the strict observance of the notification
requirements.
121

In addition, any information required by the Commission and by the World Trade
Organization regarding state aid schemes, individual state aids or de minimis aid shall be
provided according to the applicable rules.
The procurement of all contracts financed through the Structural and Cohesion Funds and
corresponding national cofinancing shall be done in compliance with EU legislation and
primary and secondary national legislation implementing the EU provisions on public
procurement.

In the above examples, shall is used deontically and it implies obligation, necessity and a certain
constraint. Unlike the cases where shall appears in the first person and where the source of constraint is very
often the speaker himself and the obligation seems to be undertaken by the subject himself , with third person
subjects, shall represents the speaker as determined to bring something about or prevent it (Stefanescu 1988:
189). In the first example it is a necessity for the Competition Council to ensure the strict observance of the
notification requirements as it is the Contact Point between the European Commission and Romanian authorities
and State aids grantors and beneficiaries and given the fact that this may be one of its duties, the meaning of
shall is very close to that of must.
As for the other two examples, the value of shall is still deontic, its purpose being that of imposing an
obligation. Firstly, some information regarding state aid schemes and individual state aids is needed and it must
be provided according to some rules which are applied. We may notice that the obligation is not imposed on the
subject of the sentence so it is not clear who owes the obligation. Still, in the same paragraph of our corpus
additional information is provided and by reading thoroughly the text we may find out that the subject of
obligation is represented by the SOP HRD Annual Implementation Reports.
It happends the same with the other example if we consider and interpret it as it appears in our corpus.
The meaning of shall is also close to that of must, that is imposing an obligation according to the EU legislation
and the example may appear in the form that is presented here:

corresponding national cofinancing must be done in compliance with EU legislation and
primary and secondary national legislation implementing the EU provisions on public
procurement.

The subject of the obligation is also unknown, so, like in the previous example, we do not know who owes
the obligation. Yet, the sentence may be reinterpreted as:

corresponding national cofinancing shall comply with EU legislation

In this case, the obligation is imposed to the subject of the sentence, so we do not need to find in the text
who owes the obligation.
Sometimes it is difficult to decide whether shall expresses futurity or it is used with deontic meaning and
even the context may lead to various interpretations as it may not be sufficiently clear. Let us consider the
following examples:

Attracting and retaining more people in employment, reducing unemployment and
inactivity, by increasing the demand and supply of labour, are key objectives of Romanias
HRD Strategy. The activities envisaged to be funded by the ESF shall aim at improving the
attractiveness of jobs and the quality of labour productivity, preventing exclusion from the
labour market, reducing regional disparities in terms of employment, unemployment and
labour productivity, especially in regions lagging behind.
Since youths and older workers unemployment rates are higher than for other groups, this
key area of intervention shall aim at facilitating progress in employment, whether it is first
time entry, a move back to employment after a break or the wish to prolong the active life.

Our first interpretation of the use of shall in these two examples is that it expresses epistemic meaning,
giving the possibility of replacing it with will and describing, in the first example, that the activities envisaged to be
funded by the ESF will aim at improving the attractiveness of jobs, considering all these the purpose of the
122

activities, and in the second example, the key area of intervention will aim at facilitating progress in employment,
this action being considered as a consequence of the fact that youths and older workers unemployment rates
are higher than for other groups.
The other interpretation of these two examples is marked by the deontic meaning of shall in both of them,
as it may be replaced by must denoting obligation:

The activities envisaged to be funded by the ESF must aim at improving the attractiveness
of jobs and the quality of labour productivity, preventing exclusion from the labour market,
reducing regional disparities in terms of employment, unemployment and labour
productivity, especially in regions lagging behind.
Since youths and older workers unemployment rates are higher than for other groups, this
key area of intervention must aim at facilitating progress in employment, whether it is first
time entry, a move back to employment after a break or the wish to prolong the active life.

In the first example, the value of shall may be interpreted as being deontic by taking into account the
context with particular reference to the sentence before, so in order to attract and retain more people in
employment, the activities must aim at improving the attractiveness of jobs and the quality of labour productivity.
The same happens with deontic shall in the second example where the fact that this key area of intervention
must aim at facilitating progress represents a consequence of the fact that youths and older workers
unemployment rates are higher than for other groups, the value of shall expressing a certain constraint upon the
subject of the sentence.
The view of WILL and SHALL as markers of the future tense stated that SHALL is the form that occurs
with the firstperson subjects I and we while will occurs with second and thirdperson subjects; similar
statements were made for should and would. Evidence that this was simply not true of conversational English
was convincingly supplied in the 1920s by Fries (1925, 1927) and it is now generally accepted that will and
would regularly occur after I and we, even when used in a pure future sense. This does not, however,
exclude the use of shall with first person subjects in a futurity sense (although with other persons it is always
deontic) (Palmer 1995, 137).
The results of our analysis contradict Palmers theory about the use of shall with second and third person
subjects only with deontic meaning. Our corpus analysis shows that we have 34 appearances of shall expressing
futurity and 6 occurrences where it may be replaced with a present tense verb describing a present action or a
status. In our corpus, shall is mostly used in its epistemic meaning to express prediction or futurity which mark
the probability or predictability of a future state of affairs and it is necessary to highlight the fact that the type of
inference expressed indicates a high degree or probability close to certainty. The example from our corpus show
that, with this value, shall is most likely to be a stylistic device expressing the same basic meaning as that of will
(Ehrman 1966, 56). Let us take a look at the example below:

The active employment measures shall also include training programmes in the field of
entrepreneurship for the youth and long term unemployed and the inactive people, including
the rural area and subsistence agriculture, enabling them to become active on the labour
market, to get the basic knowledge on how to elaborate a business plan, the applicable
legislation they have to comply with, marketing issues, clinetorientated strategies.

In this appearance shall is used epistemically expressing futurity, its value being synonymous with that of
will. We may be sure of the value of shall used here given the fact that, earlier in the text, it is specified that these
types of measures were addressed in the Employment Act, which was enforced in 2002 and the specific
objectives, which include these active employment measures, will contribute to the achievement of the overall
objective of Priority Axis 5.
In the following example, shall is used with the same value:

The strengthening of the NGOs sector shall have positive effects on the delivery of social
services to family members who otherwise would not have had the possibility to enter the
labour market.

The fact that shall in the above example indicates a high degree of probability is strengthened by the
information offered by the context. We may find out, earlier in the corpus, that the strengthening of the NGOs
sector is included in the Key Area of Intervention 3 Development of partnerships and encouraging initiatives for
123

social partners and civil society, whose objectives are to support and strengthen the civil societys
representatives capacity to elaborate and implement project and to provide quality services.
In the example:

This key area of intervention is complementary to Priority Axis 1 which addresses the
general education system and where also schools for children with special education needs
shall benefit from the modernization process.

the epistemic value of shall + infinitive covers more or less the same semantic range as will + infinitive.
Since under this Priority Axis the targets are all those marginal groups who need special attention in a particular
way and that cannot be included in the main policies it is a clear fact that schools for children with special
education needs are included in these groups and, thus, will benefit from the modernization process.
In the following example, shall is used as a more formal variant of will in order to express futurity, so its
meaning is also epistemic:

The operation funded under this key area of intervention shall aim at eliminating
discrimination and discriminatory practices on multiple grounds including ethnic origin,
disability or age.

Earlier in the context it is stated that promoting equal opportunities on the labour market represents an
objective as the reality shows that there are cases of womens discrimination on the labour market and that
women returning to work after a break often experience direct discrimination and prejudice. So, in order to avoid
the reluctance of employers to invest in their training and career planning the operations purpose is to eliminate
discrimination and discriminating practices on multiple grounds including ethnic origin, disability or age.
Further on, we take a look at the following example where shall appear five times:

SOP HRD shall promote educational offers in schools as well as school programmes on
entrepreneurship, with a view to instil in students the entrepreneurial spirit, skills and
abilities (PA1, KA1). At the same time, SOP HRD shall support the individuals by ensuring
the necessary training in the field of entrepreneurship for the people willing to start a
business (PA3, KA1). Under this area of intervention, SOP HRD shall also ensure the
training of management levels and executive staff with a view to improve companies
management and their efficient action on the market. All of these will complement the
operations proposed under SOP IEC PA1 An innovative productive and ecoefficient
system, KAI3 Promoting entrepreneurial culture which shall support the entrepreneurs to
develop business incubators, shall provide consulting support, as well as support for
enterprises integration in supplier chains and clusters.

Taking into account the context in which shall appears we may interpret it as an epistemic modal with a
value similar to that of will expressing futurity very close to certainty. All the actions of SOP HRD are part of the
entrepreneurship development and, thus, may be considered as future plans and purposes of this programme.
However, outside the context and without knowing that the actions represent a planned programme of
development, we may interpret shall as being deontic by imposing an obligation to SOP HRD in order to achieve
the entrepreneurship development, its actions being a condition for achieving that goal. Thus, the sentences may
become:

SOP HRD must promote educational offers in schools as well as school programmes on
entrepreneurship
At the same time, SOP HRD must support the individuals by ensuring the necessary
training in the field of entrepreneurship for the people willing to start a business
Under this area of intervention, SOP HRD must also ensure the training of management
levels and executive staff
All of these will complement the operations proposed under SOP IEC PA1 An innovative
productive and ecoefficient system, KAI3 Promoting entrepreneurial culture which must
support the entrepreneurs to develop business incubators, must provide consulting support,
as well as support for enterprises integration in supplier chains and clusters.

124

We encounter the same situation in the following example:

Also, within the PA2 Linking life long learning with labour market, KAI Access and
participation in CVT, SOP HRD shall support crosssector activities in the field of
environmental training.

Here we may consider shall as being epistemic because it expresses a future action denoting possibility
very close to certainty, as Priority Axis 2 has already been established and it contains certain fixed purposes
which are very likely to happen.
As a conclusion, it is essential to mention that the results that arise from the corpus are not entirely
representative for the economics register where English is considered target language, being translated from
Romanian and should not serve as a basis for drawing general conclusions as the volume of the corpus is small
and it does not include all kinds of economics translated documents.

References
[1] Ehrman, M.E. 1966.The meanings of the modals in presentday American English. Mouton and Co.
Publishers.
[2] Gotti, M. 2003.Shall and will in contemporary English: A comparison with past uses.
[3] Palmer, F.R. 1990. Modality and the English Modals. Longman Linguistic Library. London: Longman.
[4] Palmer, F.R. 1995. Mood and Modality. Cambridge: Cambridge University Press.
[5] Quirk, R., Greenbaum, S., Leech, G., Swartvik, J.A. 1980. Grammar of Contemporary English, Longman.
[6] tefnescu, I. 1988. English MorphologyThe nominal and verbal categories, Facultatea de Filologie,
Bucuresti.
[7] Thompson, P. 2000. Academic writers putting modal verbs to work. Paper delivered at the ESSE5
Conference, Helsinki.

125

ON THE DETERRENT EFFECT OF INDIVIDUAL VERSUS
COLLECTIVE LIABILITY IN CRIMINAL ORGANIZATIONS

Laetitia HAURET
Centre dEtudes de Populations, de Pauvret et de Politiques SocioEconomiques/International Network for
Studies in Technology, Environment, Alternatives, Development,
Differdange, Luxembourg
laetitia.hauret@ceps.lu
Eric LANGLAIS
Nancy University, EconomiX and CEREFIGE, France
Eric.Langlais@uparis10.fr.
Carine SONNTAG
ICN Business School, Nancy, France
carine.sonntag@icngroupe.fr.

Abstract:
Our paper addresses the question of the deterrent effect of a monetary sanction associated to a
collective rather than an individual liability, when crimes are realized within a hierarchical gang (defined as a
criminal organization where the leader is a sleeping partner and several agents are active partners in the illegal
or criminal activity). We develop a model where the active gang members face contradictory incentives to
commit a crime. On the one hand, public authorities try to deter each gang member by imposing sanctions; on
the second, the leader of the gang try to keep his members enough active in the gang by threatening them of
private sanctions. We show that sanctions based on individual liability are inefficient to deter gangs members
since the leader overreacts on the public sanctions. In contrast, we show that a regime of collective liability,
allowing the judge to sanction the sleeping partner even if he hasnt realized any crime himself, can reach
enough deterrence of the members of the gang.

Keywords: Gangs deterrence, individual and collective liability, optimal law enforcement.

JEL Classification: K0, K42.

1. Introduction
There is a broad consensus in Law & Economics literature, since Beckers seminal work (1968), on the
relevance to apply severe penal sanction on isolated criminal. However, the optimal enforcement of law in the
context of criminal organization is still an open question. In fact, when applied to criminal organizations, the
analysis of the optimal design of law enforcement is fuzzed by the welfare implications of the structure of the
illegal market. Illegal activities develop on vertically integrated markets where a dominant firm aims at extracting
a surplus from smaller business firms (Konrad, and Skaperdas 1997, 1998, Poret 2002, Mansour et al. 2006).
Alternatively, the criminal organization emerges as a vertically structure, such as a Mafia or a gang, having the
power to regulate the entry in the criminal activity of individuals who has to pay a license to engage in illegal
business (Garoupa 2000). The criminal organization may then induce fewer offenses either due to the vertical
integration or to a cooperative or collusive behaviour of criminals (Reinganum 1993). Consequently, it has been
argued that mechanisms of internal control in criminal organization appear as close substitutes to public
punishment, and finally allows the public enforcer to undertake tougher law enforcement policies. Moreover,
Mansour and al. show that deterrence policy can have a pernicious effect on criminality. In fact, deterrence policy
can produce the split of criminal organization and therefore the increase of criminal output and the reduction of
criminal price (Buchanan 1973). However, Garoupa (2000) emphasizes that when the Mafia exerts costly
extortions on its members, it is not necessarily correct that tougher policies should be chosen by the public
enforcer and/or that the existence of a criminal organization results in a higher social welfare.
The economic literature on law enforcement generally holds that the issue of the allocation of sanctions
within a gang is irrelevant, given the vertical structure and/or institutional features of the market for crimes. It is
generally recognized that the criminal organization has the main characteristics of an agency relationship, where
the Principal (the leader or the Mafia) has to discipline the Agents (the dominated firms or the affiliated members)
and considers an incentive constraint when proposing some contractual arrangements. Thus, the conclusion
126

suggested by Shavell (1997) in his analysis of corporate liability also holds: the specific allocation of public
sanctions is irrelevant since they can always be redistributed between the leader and the Agents through the
contractual arrangement. Nevertheless, the allocation of sanctions matters as soon as one of the parties is
financially constrained (having a limited wealth) or the Principal has limited liability in controlling his affiliated
members. Differences in risk perception between the gang leader and the active members (Privileggi et al. 2001)
may be another reason explaining why the allocation of sanctions is not indifferent.
Here, we argue that the allocation of sanctions is not neutral in hierarchical criminal organizations. The
endogenous formation of gang has been investigated in the literature, focusing on the existence of social
interactions within gangs. Sah (1991), Glaeser et al. (1996), Patacchini, and Zenou (2005) develop an analysis
of the formation of criminal groups where individuals are influenced by their peers when deciding to commit
offenses. Criminologists (BaatinPearson et al. 1998, Thornberry et al. 1993) also show that the criminal activity
is more intensive in gangs than isolated. Gangs enroll agents that have a naturally greater propensity to commit
crimes, explaining that more crimes occur. In addition, the organizational context of the gang facilitates the
fulfillment of crimes, which increases the incentives of gang members to act illegally. Two mechanisms explain
this pure effect of the gang on crime intensity. Firstly, the costbenefit ratio of crime is decreased within a gang
(economies of scale, sharing of illegal human capital, division of labour). Secondly, interactions within a gang
create incentives to commit crimes. Gang members are in competition to obtain a leadership power, that
generally imply to commit more crimes (Herbert et al. 1997). Moreover, peers can reward or sanction the
members of the gang when these last ones deviate from a behaviour norm. If the objective of the gang is the
maximization of its reputation through a norm of realization of a given level of crime, members who would have
committed a level of crime below the norm may be sanctioned by the gang. As a result, more crime is committed
within the gang. As mentioned by Herbert et al. (1997, p. 56), a gang member is aggressor, because he
commits violent acts on his name or on the behalf of the group, and the victim, because if he doesnt act
violently, the gang which gives him the statute he needs the more, encounters the danger to lose his own statute
and its identity
50
.
Our paper is not explicit with the issue of gang formation, and instead, we suppose that the existing
hierarchy among the members is exogenously given. In a typical way, this corresponds for example to new forms
of international criminal organizations with a leader operating outside of the territory where the crimes will be
committed, but entering with local active criminals in a temporary association. In this setting, the paper
addresses more specifically the central question of the deterrent effect of a monetary sanction based either on
the individual liability or collective liability, when crimes are realized within a hierarchical gang, within which the
leader is a passive actor and command several active partners. Our framework extends the usual approach of
law enforcement to criminal teams when the leader of a gang has the opportunity to inflict a sanction to the gang
members when they refuse to realise a crime for the gang. In this context, the choice of the member of the gang
to commit a crime is twice influenced. On the one hand, the more the crimes benefit and the private sanctions
risk, the more he commits crime. On the other hand, the more the public sanction, the less he commits crime.
We show that sanctions based on individual liability, even if increased according to the principle of the
circonstance aggravante, are inefficient to deter gangs members, when the leader threatens them of a private
sanction
51
. Sanctioning the leader in addition to the sanction of members can lead to optimal deterrence of the
members of the gang. Our model is then an illustration of a case when sanctions based on collective liability are
more deterrent than sanctions based on individual liability. The paper is organised as follows. Section 2 presents
the model and the main assumptions. Section 3 shows the conditions of inefficiency of individual sanctions when
the leader of a gang can impose private sanctions to its members. Section 4 reveals the fundamental role of the
sanction of the leader in addition to the one of gang members to achieve a deterrent effect of public policies.
Section 5 discusses the various results and concludes.

50
Translation from the authors.
51
Realizing a crime within a group is considered as a circonstance aggravante in the French criminal code, witch
results in an increase of the individual sanction ladder compared to the one that punishes the same individual act committed
alone. For instance, theft is punished with 3 years of imprisonment and a fine of 45 000 euros when realized by an
individual criminal (Art. 311-3 CPN), it is punished with 5 years of imprisonment and a fine of 75 000 euros, when
committed by several persons acting as authors or accomplice, without constituting an organized gang (Art 311-4 CPN)
and finally, theft in organized gang is punished with 15 years of imprisonment and a fine of 150 000 euros (Art. 311-9
CPN) [Translation from the French criminal code (CPN)].
127

2. Model and main assumptions
Assume the existence of a hierarchical gang monopolizing the market for crimes, with a leader who does
not realize any crime and several members who are the active criminals. We consider a case where the gang
members and the leader act cooperatively, in the sense that they share the illegal benefit and comply with the
rules of the gang. The leader receives a part (1 ) of the illegal benefit captured by a member of the gang (b),
with the part of the benefit kept by the gang member (e]0,1[)
52
. The authorities and the gang leader do not
observe (neither ex ante nor ex post) the type of individual criminals, and just know that this type has a uniform
distribution function defined on [0,1].
Public authorities enforce an expected sanction (pf) to deter individual gang members to commit the crime
: p is the probability of apprehension and conviction that each member faces when committing a crime and f is a
monetary sanction imposed by public authorities in case of conviction; we will assume that f F, where F
represents the maximum possible sanction of the member of the gang (for example the own criminal wealth,
which is a basic assumption in the literature). On the other hand, the leader could be punished with a monetary
sanction sS where S is the maximum possible sanction for the leader.
Two polar cases will be investigated in the paper: on the one hand, the situation corresponding to a limit
case where S = 0; on the other hand, a case where the public authority can enforce a S > 0.
To begin with and as a matter of comparison, let us recall what are the basic predictions of a canonical
framework la Becker (i.e. setting =1 and o=0; see Becker (1968), and Garoupa 2000, 2001): in a competitive
criminal market, maximal fines are always optimal, and the equilibrium values

for the probability of sanction, the
level of deterrence and the expected sanction are given by
|
.
|
\
|
=
F
c
h
F
B
p
1
and
F
c
h F
B
p
B
b = = ,
implying as is wellknown that some level of underdeterrence is optimal: h
B
b < . Obviously, some restrictions
such as | | 1 , 0 e
|
.
|
\
|
F
c
h and F >1 give sufficient conditions in order that the equilibrium value for b
B
and thus
for p
B
are set in | | 1 , 0 . These conditions will be supposed to hold throughout the paper.

3. The failure of law enforcement with hierarchical gangs: an example
First, let us consider the case for an international criminal organization, for which the leader is neither a
native nor a resident of the country where the crime is committed, while the active members are (obviously)
residents. Thus, it is natural in such a case to set S=0, since when there exists no international mechanism of
law enforcement, or in absence of a high level of cooperation between national enforcers allowing at least
bilateral agreements concerning the extradition of criminals, then national enforcers have by no means the
opportunity to punish the leader (neither to seize his personal wealth, not to use prison sentences)
53
.
In the following paragraphs, we study the characteristics of a monopolized market for crime with a
hierarchical organization of the gang.

3.1 The members of the gang
Each risk neutral gang member decides to commit a crime or not depending on the monetary gain he gets
(b) and on incentives he receives from the authorities on one side and from the leader on the other side. On the
contrary, when the criminal refuses to commit a crime, the member suffers a private sanction imposed by the
leader . The cost of the private sanction for the criminal is the monetary equivalent of psychological or physical
hurts imposed by the leader of the gang to his deviant members, ie those who do not commit crime. Given
contrary incentives from public authorities and the leader of the gang, each member will commit a crime if:

o | | > + f) b ( p b ) 1 ( p (1)

52
We assume that is exogenously set. An endogenous determination of during a bargaining stage between the
leader and the other gang members would not affect the main conclusions of the paper, but instead would introduce
secondary difficulties due to a lengthy analytical resolution of the model. Given our assumption that the leader does not
observe the criminals types (b), is understood as corresponding to their mean type E(b), w.l.o.g.
53
On the other hand, for national criminal organizations for which both the leader and the active criminals operate in
the country where the crime is committed, it is relevant to assume that S > 0. This last case will be investigated in the next
section.
128

Equivalently, these exists a threshold benefit
|
o pf

= b
~
such that if the criminal is of type b
~
b > , he
commits the crime; otherwise he is honest and suffers the private sanction.
Thus, everything being equal, the existence of a gang modifies the deterrent equilibrium threshold by two
different channels as compared to a competitive one (as compared to the threshold labelled F
B
p
B
b = ).
Firstly, the marginal criminal in a gang may be of a greater type than the marginal criminal without a hierarchical
gang, as a result of the sharing of the illegal benefits between the active members and the leader (given that <
1). Secondly, the marginal criminal in a gang may be of a smaller type than the marginal criminal without a
hierarchical gang, since
paper studies which of the first or of the second effect dominates at equilibrium.

3.2 The leader of the gang
Assume that e[0,1] is the implementation cost of a level of private sanction
54
to each member who
decides not to commit a crime, implying that the total cost faced by the leader increases with the number of
deviant members at a constant rate (). Considering that S=0, the leader chooses the level of private sanction
imposed to deviant members that maximises his expected benefit:

( ) b db 1 EB
1
b
~
~
oo |
}
= b (2)

meaning that the leaders net benefit, depending on the number of members deciding to commit a crime,
equals the sum of benefits taken from the criminals (1st term) minus the cost he faces to punish deviant
members (2
nd
term). The necessary and sufficient conditions for an interior solution to the leaders maximisation
problem are:

0 2 = + + oo o o
|
o
|
pf pf
pf
(3)

0
2 1
<

|
o| |
(4)

Since 0 > | , the Second Order Condition (4) requires to hold that : 0 2 - - 1 > o| | . From (3), the
reaction function of the leader is reduced to:

pf o o = (5)

with |
.
|
\
|

=
o| |
o| |
o
2 1
1
> 1 as a result of the SOC once again. This means that the best response of
the leader to the increase in sanctions by the enforcer, is also to increase (more than proportionally) his own
private sanction. More precisely, we obtain the following result:
Proposition 1. Whatever the level of public sanctions to punish the criminal members of a gang, its
leader imposes a greater private sanction to inactive members ( > pf).
As a result, remark that soon as the public enforcer chooses a p > 0, the associated level of deterrence
satisfies : 0 < b
~
given that according to (4) we obtain > pf. Thus, everything else held equal, the threat that
the authorities impose through the possible use of an individual sanction on gang members is inefficient, since
none will be deterred to commit the crime; hence:
Corollary 1. If S = 0, it is socially worth that public authorities do not monitor criminal activities (p=0 is
efficient).

54
Throughout of the paper we focus only on the situations where the non negativity constraint o 0 holds.
129

The situation considered here is one where public authorities are deterred from investing in crimes
control. When imposing individual sanctions to criminals affiliated to a gang, the public authorities fail to deter
these members to commit crimes since at any level of (public) expected sanction, the leader of the gang in fact
over reacts by imposing a private sanction greater than the public expected sanction ( pf > o ).
Thus, the main consequence is obvious:
Corollary 2. When sanctioning the leader is not feasible (S = 0), the monopolized criminal market yields a
larger (in fact, the maximal) number of crimes committed as compared to the competitive one ( 0
~
= b < b
B
).

4. Recovering the effectiveness of public enforcement on criminal gangs
Suppose now that the leader can be sanctioned by authorities when gang members commit a crime (S >
0). Remark that this does not change the general definition of the threshold
|
o

=
pf
b
~
. However, we will show
that this leads to alternative equilibria on the monopolized market which have sharp differences as compared
both to the previous case and to the competitive market.

4.1 The leader of the gang
The net benefit function of the leader can now be written:

( ) | | b db p s b EB
b
~
1
1
~
o o
}
= (6)

where s represents the sanction imposed by the authorities to the leader in case of conviction. The
reaction function of the leader is now
55
:

( ) s f p o o = (7)

where according to the SOC

o| |
|
2 1
> 0. The choice of the level of the private sanction depends
on two effects: the level of expected sanction imposed to the members and the level of expected sanction
imposed to the leader of the gang. The first one tends to increase the answer of the leader (over reaction)
whereas the second tends to reduce the level of private sanction () imposed
56
.

4.2 The public authorities
The objective of public authorities is to maximise the social welfare by adjusting their policy through the
amount of monetary sanctions imposed to criminals, denoted as f, and to the leader, denoted as s, on the one
hand, and the expenditures in monitoring and sanctioning, p, on the other hand. We assume that the monitoring
and sanctioning cost is represented by a constant marginal cost c > 0. The choice of the optimal policy for (p, f,
s) is obtained through the maximisation of the social welfare function:

( ) cp b db h b W
b
+
}
=
~
1 ) (
1
~
(8)

under two constraints: f F and s S. The social welfare is the sum of benefits less harms from the
crime (1st term) reduced on one side by the cost of the private sanction (2
nd
term) and on the other side by the
cost of law enforcement (3rd term). Following Becker (1968) it is easy to see that the constraints on fines will
bind, i.e. the public authority will choose to impose the maximum monetary sanctions. The reason is that f and s

55
Using the FOC, and given that the same SOC still holds : 0
2 1
s

|
o| |
.
56
However, it is obvious that when the enforcer monitors illegal activities, a necessary condition for leader to use his
own threat of sanction ( > 0) is 0 > s f o - otherwise, it is not effective. This point will be more detailed when we will
study the equilibria.
130

are costless in this model the social welfare is independent of s. Thus, if f < F, it is possible to reduce the cost
of enforcement and to increase the amount of the sanction, by maintaining the expected sanction. Knowing that
in any equilibrium we must have f* = F, s* = S, we can now focus on the FOC for the enforcer which writes as
57
:

F
c
b h
|
o o = + ) 1 (
~

(9)

This implies the following result:
Proposition 2. In any interior equilibrium where it is socially efficient that the public enforcer chooses to
control the illegal activity (i.e. p > 0), there exists some level of underdeterrence (i.e. h b <
~
).
The proof is straightforward. Let us write (9) as :
F
c
b h
|
o o + + = ) 1 (
~
. Given that the RHS of this
new equality is positive, it is obvious that the LHS is also positive and thus that in equilibrium: b h
~
> .
Finally, denoting
F
c
h
|

o 1
1
> 1 and solving (9) for the reaction function of the public
authorities leads to:

( ) h h
pF + =
(10)

where 0 > h h (given that
F
c
h > according to the competitive equilibrium). This implies that as the
leader increases the level of his private sanction, the public authorities react also by increasing the probability of
control of the gang members.

4.3 The equilibria
Several alternative equilibria may occur for a monopolized market for crime. To see this, first remark that
since we must have f* = F and s* = S in any equilibrium, the system (7)(10) now writes equivalently as:
( ) S F p o o = : Reaction Function of the gang leader
( ) h h pF = | o : Reaction Function of the enforcer
Thus two kinds of equilibrium may exist depending on the sign of S F o , which is the slope of the
leaders reaction function.
Let us assume first that the leaders reaction function is negatively sloped, i.e.
o
o > s
F
S
S F 0 . It is straightforward to see that in such a case, it is individually efficient for
the gang leader to never punish the inactive criminals: ; in contrast, it is efficient for the public
enforcer to choose a positive level of monitoring

p*= ( ) h h
F

|
> 0, in order to enforce a level of
deterrence h h b =
*
~
. This kind of equilibrium has the following properties:
Proposition 3. Assume that
o
>
F
S
. Then, the NE of the monopolized criminal market (o*=0,p*) yields
a higher level of deterrence (thus, a smaller number of crimes) than the competitive one. Moreover, if the
maximum fine on active criminals is large enough, i.e. ) 1 ( | + >
h
c
F , then both the expected sanction and the

57
Once again, the SOC holds: 0
2
2
F
< =
c
c
|
2
2
p
W

131

cost of monitoring for the enforcer are smaller than in a competitive market. However, as ) 1 ( | + <
h
c
F , then
both the expected sanction and the cost of monitoring for the enforcer are larger than in a competitive market.

The proof is straightforward, since simple calculations show that:

( ) ( ) | = 1
*
~
sign
B
b b sign
( ) ( )
|
.
|
\
|
+ = = h
F
c
sign F
B
p F p sign
B
p p sign ) 1 (
* *
|
As a result,
B
b b >
*
~
is always true, but we obtain both that
B
p p >
*
and F p F p
B
>
*
soon as
h
F
c
> + ) 1 ( | whereas
B
p p <
*
and F p F p
B
<
*
hold soon as h
F
c
< + ) 1 ( | .

Remark that when 0 = o , the equilibrium is still different from the competitive one la Becker.
Let us assume now that the condition 0 > < S F
F
S
o
o
holds; then any equilibrium of the
> 0. Now, private sanctions and public monitoring are
strategically complement decision variables (both reaction functions are positively sloped): the best
response for any of the two parties to an increase in the level of the control of his opponent, is to also
increase his own control. Explicitly solving the system (7)(10) gives us
58
the couple (p**, **) such
that:

( )
( ) h h
S F
p
+
=
o
|
* *
,
( )
( )
( ) h h
S F
S F
+

=
o
o |
o * *

which leads to an associated level of deterrence equal to:
( )
( )
( ) h h
S F
S F
b
+
+
=
o
o ) 1 (
* *
~
.
This equilibrium has some remarkable properties as compared both to the case of a competitive market
for crimes, and to the previous case of the monopolized one:
Proposition 4. Assume that
o
s
F
S
. Then, the NE equilibrium of the monopolized criminal market
(o**,p**) may correspond to a smaller level of deterrence (thus, a larger number of crimes), a higher expected
sanction and a larger cost of monitoring for the enforcer than in a competitive market. But the opposite results
may also hold.
The result is straightforward: on the one hand, it is obvious that b** may be larger than
F
c
h F
B
p
B
b = = , since > 1 and
F
c
h h h > ; but on the other hand, it may be smaller as well
since
( )
1
) 1 (
<
+
+
S F
S F
o
o
. The same line of reasoning applies to the comparison of
|
.
|
\
|
=
F
c
h
F
B
p
1
and
p**. Hence the net effect both on the level of deterrence and on the cost of public monitoring at equilibrium will
depend on the specific value of the technological and behavioral parameters of the model (which is of secondary
interest for our purpose).

5. Discussion and conclusion
The specific organisational context of the gang, apprehended here through the threat of private sanction
in case of deviation from the gang objective, shows how individual public sanctions may become inefficient. The
possibility for the leader to threaten the gang members reduces to null the deterrent effect of the public policy so

58
Moreover, it can be verified that this equilibrium is asymptotically stable (See Funderberg, and Tirole 1991). On
the other hand, in the appendix we give some conditions required in order that | | 1 , 0 * *
~
e b and | | 1 , 0 * * e p .
132

that no member is deterred to commit a crime in the gang. As a consequence, one may consider the possibility
that the organizational context of the gang increases the number of criminals.
The conclusions in proposition 1 and corollaries 1, 2 differ from the one in Garoupa (2000) who shows
that the number of criminals when gangs exist is the same than when it doesnt. These different results are
based on two elements. On one hand, in Garoupa (2000) the agents have to pay a rent to the principal to enter
on the illegal market, corresponding to a fixed price independent from the illegal benefit of the crime. In our
model, principal and agents act in cooperation because each one of them receives a part of the benefit from the
crime and because agents bear the private sanction of the principal only if they deviate from the norm. On the
other hand, in Garoupa (2000), the principal invests ex ante in an enforcement mecanism to be sure that the
agents pay the rent. The private enforcement cost in the gang is independent of the number of inactive criminals
on the illegal market. On the contrary, in our model, the private enforcement cost in the gang is a function of the
number of deviant criminals.
As a consequence, public individual sanctions may fail to reach a deterrent effect in a monopolized
market for crime where criminals operate in a hierarchical gang. Specifically, soon as the gang leader has the
opportunity to escape from public punishment but may inflict to the active members a private sanction which
inflates the public sanction once they are caught, the threat of punishment by the legal enforcer ceases to
maintain an effective deterrence.
Proposition 3 exhibits a situation which is the dual of the one of corollary 1, in the sense that the leader is
now deterred from exerting the threat of sanction on the members of the gang. As a result, it appears that the
monopolized market leads to a smaller number of crimes than the competitive one soon as the ratio
F
S
is large
enough, i.e.
o
>
F
S
. Another consequence is that, generally speaking, it is not necessary for public authorities
that the sanction imposed to the leader be larger than the sanction inflicted to a gang member (S > F) to reach a
positive level of deterrence: in a sense, this depends on the sharing rule of the criminal benefits. To see this,
remark that < is obtained soon as > . Thus, when gang members retain a large proportion of their illegal
benefits ( > ), it is sufficient (although not necessary) that S > F for public authorities to reach an efficient
control of criminal activities; but public authorities also fulfil this objective even when S < F. In contrast, when
gang members retain a small proportion of their illegal gains ( < ), public authorities cannot deter criminals
when S < F, and S > F is not sufficient to yield enough deterrence.
At the same time, proposition 3 shows that despite a smaller number of crimes (a smaller probability of
crime) the expected sanction and the cost of public monitoring are not necessarily smaller in a monopolized
market than in a competitive one. This depends on the size of the maximal fine which is applied to the members
of the gang (all else held equal, and specifically, given the size of h the external cost of the illegal act), and the
monopolized market allows a smaller monitoring cost of the illegal activities for public authorities only when the
maximal fine on active members is large enough. Otherwise, the larger level of deterrence obtained in the
monopolized market requires a higher enforcement cost.
The main consequence of proposition 4 is that the common view according to which the concentration of
the criminal market improve the social welfare, since it enhance the efficiency and effectiveness of public control
regarding illegal activities (allowing a smaller number of crime realizations and saving on the cost of public
monitoring) cannot be generally sustained. Specifically, soon as the ratio
F
S
becomes small enough, then the
monopolized market may lead to a smaller level of deterrence. Remark that the ambiguity which appears in
proposition 4 cannot be easily ruled out in contrast to proposition 3.
Empirical studies have shown that, everything being equal, criminals affiliated to gangs are more involved
in criminal activities than those who are not (Thornberry et al. 1993, BattinPearson et al. 1998). This difference
of behaviour may be explained by the fact that criminal organisations create incentives to commit crime. Then,
members of gangs fearing to be victims of private sanction are more likely to commit crime when affiliated to
criminal organizations. These incentives from the gang must be taken into account by the public authorities to
efficiently deter gang members from crime. We show that an individual expected sanction may lead to a null
deterrence when criminals are affiliated to gang, although the same expected sanction is efficient for isolated
criminals. In fact, the leader of the gang over reacts on the public policy by imposing a level of private sanction
greater than the public expected sanction. Punishing the members of the gang and their leader may create
efficient deterrence.
133

The French criminal law proposes two answers to deal with crimes committed in groups. Firstly, each
criminal is convicted on the basis of the acts he realized himself, even if the criminal action was a collective one.
Nevertheless, realizing a crime within a group is considered as a circonstance aggravante witch results in an
increase of the individual sanction ladder compared to the one that punishes the same individual act committed
alone. Secondly, following the actual tendency to prosecute for a collective liability all members of a group, the
liability for the criminal act is extended to the person who intentionally, helping or assisting, makes easier the
preparation or consumption of the criminal act [or] by promise, threat, order, authority abuse or power brings
about the criminal act or gives instructions to commit it (Art 1217 CPN)
59
. As a consequence, the gangs leader
can be convicted as author of the crime at the same level of sanction as the members of a gang even if he hasnt
committed the crime himself (Art 1216 CPN). This second solution challenges the principle of individualisation
of the sanction, which states that each person is responsible for his own actions, and its legitimacy has been
hotly discussed since the XVII
th
century on the basis that, in the context of crimes in groups, it reduces the
liability

(Fauconnet 1920, p. 330).
The argument in proposition 1 and corollaries 1 and 2 implies that the French law based on the
circonstance aggravante may be inefficient in creating any deterrence when the leader of a gang, or its peers,
have the possibility to impose private sanctions that thwart the incentives created by the public ones. The public
authorities should then apply the second type of law relative to crimes in gang: convicting the leader of the gang
for complicity even if he hasnt committed any crime. It might be possible to influence the incentives inside the
gang and create, by the way, an efficient deterrence for the members of the gang.
On the other hand, the adoption in France of the loi Perben II (March, 9th, 2004) which was presented as
the adaptation of the French criminal code to the modern forms of criminality has raised many criticisms.
Contradictors insisted that it promotes a sharp reduction of privacy rights which would by no way be
compensated by the uncertain gains of effectiveness in the control and deterrence of criminal activities. A close
controversy emerged in United Kingdom in 1998, at the time where the European Convention of Human Rights
has been incorporated into the English & Welsh criminal law. Opponents to the reform argued that it would lead
to a weakness in the penal code effectiveness, while promoters such as advocates of human rights rejected on
principle any arguments based on efficiency analysis. But as the arguments pro collective liability is imprecise, it
opens a window for law and economics to justify the use of collective responsibility. Our paper takes an agnostic
view on such an issue, and tries to assess the circumstances under which such a repressive law fulfils its
objective. In some sense, the two French laws of circonstance aggravante and leader liability for acts realised
under his influence cannot be imposed separately when the leader (or the peers) have means to incite members
to crimes. Although our model cannot pretend to full generalisation, it illustrates the legitimacy of collective
sanctions from a deterrent point of view.

Acknowledgements
We thank Nuno Garoupa, Ccile BourreauDubois, Roberto Galbiati, Dominique Demougin and Martina
Samyer for helpful comments and discussions. In addition, we benefited from comments by participants at the
European Association of Law and Economics Conference in Madrid (2006), the SIDE Meeting in Rome (2006),
the FrenchGerman Talks in Kassel (2006), the AES Meeting in Nancy (2006), and at the internal seminar of
BETA in Nancy (may 2007).

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135

APPENDIX
Let us have a look at the conditions required in order that | | 1 , 0 * *
~
e b and | | 1 , 0 * * e p in proposition
4.

It is easy to see that p** > 0 requires that
o
>
F
S
with a trivial case 0 >
F
S
obtained when < .
On the other hand, b** > 0 needs that
|
|
.
|
\
|
>
>
o 1
F
S
.

But, we also have p** < 1 when ) ( h h
F F
S
+
A >
o
and b** < 1 soon as
|
|
.
|
\
|

|
|
.
|
\
|

O >
) ( 1
1
) )( 1 (
h h
h h
F
S
o
, assuming that the conditions required to have >
0 are met. To summarize, the solution in proposition 4 is supported by a set of conditions which can be
expressed (for example) as both an upper and a lower values for the ratio
F
S
: we must have
|
|
.
|
\
|
A O
> > , ,
1
max
o
F
S
.

136

CHURCHES AND PRIVATE EDUCATIONAL INSTITUTIONS AS
FACILITATOR OF MONEY LAUNDERING: THE CASE OF NIGERIA

Kato Gogo KINGSTON
University of East London, School of Law, England

Abstract
There is worldwide concern over the ways in which criminally acquired assets are being concealed,
transferred and preserved. Many countries including Nigeria have enacted laws against money laundering; drugs
trafficking; and, corruption. The study investigates the association of money laundering through the private
schools and churches; and, four independent variables namely: Laws and Regulations, enforcement efficiency,
banking compliance and corruption. The multiple regression models of Aldrich (2005), and Fisher (1922) are
employed to investigate the association of the variables. The study hypothesize that money laundering in Nigeria
is enhanced by the proliferation of churches and private educational institutions by which finances are largely
unchecked by the authorities to such degree that defective banking regulations; lack of government control of the
funds of private schools and faith groups; inadequate enforceability of antimoney laundering laws; and,
corruption are the propelling factors. The study suggests that private schools and churches in Nigeria are
facilitating money laundering, corruption and organised crimes. It finds that there are serious loopholes in
Nigerias money laundering laws which enable criminal assets to be preserved and protected under the auspices
of schools and church assets. The study concludes that there is urgent need for the overhaul of the national
criminal laws and the regulation of the assets of private schools and churches in such ways that can deprive the
criminal concealment of illegally acquired assets.

Keywords: assets, crime, money laundering, Nigeria, churches, fraud techniques.

JEL Clasiffication: K14, K40, E40.

1. Introduction
Money laundering, terrorism and drugs trafficking are among the most prevalent global criminal activities.
Money Laundering refers to the process and act of concealing illegally acquired assets through legally
constituted institutions such as banks. Simply put, it is the act of hiding stolen and corruptly acquired assets from
the preying eyes of the regulatory authorities. Masciandaro (2000) defined money laundering as an autonomous
criminal economic activity whose essential economic function lies in the transformation of liquidity of illicit origin,
or potential purchasing power, into actual purchasing power usable for consumption, saving, investment or
reinvestment. In essence, money laundering is a process in which assets obtained or generated by criminal
activity are moved or concealed to obscure their link with the crime (IMF 2005). Amedeo et al. (2008) observes
that money laundering is a multiplier of criminal financial activities and a major process that strengthens the ties
between the real and the financial side of criminal economy.
Money laundering is necessitated by the desperate need to: (1) hide the source and proprietary
ownership of the assets; (2) retain control of the assets; and, (3) disguise and neutralise suspicion.
The perpetrators of money laundering routinely use three methods in their illicit transactions namely:
Assignment; Shielding; and Mixing. Assignment involves the placement of the illicit assets into legitimate
financial and social institutions in order to be able to convert the assets into smaller units for easier mode of
transfer. Shielding is the disguising process which involves various attempts to erase the trail of the assets from
the source of origin. The shielding process requires the transfer of assets through foreign banks; electronic
transfer of company shares; and, stocks dealing. Mixing strategy of money laundering is complex and
sophisticated ways by which launderers are able to convincingly integrate the proceeds of crime into legitimate
economy. The process involves the establishment of companies in different countries; the entering of joint
venture with legitimate foreign investors; the use of legitimate firms to export and transfer funds abroad; the use
of private institutions and nonprofit organisations (including churches) to safeguard and maintain banking
transactions etc.
As far back as the 1930s, money laundering has been regarded as crime by the United States
government. It is very difficult to accurately estimate the value of money laundering due to the covert nature of
the criminal activity. In 2000, it was estimated that approximately 3.9% of the global gross domestic product
137

(GDP) originated from criminally acquired assets and the worlds money laundering is more than US$2.5 trillion
yearly (see IMF 2002; Agarwal, and Agarwal 2004).
The European Union Council on the prevention of the use of the financial system for the purpose of
money laundering Directive 91/308/EEC of 1991 provides extensive list of acts which constitute money
laundering as follows:

(1) the conversion or transfer of property, knowing that such property is derived from
criminal activity or from an act of participation in such activity, for the purpose of concealing
or disguising the illicit origin of the property or of assisting any person who is involved in the
commission of such activity to evade the legal consequences of his action; (2) the
concealment or disguise of the true nature, source, location, disposition, movement, rights
with respect to, or ownership of property, knowing that such property is derived from criminal
activity or from an act of participation in such activity; (3) the acquisition, possession or use
of property, knowing, at the time of receipt, that such property was derived from criminal
activity or from an act of participation in such activity; (4) participation in, association to
commit, attempts to commit and aiding, abetting, facilitating and counselling the commission
of any of the actions mentioned in the foregoing paragraphs. Knowledge, intent or purpose
required as an element of the abovementioned activities may be inferred from objective
factual circumstances...

Walker (1994, and 2007) suggests that corruptly acquired assets account for the highest volume of
money laundering and closely followed by assets acquired through narcotic drugs trafficking. Money laundering
cannot succeed without the existence of enabling environment of crime and corruption. Edgardo, and van Dijk
(2003) argue that organized crime and corruption are shaped by the lack of strength of the control mechanisms
of the State and civil society.
Schneider (2008) explains that it is extremely difficult to effectively device adequate measures for the
control of international and domestic money laundering because money laundering is defined almost differently
in every country, the measures taken against it are different and vary from country to country; and, there is lack
of an approved international organisation responsible for the enforcement of uniform control of money laundering
across national boundaries.
Guiora, and Field (2007) suggest that one of the problems confronting the enforcement of money
laundering is the sophistication of Informal Value Transfer Systems also known as underground banking which
does not necessarily comply with the customary banking procedures. Between 1999 and 2009, underground
banking practices have led to the liquidation of several banks in Nigeria.
Edgardo (2008) investigated the legal and economic factors determining the success and failure of the
fight against organized crimes using data from 107 countries which are known to be highly corrupt and lacking
good governance. Edgardo suggests that national level official data produced and published by the law
enforcement agencies are inadequate and cannot be relied upon because of the politics involved in crime
prevention in different countries thus the information on the extent of organized crime activity in a country had to
be developed from other sources to obtain primary data. In consideration of the data collection challenges,
Edgardo (2008) adapted the data of the World Economic Forums survey which provided information on the
extent of victimization of businesses by organized crimes across the globe and finds that the most valuable and
reliable strategy that is likely to curb organized crimes are connected to those that give adequate attention to
high level public sector corruption and for the measures to be successful, four requirements must be met as
follows:
1. The introduction of impartial justice system allowing for adequate use of discretion by the courts
without interference by the State and the powerful few in the society,
2. Protection of evidence, and swift convictions based on evidentiary material provided by financial
intelligence systems aimed at the systematic confiscation of assets in the hands of criminal groups
and under the control of illegal businesses linked to organized crimes,
3. Intensive and consistent investigation of allegation of high level public sector corruption, and
4. The introduction of awareness policies to encourage the operational presence of government and/or
nongovernmental preventive programmes.
Edgardos study offers significant insight into the understanding of organised crimes; however, the
findings are too vague and cannot be realistically applicable to all countries.
138

The data used and the model of analysis are likely to produce fluke outcome. The study also failed to
recognise the extent of some governments participation in organised criminal activities. Where corruption is
entrenched in the body politics of a country, it is practically impossible for the government to effectively enforce
anticorruption laws making it impossible for organised crimes of huge final values to be controlled.
Although the present study focuses on private educational institutions, churches and money laundering;
previous studies on the effect of religion on crime have produced mixed results. Stack, and Kposowak (2006),
and Pettersson (1991) argue that the most efficient method of analysing the effects of religion on crime is the use
of quantitative model. They went further to identify the barriers of crime, as tax fraud acceptability, and
religiosity, braking down the levels of religious adherence; in essence, social cohesion and mitigating
circumstances influence the rate of criminality. This finding is affirmed by Lee (2006). On the other hand, Cook,
and Powell (2003) suggest that the social persuasion and influence that occurs within religion does not affect the
rates of criminality.
Nevertheless, financial crimes are among the worlds fastest growing illicit activities. It fosters other vices
including narcotic trade, terrorism, homicide and people trafficking.
These have led countries to enact stringent laws to deal with the problems. For instance, in the United
Kingdom, the Money Laundering Regulations 2007; the Financial Services and Markets Act of 2000; and, the
Proceeds of Crime Act 2002 stipulate the ways of dealing with suspicious as well as criminal assets. In the
European Union, the European Union Directive 2005/60/EC prohibit the use of the financial system for the
purpose of money laundering and terrorist. In the United States, the Patriot Act of 2001 and the Bank Secrecy
Act of 1970 (as amended by AntiMoney Laundering Acts) regulates the financial institutions and persons with
regards to money laundering and criminal assets.
In Nigeria, there are laws directed toward the prevention of money laundering and other economic crimes.
The laws are: The Money Laundering Act 1995; The Money Laundering (Prohibition) Act 2004; the Failed Banks
(Recovery of Debts) and Financial Malpractices in Banks Act 1994; the Banks and other Financial Institutions Act
1991; and, the Advance Fee Fraud and Other Fraud Related Offences Act 1995 (formerly, Decree 419).
The Economic and Financial Crimes Commission established in 2004 is responsible for the overall
enforcement of the antimoney laundering and all economic crimes legislation in Nigeria.
Despite the prevailing laws and regulations, money laundering and other organized crimes continue to
prevail and develop in Nigeria. It is important to mention that all the prevailing laws on money laundering and
criminal concealment of illicit assets in Nigeria are principally directed towards corporate entities and individuals
thus, have one central defect; they fail to widen the scope of coverage of the regulated entities to include non
profit organisations, associations, private educational establishments and faith groups such as Mosques and
churches. It is this loophole that is being exploited by criminals.
According to official sources in Nigeria including the central bank and the Economic and Financial Crimes
Commission, Nigerias money laundering activities in 2009 and 2010 is estimated at US$1.250 billion. In 2010,
Economic and Financial Crimes Commission in Nigeria affirmed that files containing evidence of money
laundering of the sum of US$35 million involving a church was missing from the custody of the law enforcement
agency leading to the termination of legal actions against the church.

2. Methods and materials
Fundraising is a major source by which churches sustain their existence and schools fees and other
charges are the official known sources of private schools fund. In some countries, the bank accounts of religious
and charitable organisations are seen as sacred and unquestionable. There is continuous proliferation of private
educational institutions and churches in Nigeria; almost every street in the Southern part of the country is host to
at least one church. Each church including all its branches posses at least one bank account. There is no
legislation for the monitoring and supervision of the sources of church funds; there is no regulation as to the
maximum amount of money that churches and the private educational institutions can hold in their bank
accounts and, there is no peg on the maximum number of bank accounts each church can operate. This
provides huge money laundering opportunities for corrupt politicians and organised criminals to be able to
conceal criminally acquired assets.
The data used were collected from 16 States in Southern Nigeria namely: Lagos, Ondo, Ogun, Ekiti, Oyo,
Rivers, Cross River, Akwa Ibom, Edo, Delta, Bayelsa, Imo, Abia, Anambra, Ebonyi, and Enugu. The data consist
of the current and savings account of 5 large and 5 medium size churches; 16 private secondary schools (one
from each State) and 10 private universities. The large churches refer to those with minimum total estimated
members of 5,000 and the medium size churches are those with an estimated total of 3,000 members.
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The churches chosen for this analysis are those that have a minimum of five branches across different
cities and the private secondary schools chosen are those that have existed for at least five years. The data
include: the number of bank accounts held by each church branch and each school; the volume of monies in the
bank; the frequency of bank deposits and transfers; and, the number of private properties acquired in the name
each of the educational institution and each branch of churches.
Data analysis was conducted using multiple regression statistical technique of Aldrich (2005) and Fisher
(1922. The Multiple Regression statistical model involves the prediction of the action of one variable also known
as the dependent variable on the basis of their score values weighed against many other variables known as
independent variables. In this paper, money laundering through Nigerian private educational institutions and
churches are single parameter representing the dependent variable and the independent variables measured
are: Laws and Regulations (LR), Enforcement efficiency (EE), Banking compliance with national regulations (BC)
and corruption (CR).
Table 1 presents the results of the multiple regressions. The Rsquare is 0.6615 adjusted for sample bias
resulting in R= 0.6181 meaning that 61% of the change in the dependent variable (Money laundering through
private educational institutions and churches) can be explained by change in the independent variables LR, EE,
BC and CR. The Fstatistic is 0.1587 and statistically significant on the DurbinWatson level of confidence of
5%. The regression parameters show that changes in the independent variables would result to the change in
the dependent variable. The illustrate that the laxity in the four independent variables in Nigeria contribute
significantly toward the prevalence of money laundering and other organised financial crimes. However, it is
difficult to ascertain the measurability of money laundering because it is not directly observable (Amedeo et al.
2008).

Table 1. Summary of Results of Multiple Regression

Equation Parameters

R Square
Adjusted R square
Standard Error
F Statistic
0.6615
0.6181
137.7381
0.1587
Multiple Regression
Equation
Independent Analysis
Coefficients
Standard
Error
R
Squared
Gradient

Intercept
Intercept
LR
BC
EE
CR
119.476
33.467
4.086
21.178
49.45
134.566
32.267
2.017
14.017
23.703
0.627
0.751
0.659
0.609
1.59
3.91
29.59
33.63
482.4
412.66
336.84
425.07

Note: DurbinWatson Statistic is 2.89787; Critical DW Values: Lower (Dl) = 0.69; Upper (Du) = 1.97; Critical F
Statistic at 95% Confidence is 3.25917; there is positive Autocorrelation at 5% confidence

3. Discussion
The multiple regression results show positive association of the dependent variable with all four
independent variables. This suggests that money laundering through the private educational institutions and
churches is intertwined with corruption, ineffective enforcement of laws, weakness of the laws, and lack of
adequate compliance by the financial institutions.
It also suggests that the fiscal structure of Nigeria is affecting the countrys risk rating. This is consistent
with Edgardo, and van Dijk (2003) which states that:

A countrys financial and liquidity risk ratings are all positively related to the organized crime
index ... higher country risk ratings are associated with higher levels of organized crime.

Corruption is endemic in Nigeria, perpetrators range from top level government officials to business men
and firms. Between 2000 and 2010 not less than 15 former State governors, 5 bank executives, and 4 firms have
been charged with corruption and money laundering related offences involving an estimated US$270 billion. The
bulk of the stolen assets have been traced to foreign bank accounts. The process and strategies adopted by the
140

Nigerian government to deal with money laundering suspects lack transparency; there is selective enforcement
of anticorruption laws in that some suspects cannot be indicted and are simply untouchable due to the
extensive network and powers of the persons and firms benefiting from financial crimes in the country.
The judiciary in Nigeria is not independent enough to be able to handle cases of money laundering
against certain persons and certain firms. In Attorney General of Rivers State v. the Economic and Financial
Crimes Commission & 3 Others suit No. FHC/PHC/CSI78/2007, the plaintiff (Justice Mary Odili) was the wife of
former Rivers State governor and acting in her capacity as the State Attorney General; sought perpetual
injunction to restrain the defendant (authorised antifraud and anticorruption agency of the federal government)
from investigating and indicting former Governor Peter Odili (her husband) on the grounds that the defendants
activities were unlawful interference with the internal affairs of the government of Rivers State. The injunction
was granted by the court on the grounds that the defendants investigation of the former governor was invalid,
unlawful, unconstitutional, null and void. The injunction further forbids the defendant from publishing the report of
the criminal investigations to which Peter Odili was personally mentioned and, also forbids the defendant from
taking further actions concerning the former governor regarding alleged corruption, looting of State treasury and
money laundering.
In Federal Republic of Nigeria v. Ibori & others FHC/ASB/IC/09, the defendants were acquitted by
Nigerian court of 170count of corruption and money laundering however, one of the defendants was later
convicted on the same charges in a separate suit filed in the United Kingdom court.
The study finds that corrupt government officials and politicians in Nigeria that are actively involved in
harvesting the proceeds of crime are very conscious of the possibility of being arrested and charged in Europe
and the United States therefore, have devised various methods of concealment including, conversion of all
stolen monies into foreign currencies and storing such monies in large concrete underground bunkers usually in
their secret countryside homes; purchasing of multiple houses using the names of friends and churches; giving
the assets to churches on secret trust agreements whilst proclaiming such assets to be anonymous donations
and gifts to the churches, establishing private educational institutions in the name of unsuspected business
persons or entering into anonymous jointventures with others to establish same; and, using the names of
friends to buy large quantity of securities and shares in blue chip firms. These criminal ways of concealment are
energised by the prevalence of corruption in the country. According to the United Nations Convention against
Corruption:

Corruption is a complex social, political and economic phenomenon that affects all
countries. Corruption undermines democratic institutions, slows economic development and
contributes to governmental instability. Corruption attacks the foundation of democratic
institutions by distorting electoral processes, perverting the rule of law and creating
bureaucratic quagmires whose only reason for existing is the soliciting of bribes. Economic
development is stunted because foreign direct investment is discouraged and small
businesses within the country often find it impossible to overcome the startup costs
required because of corruption.

The above statement of the UN Convention against corruption seems to have summed up the negative
effects of corruption however, the UN has not been able to device the mechanism by which the problem of
corruption could be eradicated rather, it delegate the duties of corruption control to individual national
governments. It is foreseeable that corrupt national governments cannot eradicate corruption.
The study suggest that churches in Nigeria are autonomous private governments immune from national
legal control mechanism in that the churches and charitable organisations control proprietary rights including
huge volume of liquid assets without the need for accountability to the national government. It also suggests that
government does not control and monitor the finances of private educational institutions. This void in the national
control of churches is the prime reason for the prevalence of money laundering within the church private
government; this is consistent with Hills (2001).
The churches and private educational institutions in Nigeria are conveniently conducting money
laundering business in the face of the apparent weak corporate governance, low ethical standards, and lack of
banking transparency in the country. This is consistent with Ogunleye (2001) which suggest that the banks
cannot be free of criminality due to uncontrollable or external factors that influence bank performance. The
present study further finds that the weakness of banking regulation is correlated to money laundering activities,
in conformity with Ogunleye (1999, and 2001) which suggests that fraud and inadequate risk management in the
banking sector caused the liquidation of 36 banks in Nigeria.
141

The study finds that the establishment of multiple branches of same church enabling each branch to
operate separate bank account in various banks facilitates the splitting of huge criminal assets into small units for
easier concealment by the churches and private educational institutions. The study also finds that the churches
appoint several individuals as pastors and encourage them to break away to establish new independent
churches to facilitate the splitting of large size illicit assets to smaller units for the concealment in banks and
other financial institutions. The church officials including pastors are also actively engaging in several criminal
activities including rape, deception, extortion, false miracles/healings, adultery, incest, sodomy, organised armed
robbery, drugs trafficking and large scale fraud.

4. Conclusion
In terms of policy implication, in the light of the findings of this study, there is urgent need to legislate to
control the activities of all association of persons including faith groups and there is urgent need for governments
around the world to actively scrutinise the assets of private enterprises; this may be very challenging however,
there could be mechanism in place for monitoring the rate of fund transfers by firms, private educational
institutions and churches. The starting point could be in the form of compulsory requirement for registration of all
associations including religious groups and allied units and routine declaration of assets whilst the sources of the
assets should be transparent.
The registration process should include the declaration of compliance with national money laundering
laws and the regular declaration of assets including the sources of the assets. There should be maximum value
of assets which each branch of a church is allowed to hold. However, it may be difficult to enforce the laws in the
light of the growing sophistication used by money launderers who are actively using the private educational
institutions, churches and other covert mode of operations.

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143

COMMON LAW VS. CIVIL LAW:
WHICH SYSTEM PROVIDES MORE PROTECTION TO
SHAREHOLDERS AND PROMOTES FINANCIAL DEVELOPMENT

Prabirjit SARKAR
Jadavpur University, Kolkata, India
prabirjit@gmail.com

Abstract
This study reexamines the theory of legalorigin on the basis of a new longitudinal dataset for four
OECD countries (UK, USA, France and Germany) over a long time span 19702005. It observes that the civil
law countries (France and Germany) provided better minority shareholder protection. Through dynamic panel
data modelling our study shows that minority shareholder protection has a longterm favourable effect only on
stock market listing of firms. Thus, our study questions the proposition that commonlaw countries provide more
protection to their shareholders; it also casts doubt on the related proposition that shareholder protection
promotes stock market development.

Keywords: shareholder protection, investor protection, Corporate Governance, Law and Finance.

JEL Clasiffication: G30, G38, K22, K40.

1. Introduction
The idea that law matters for a proper capitalist development can be traced back to the writings of famous
German social scientist, Max Weber. Comparing the experience of industrialising countries of Western Europe
with other countries Weber concluded that a rational legal system is a precondition for the emergence of
capitalism. Some legal scholars call it endowment perspective because it treats legal system as an endowment
(created by fixed investment) which determines the path of development without itself being subject to change
(for details see Milhaupt, and Pistor 2008:1822).
North (1990) had a similar viewpoint. He argued that rich nations have managed to form proper
institutions that protect property rights and enforcement contracts while poor countries lack these institutions and
so fail to develop.
The works of La Porta, LopezdeSilanes, Shleifer and Vishny (henceforth, LLSV, 1997, 1998) and the
subsequent works by them and their followers (see La Porta et al. 1999, 2000; 2006, 2008; Djankov et al. 2003;
Glaeser, and Shleifer, 2002, 2003; Beck et al. 2003a, 2003b; Botero et al. 2004) infused a strong leximetric
flavour to this endowment perspective of law. La Porta and his collaborators and followers used (by and large)
binary variables (0, 1) to quantify the quality of various types of law existing in a large number of countries
protecting the interests of the their shareholders, creditors and labourers (these are what we call leximetric
data). The countries were classified according to their legal origin: English common law and civil law are two
broad categories. The civil law systems were further subdivided into those of French, German and
Scandinavian origin. Through various crosssection regression studies of these leximetric data, it was argued
that English common law systems are more marketfriendly; they provide higher level of shareholder and
creditor protection to promote financial development and create more employment opportunities by providing
less protection of their labour.
This literature connects with other contemporary works which show financial development promotes
economic growth (see King, and Levine 1993; Levine 1997, 2001, 2003; Levine, and Zervos 1998; Levine et al.
2000; Beck et al. 2000b; Claessens, and Laeven 2003). Hence, the conclusion that follows from this whole
gamut of literature is that legal origin matters for economic development. Some works even find that the common
law countries grew faster than the civillaw countries (Mahoney 2001).
There are two interlinked postulates that can be found in this literature: Quality of Law or law matters
and Legal Origin (see also our earlier paper, Armour et al. 2009a):
1. Quality of Law: Legal rules shape economic outcomes according to how far they support market
based economic activity as suggested in new institutional economics (North 1990). It is argued that legal
protection of the interests of the shareholders and creditors will increase the flow of investments and enhance
144

the availability of external finance to firms (La Porta et al. 1998, 2008; Djankov et al. 2003; Claessens, and
Laeven 2003).
2. Legal Origin: The quality of legal institutions varies systematically with the origin of a countrys legal
systemthat is, whether it falls into the AngloAmerican common law, or French, German or Scandinavian civil
law systems.
LLSV and others asserted the superiority of common law because of adaptability and political factors
(Beck et al. 2003a, and Botero et al. 2004):
The adaptability argument can be traced back to Hayek (1960). It is related to the process of framing
new rules. Judges interpret the law in common law countries; this ability to shape the law on a casebycase
basis helps to make legal regulation more adaptable to changing circumstances. In civil law countries judges are
bound by long explicit laws and codes leaving them with little discretion so that civil law systems may suffer from
excessive rigidity, as changes may only be made by fits and starts through legislation.
The political factor focuses on the greater independence provided to the judiciary under common law
system. Therefore, the common law judges are less susceptible to influence by the legislature, and are better
able to protect individual property rights from encroachment by the state. In contrast, in a civil law system, the
legislature has greater control over legal institutions, including judicial appointment, selection and tenure. Hence,
the judiciary is less able to protect individual property rights from the clutches of the state. In the words of
Mahoney (2001, 505):
There are structural differences between common and civil law, most notably the greater degree of
judicial independence in the former and the lower level of scrutiny of executive action in the latter, that provide
governments with more scope for alteration of property and contract rights in civil law countries.
The works of LLSV and their followers, which support the endowment perspective of law, have created a
furore in the academic world. At the same time, their works have driven the legal reform policies of the World
Bank and other institutional organisations towards AngloSaxon legal system (thereby adding another dimension
to globalisation, which can be called globalisation of law). The World Bank has funded much of the subsequent
works of LLSV and created a database that assigns score to each country for their legal institutions to protect the
interests of shareholders, creditors, employers (visvis employees) and other stakeholders.
In this perspective, we shall reexamine the LLSV theory on the basis of a new dataset available from the
source of Centre for Business Research, CBR (University of Cambridge, UK) for four OECD countries (UK, USA,
France and Germany) over a long time span 19702005.
60
In the LLSV theory of legal origin, the three countries,
England, France and Germany, may be termed as mother countries. These are essentially countries where
different legal systems originated, and subsequently spread to developing countries often through colonisation
and conquest. In the US, not a mother country, the AngloSaxon system reached a high level of development
and the model was exported to other countries.
The rest of the paper is organised as follows. The next section provides a critique of the LLSV theory.
Sections 3 and 4 outline the results of our empirical analysis and Section 5 concludes.

2. Legal Origin Theory: A Critique
The legal origin postulate suffers from serious conceptual problems. Scholars of comparative law argue
that the classification of countries by reference to legal origins is not always clear and point out that in reality
most legal systems are hybrids. For instance, South African law derives from both civil law and common law
traditions; Japanese company law used to be based on the German model but, since the 1950s, has been
heavily influenced by the US law; Swiss company law is influenced by the UK legal system and, due to the
influence of the EU, UK law itself has become more continental (Siems 2007). The mechanisms by which legal
origins exert their influencethrough the political and adaptability channels are strongly questioned by the
modern scholars of corporate law. For example, under current French practice judges interpret the law whereas
English judges on the other hand have less scope than before in view of the detailed descriptions contained in
modern English law, such as the company law (Deakin, and Singh 2008). The French judges are also able to
have discretions by appealing to the Roman law concept of good faith.
Furthermore, the empirical base of the LLSV theory can be questioned and a number of strong critical
points can be raised (see also, Armour et al. 2009a):

60
CBR data over a long time span, 1970-2005 are available for five countries: four OECD countries covered in this
paper and India. Indian data on shareholder protection were examined in a separate paper (Sarkar 2009).

145

1. LLSV data lack transparency. For any index to be a meaningful representation of the effects of legal
rules across different jurisdictions, it must contain coding which corresponds to the state of the law in the
different countries under review. It should take into account relevant crossnational differences in the operation
of legal rules. There is always room for differences of view in the way that legal rules are interpreted. When the
coding of LLSVs shareholder rights indices was checked by independent experts, numerous coding errors were
revealed, casting serious doubts on the main findings of LLSV (Spamann 2006, 2008).
2. A second problem relates to the selection of variables. A functional theory of how legal rules work in
relation to economic variables is needed to guide the selection process. In the absence of such theory, there lies
a danger of home country bias on the part of the researchers constructing the index. LLSVs legal indices have
been criticized on these bases (Ahlering, and Deakin 2007).
3. A third problem concerns the aggregation of the variables coded. The indices are constructed from the
unweighted sums of the various measures. It is not clear how significant each variable is in its contribution to the
overall business environment. The scores given to particular variables or groups of variables should be
weighted on a country by country basis to reflect the comparative law principle of functional equivalents: the
same variable may play a completely different functional role in different countries, or different variables may
play the same role, with their relative importance varying from one context to another (see Ahlering, and Deakin
2007). For example, regulatory takeover codes are generally thought to play a major role in underpinning
minority shareholder rights and encouraging the dispersion of ownership in some common law systems, such as
the UK and Australia, but this type of regulation is absent in the United States. In the latter country certain
specific rules of securities law, the law of fiduciary duties and a more permissive approach to shareholderled
litigation play a similar role (Armour, and Skeel 2007).
4. Fourthly, the legal indices in large part rely only on formal legal rulesthat is, the law on the books, as
opposed to the law in action. Differences in judicial quality, legal procedure, social norms, and a host of other
factors may make the operation of legal rules in practice very different from their formal characterization. The
gap between formal law and law in practice does not affect all countries equally; this poses a problem for the
indexing methodology. Moreover, the form taken by a particular law may reflect the practical impact of that rule
on parties subject to it. That may depend on factors outside the scope of the legal indices, including social and
cultural norms beyond the law. The social or economic effect of a given legal rule can only be understood by
seeing law as part of a system of interlinked norms, some of which are extralegal in nature (Zweigert, and Ktz
1998).
5. The majority of the LLSV indices provide a crosssectional view of the law. Most of them describe the
law as it stood in the second half of the 1990s. It does not provide any idea regarding the direction of causality.
While a proper legal framework could promote financial development and economic growth, it is also plausible
that financial development influences the creation of appropriate legal environment. A number of case studies of
the evolution of company law at the national level suggest that for both USA and UK financial market
developments preceded legal change (Cheffins 2001; Coffee 2001).
With the above points in mind, CBR (Centre for Business Research, University of Cambridge, UK)
scholars have constructed new indices on shareholder protection. The CBR approach differs from that of LLSV
in a number of respects (see Armour et al. 2009a):
Firstly, CBR indices take into account a wider range of legal and regulatory information, which are
functional equivalent of hard laws whereas LLSV focused mainly on positive legal rules. All primary legal
sources are set out in the documents constituting the CBR datasets, a practice not followed by LLSV.
61

A second difference is that a wider range of values is used in CBR data to consider the effects of a given
rule. On the contrary, many of the LLSV codings use binary variables (0, 1): for the existence a given rule the
code is 1 otherwise it is 0. This procedure does not take into account the possibility of ambiguity or uncertainty in
the interpretation of a legal provision. In the CBR data intermediate values between 0 and 1 are arrived at based
on interpretative judgments by legal experts.
Thirdly, the CBR data cover a wider range of legal norm than LLSV. In practice, many rules of company
law and securities law are default rules which may apply or not depending on how the parties to particular
transactions choose to deal with them. The norms of corporate governance codes, which follow the comply or
explain approach, offer an illustration of this: companies have a choice of either conforming to the relevant norm,

61
These are available online, on the website of the Centre for Business Research (CBR) at the University of
Cambridge. See http://www.cbr.cam.ac.uk/research/programme2/ project2-20.htm.
146

or disclosing their reasons for not complying with it. However, this is also a feature of many statutory rules of
core company law. Each of these types was included within the CBR coding.
Fourthly, and most fundamentally, CBR indices are all longitudinal. Legal rules were coded as they have
evolved over time. These data allow us to track legal changes over time and to analyze their relationship to
economic development. In the next two sections, we shall reexamine the LLSV legal origin hypothesis on the
basis of these CBR data for four OECD countries (UK, USA, France and Germany) over a long time span 1970
2005.

3. Legal Protection of Shareholders: Common Law vs. Civil Law
In the CBR data on shareholder protection there are 60 legal variables for each country; each variable
has 36 annual observations over the period 19702005(for the exhaustive list of variables considered see the
original data source mentioned in footnote 2). Every variable takes a value between zero (the lowest level of
protection) and one (the highest level of protection); many take intermediate values. Thus, if a country were to
have the maximum level of protection, the indicators would sum up to 60 assuming uniform weight for all the
variables (we shall use unweighted average so that the minimum value of the index is zero and the maximum
value is one). In order to make comparative statements about legal protection for shareholders in different
countries it would be useful to aggregate the variables. In line with much of the literature, we use the un
weighted sum of all variables as an aggregated index of shareholder protection. This procedure thus assumes
that all variables are equally important which is of course unlikely to be true but assigning unequal weights risks
the exercise becoming too arbitrary. A simple unweighted average of all 60 variables (hereafter ALLSP)

gives
an aggregate picture of shareholder protection.

Corporate law is often designed to protect the dispersed
shareholders from mangers and board and also to protect minority shareholders from the majority (see Coffee
2002; Kraakman et al. 2004). Therefore, we shall use two broad subcategories of ALLSP: shareholder
protection against board and management (hereafter SPBRD) the unweighted average of 42 variables and
shareholder protection against other shareholders (minority shareholder protection often called investor
protection, hereafter SPMIN) the unweighted average of the remaining 18 variables.
The two subcategories are described below:
a. Protection against board and management (SPBRD): It covers all the rules and regulations that protect
the shareholders against the activities of board and management. These rules deal with the powers of the
general meeting of the shareholders (regarding the amendments of the articles of association, mergers and
divisions, sale of substantial assets of the company, dividend distributions, election of the board of directors,
directors appointment, remunerations and dismissal, directors selfdealing of substantial transactions etc.), the
agenda setting power of the shareholders in the general meeting, the power of the shareholders to call for an
extraordinary shareholder meeting, the shareholders right to demand information and to get access to the
register of shareholders and beneficial owners etc.
b. Protection of minority shareholders against the majority shareholders (SPMIN): It covers the issue of
quorum in the extraordinary shareholder meeting, supermajority requirements (e.g., 2/3 or 3/4) for amendments
of the articles of association, mergers, and voluntary liquidations, provision of protection of outvoted minority
shareholders, prohibition of voting by interested shareholders, disclosure of major share ownership, provision of
mandatory bid and public offer for acquisition etc.
In Table 1 we have presented the quinquennial average shareholder protection indices (three series,
ALLSP, SPBRD and SPMIN) for the four countries under study. Through simple averaging, we have also
calculated the quinquennial average shareholder protection of common law group (UK and USA) and the civil
law group (France and Germany). All these are plotted in a number of diagrams.
Figure 1 shows that in the first quinquennium (197074), UK had the lowest level of aggregate
shareholder protection (ALLSP) while Germany had the highest level of aggregate shareholder protection
followed by USA and France. In the subsequent quinquennia, all the four countries made a number of changes
in their law to provide more and more shareholder protection. Changes were more pronounced in UK and
France; while Germany tried to catch up in the 1990s, the US law lagged behind. Hence, in the first 6 years of
the current millennium for which we have the relevant CBR data there is not much difference in the state of legal
protection of shareholders in the three countries. Our aggregation at the level of legal origin (see also our earlier
study, Sarkar, and Singh, 2010) shows that in each quinquennium shareholder protection is more in the civil law
countries than that in the common law countries (Figure 2).

147

Table 1. Shareholder Protection in Four OECD Countries, 19702005
(Period Averages)
Period & Series

France Germany UK USA Common Civil
Board & Management
(SPBRD)
197074 0.46 0.47 0.46 0.46 0.46 0.47
197579 0.46 0.47 0.47 0.47 0.47 0.47
198084 0.47 0.50 0.50 0.48 0.49 0.48
198589 0.55 0.51 0.54 0.49 0.52 0.53
199094 0.57 0.51 0.57 0.51 0.54 0.54
199599 0.58 0.52 0.64 0.52 0.58 0.55
200005 0.65 0.60 0.68 0.59 0.63 0.63
Minority
(SPMIN)
197074 0.50 0.53 0.42 0.50 0.46 0.52
197579 0.50 0.54 0.43 0.54 0.49 0.52
198084 0.50 0.56 0.46 0.55 0.50 0.53
198589 0.54 0.56 0.46 0.48 0.47 0.55
199094 0.60 0.56 0.47 0.46 0.47 0.58
199599 0.54 0.58 0.47 0.42 0.45 0.56
200005 0.56 0.64 0.47 0.45 0.46 0.60
Aggregate
(ALLSP)
197074 0.47 0.49 0.45 0.48 0.46 0.48
197579 0.47 0.49 0.46 0.49 0.47 0.48
198084 0.48 0.52 0.49 0.50 0.49 0.50
198589 0.54 0.52 0.51 0.49 0.50 0.53
199094 0.58 0.52 0.54 0.50 0.52 0.55
199599 0.57 0.54 0.59 0.49 0.54 0.56
200005 0.63 0.61 0.62 0.54 0.58 0.62

Source: Calculated from CBR (University of Cambridge) data available in
http://www.cbr.cam.ac.uk/research/programme2/project220.htm.

148

Figure 1. Aggregate Shareholder Protection in Four OECD Countries, 19702005

Figure 2. Common Law vs. Civil Law: Aggregate Shareholder Protection, 19702005

At the disaggregative level, it appears that in the field of shareholder protection relating to board and
management (SPBRD) there is not much gap between UK and France and between Germany and USA (Figure
3). We find not much difference between common law and civil law (Figure 4). That means the distinction
between the two groups arises in the field of minority shareholder protection (SPMIN). Both Germany and
France provided more and more minority shareholder protection in contrast to its steady decline in the USA and
stagnation in the UK (Figures 5 and 6).

Figure 3. Shareholder Protection Relating to Board and Management in Four OECD Countries, 19702005
0.40
0.45
0.50
0.55
0.60
0.65
1970-74 1975-79 1980-84 1985-89 1990-94 1995-99 2000-05
France Germany UK USA
0.40
0.45
0.50
0.55
0.60
0.65
1970-74 1975-79 1980-84 1985-89 1990-94 1995-99 2000-05
Common Law Civil Law
0.40
0.45
0.50
0.55
0.60
0.65
0.70
1970-74 1975-79 1980-84 1985-89 1990-94 1995-99 2000-05
149

Figure 4. Common Law vs. Civil Law:Shareholder Protection Relating to Board and Management, 19702005

Figure 5. Minority Shareholder Protection in Four OECD Countries, 19702005

Figure 6. Common Law vs. Civil Law: Minority Shareholder Protection, 19702005

To examine the same question at a more rigorous level, consider all the 36 years (19702005) of
observations for each country to get a panel dataset of 144 observations. We use the dummy variable for
common law origin countries (COM) and fit the following regression with a timetrend:
0.40
0.45
0.50
0.55
0.60
0.65
1970-74 1975-79 1980-84 1985-89 1990-94 1995-99 2000-05
0.40
0.45
0.50
0.55
0.60
0.65
1970-74 1975-79 1980-84 1985-89 1990-94 1995-99 2000-05
0.40
0.45
0.50
0.55
0.60
0.65
1970-74 1975-79 1980-84 1985-89 1990-94 1995-99 2000-05
150

Y = a + b.COM + c.t (1)

where Y = the shareholder protection index (ALLSP or SPBRD or SPMIN), COM is the dummy variable
= 1 for common law countries (UK, USA) and zero for other countries (France and Germany) and t is the time
trend. This regression procedure shows that common law countries and civil law countries do not differ in
shareholder protection relating to board (SPBRD) the dummy (COM) is not statistically significant. Contrary to
the LLSV legal origin hypothesis, the minority shareholder protection and so the aggregate shareholder
protection is lower in the common law countries the dummy is negative and highly significant for the dependent
variables, SPMIN and ALLSP (Table 2). Our result holds irrespective of whether we add timetrend in the
regression equation (1).

Table 2. Shareholder Protection in Common Law visvis Civil Law Countries, 19702005: Dummy Variable Analysis
1

Series Intercept(a)
Dummy for Common Law
Countries (COM)
Time
Trend (t)
RSquare
1.Aggregate Shareholder Protection
(ALLSP)
0.458* 0.022* 0.004* 0.706
2. Shareholder Protection Concerning
Board and Management (SPBRD)
0.425* 0.004
x
0.005* 0.732
3. Minority Shareholder Protection
(SPMIN)
0.534* 0.083* 0.001* 0.539

* Significant at 1 per cent level (based on robust standard errors).
x Not significant even at 10 per cent level (based on robust standard errors).
1 The following regression equation has been fitted through OLS:

Y = a + b.COM +c.t

where Y is shareholder protection index (ALLSP or SPBRD or SPMIN), t is the time trend and COM is
the dummy variable = 1 for common law countries (UK, USA) and zero for other countries (France and
Germany). To sum up, our study of the leximetric data of four major countries (from the perspective of legal
origin) over a long span of time (19702005) does not support the LLSV proposition that the common law is
superior to civil law in protecting the interests of shareholders. Rather we find that overall civil law is superior to
common law because of better minority shareholder protection in the civil law countries. There is also a tendency
towards divergence because of declining minority shareholder protection in the USA coupled with its sluggish
improvement in the UK.

4. Does Law Matter?
In this section, we shall examine whether law matters: whether a country with higher shareholder
protection experiences greater development of its stock markets. To examine this proposition we shall consider
the following indicators of stock market development (used one at a time) along with shareholder protection
indices (taken one at a time) discussed in the earlier section (SPBRD, SPMIN, and ALLSP):
1. Market capitalisation or the value of the shares of listed firms to GDP, MKAPY.
2. Value of total shares traded on the stock exchange to GDP, VTRDY.
3. Turnover ratio, which is the ratio of the value of total shares traded to average real market
capitalization, TURN.
4. Number of domestically incorporated companies listed in the countrys stock exchange per million of
population, LISTPOPM.
The data source of the three series, MKAPY, VTRDY and TURN is the Financial Structure Dataset of
World Bank (see Beck et al. 2000a). The data on legal protection of shareholders are from online CBR
(Cambridge, UK) source (as already mentioned). All other data are from the World Development Indicators of
World Bank.
The periodic (mostly quinquennial) averages of the indicators of stock market and development are
plotted in Figures 7 to 10. These show that for all the indicators of stock market development (excepting
151

turnover ratio), the common law countries (UK and USA) are better placed. They had higher market
capitalisation and value of trading (both relative to GDP) throughout the period 19762005 for which we have
data. This is also true for stock market listing (per million of population) over the period 19802005.
We have also replicated the dummy variable analysis of annual data conducted in the earlier section to
supplement our graphical analysis of quinquennial average data. We have considered additional dummies
(intercept and slope dummies) for the period, 20012005 in order to take into account the impact of dotcom
bubble bursting and subsequent recovery. This procedure supports our graphical observation: the commonlaw
group has statistically significant higher market capitalisation, higher value of stock trading (both relative to GDP)
and higher number of listed firms (per million of population); only for turnover ratio the difference is not
statistically significant (Table 3). Now the crucial question is how far this higher stock market development in the
commonlaw group is due to its shareholder protection. We shall seek an answer to these questions through
dynamic panel data modelling (discussed below). To control for the level of economic activity of a country we
shall consider real GDP in purchasing power parity constant dollars, deflated by population (PPPCY) available
from World Bank source (World Development Indicators).

Figure 7. Stock Market Capitalisation (relative to GDP) in Four OECD Countries, 19762005

Figure 8. Value of Stock Trading (relative to GDP) in Four OECD Countries, 19762005

0
0.5
1
1.5
2
1976-80 1981-85 1986-90 1991-95 1996-2000 2001-2005
0
0.5
1
1.5
2
2.5
1976-80 1981-85 1986-90 1991-95 1996-2000 2001-2005
152

Figure 9. Stock Market Turnover Ratio in Four OECD Countries, 19762005

Figure 10. Stock Market Listing of Firms per Million of Population in Four OECD Countries, 19802005

Table 3. Stock Market Development in the Common Law visvis the Civil Law Countries since the 1970s: Dummy
Variable Analysis
1

Series & Period of Analysis
Intercept
(a)
Dummy for
Common Law
Countries
(COM)
Time
Trend
(t)
dummy
for
2001
2005
(d2001)
t.dummy
for
2001
2005
(sd2001)
R
Square
Market CapitalisationGDP ratio
(in natural log), LMKAPY,
19762005
3.121** 1.212** 0.078** 3.993* 0.125* 0.91
0
0.2
0.4
0.6
0.8
1
1.2
1.4
1.6
1.8
1976-80 1981-85 1986-90 1991-95 1996-2000 2001-2005
0
5
10
15
20
25
30
35
40
45
50
153

Series & Period of Analysis
Intercept
(a)
Dummy for
Common Law
Countries
(COM)
Time
Trend
(t)
dummy
for
2001
2005
(d2001)
t.dummy
for
2001
2005
(sd2001)
R
Square
Value of Stock TradingGDP ratio
(in natural log), LVTRDY,
19762005
5.234** 1.237** 0.146** 6.012** 0.186** 0.894
Stock Market Turnover Ratio (in
natural log), LTURN,
19762005
2.112** 0.025 0.068** 2.303 0.069 0.656
Number of Firms Listed in the
Stock Market per million of
population (in natural log),
LLISTPOPM,
19802005
2.058** 1.256** 0.006 0.951 0.03 0.854

* Significant at 5 per cent level (based on robust standard errors).
** Significant at 1 per cent level (based on robust standard errors).
1 The following regression equation has been fitted through OLS:

Y = a + b.COM +d.t +e.d2001 +f.sd2001

where Y is the alternative stock market development indicators (alternatively LMKAPY, LVTRDY, LTURN, LLISTPOPM),
COM is the dummy variable = 1 for common law countries (UK, USA) and zero for other countries (France and Germany), t
is the time trend, d2001 is dummy for dotcom bubble that assumes the value zero for 19702000 and =1 for 20012005 and
sd2001=d2001*t varies accordingly.
Dynamic Panel Data Analysis: Estimates of Short run and Longrun Relationships
For a large time dimension of panel data (as we have here), Pesaran, and Smith (1995) showed that the
traditional procedures for estimation of pooled models, such as the fixed effects, instrumental variables, and
generalized method of moments (GMM) can produce inconsistent, and potentially very misleading estimates of
the average values of the parameters in dynamic panel data models unless the slope coefficients are in fact
identical (Pesaran, and Shin 1999, p.622). Therefore, to ascertain the nature of the relationships between
financial development and shareholder/creditor protection we shall use the PesaranShin dynamic panel data
analysis. We start with a postulate of longrun relationship involving X (four stock market development indicators
such as MKAPY, VTRDY, TURN and LISTPOPM), Y (per capita GDP, PPPCY in natural log) and Z (various
shareholder protection indexes taken one at a time):

X
it
=
i
Y
it
+ t
i
Z
it
+ q
it (2)

where i (=1,2,3,4) represents countries, t (=1,2, T) represents periods (years), i i are the longrun
parameters and it is the error term.
We are interested to know whether there exist longterm and shortterm effects of Z (shareholder
protection) along with Y (per capita GDP measuring economic activities) on X (stock market development
indicators respectively) and whether there exists a stable adjustment path from the shortterm relationship (if
any) to the longrun relationship. Following Pesaran, and Shin (1999), our panel data analysis is based on the
following error correction representation:

p1 q1 r1
X
it
= u
i
(q
it1
) +

E
ij
X
i, tj
+ E
ik
Y
i, tk
+ Et
il
Z
i, tl
+
i
+ |
it
(4)
=1 k = 0 l = 0

154

where is the difference operator, i is the countryspecific errorcorrecting speed of adjustment term,
ij
,
ik

and t
ij
are the coefficients of the lagged variables,
i is the country fixed effect and |
it
is the disturbances
term. The existence of a meaningful longrun relationship with a stable adjustment dynamics requires u
i
< 0.
Under this general structure, we can have three alternative models. On one extreme, we can have
dynamic fixed effect estimators (DFE) where intercepts are allowed to vary across the countries and all other
parameters and error variances are constrained to be the same. At the other extreme, one can estimate
separate equations for each country and calculate the mean of the estimates to get a glimpse of the overall
picture. This is called mean group estimator (MG). Pesaran, and Smith (1995) showed that MG gives consistent
estimates of the averages of parameters. The intermediate alternative is pooled mean group (PMG) estimator,
suggested by Pesaran, and Shin (1999). It allows intercepts, shortrun coefficients and error variances to differ
freely across the countries but the long run coefficients are constrained to be the same; that means,
i
=
and t
i
= t

or all i while u
i
may differ from group to group.
Using the STATA ado developed by Blackburne, and Frank (2007) we have estimated all the three
alternative models, MG, PMG and DFE. Based on Lag Exclusion Wald Test for each variable separately we
have determined the lag structure (p, q, r).
62
Our findings are presented below:
1. In none of the three models, we find shortterm or longterm effect (favourable or unfavourable) of
aggregate shareholder protection, ALLSP on the four stock market development indicators. This is also true for
the shareholder protection relating to Board, SPBRD (Table 4, Parts A and B). In our earlier study (Sarkar, and
Singh 2010) we arrived at the similar conclusion on the basis of a timeseries analysis of the individual country
cases.
2. As regards the impact of minority shareholder protection on stock market development indicators, the
same conclusion cannot be drawn because of one remarkable exception. This is the case of stock market listing
in the DFE model: the effect of minority shareholder protection on stock market listing is negative in the short
run but positive in the longrun and there exists a stable adjustment path from the shortrun relationship to the
longrun relationship. A series of Hausman tests support the DFE model and so it can be concluded that
minority shareholder protection matters for stock market listing.
63
There is another minor exception: a negative
shortterm effect on turnover ratio was observed in the DFE model but no significant longterm effect (Table 4,
Parts C(iii) and (iv)).

Table 4. Shortrun and Longrun Relationships between Legal Index and Stock Market Variables 1976/802005:
Dynamic Panel Models

Period of Analysis/Models
1
PMG MG DFE
A. Impact of Aggregate Shareholder Protection Index,
ALLSP (Z) on

(i) Stock Market
Capitalization , LMKAPY (X)

Longterm Relationship
Y (LPPPCY) 5.415*** 1.432 2.531***
Z (ALLSP) 2.651 16.076 3.331
Shortterm Relationship
u 0.158 0.297*** 0.164***
X
t1
0.373*** 0.421*** 0.454***
Y
t
1.114 1.058 0.374
Y
t1
0.221 0.756 0.639

62
We have considered a uniform lag-structure for all the countries, as the STATA ado used here does not have this
option. It is theoretically possible to consider different lag structures for different countries on the basis of some information
criteria.
63
Our individual country case studies.(reported in Sarkar, and Singh, 2010) could not find this result that supports
the law matters proposition of the legal origin theory.

155

1
PMG MG DFE
Z
t
1.453 1.094 0.678
8.997 11.156 4.456**
Chosen Model
2
DFE
(ii) Value of Stock Trading, LVTRDY (X)
Y (LPPPCY) 6.614*** 6.722*** 6.224***
Z (ALLSP) 2.949 1.744 2.658
u 0.279*** 0.382*** 0.221***
Y
t
3.606 4.164 2.999
Y
t1
2.551 1.475** 1.039
Z
t
0.068 0.212 1.917
18.433 28.029** 14.408***
Chosen Model
2
PMG
(iii) Turnover Ratio, LTURN (X)
Y (LPPPCY) 3.628*** 3.185*** 3.5***
Z (ALLSP) 1.282 1.672 0.798
u 0.499*** 0.508*** 0.388***
Y
t
1.611 1.731 1.529
Y
t1
1.886 2.187 0.389
Z
t
0.913 1.753 0.579
18.168 19.049*** 13.699***
Chosen Model
2
PMG
(iv) Stock Market Listing, LLISTPOPM (X)
Y (LPPPCY) 1.444*** 0.099 0.116
Z (ALLSP) 1.549 0.097 1.108
u 0.361** 0.511 0.287***
Y
t
1.989** 1.923** 1.78
Y
t1
0.103 0.625 0.319
Z
t
0.234 0.029 0.544
4.078 1.141 0.932
Chosen Model
2
MG
B. Impact of Shareholder Protection relating to Board,
SPBRD (Z)
on

(i) Stock Market

Y (LPPPCY) 2.887*** 0.017 2.269**
156

1
PMG MG DFE
Z (SPBRD) 0.335 8.758 3.039
u 0.167*** 0.283*** 0.15***
X
t1
0.465*** 0.44*** 0.469***
Y
t
0.412 0.735 0.189
Y
t1
0.026 0.427 0.427
Y
t2
1.324 0.205 0.703
Z
t
0.146 1.046 0.977
4.998*** 10.505 3.749*
Chosen Model
2
PMG
Y (LPPPCY) 7.221*** 7.042*** 5.456***
Z (SPBRD) 3.965 0.616 4.496
u 0.273*** 0.382*** 0.224***
Y
t
2.806 3.793 3.092
Y
t1
2.044* 1.259 1.282
Z
t
0.448 0.597 1.439
Z
t1
1.642 0.899 1.049
19.458*** 31.655*** 13.064**
Chosen Model
2
PMG
Y (LPPPCY) 3.583*** 3.294** 3.031***
Z (SPBRD) 0.878 0.249 0.919
u 0.479*** 0.502*** 0.38***
Y
t
1.244 1.511 1.683
157

1
PMG MG DFE
Y
t1
1.168 1.337 0.313
Z
t
1.204 1.911 0.072
Z
t1
0.792 1.175 0.628
0.17345*** 20.463 11.988***
Chosen Model
2
DFE
Y (LPPPCY) 1.607*** 0.218 0.254
Z (SPBRD) 1.782 0.404 0.304
u
0.368**

0.455*** 0.279***
Y
t
1.879** 1.866** 1.723
Y
t1
0.678 1.076 0.059
Z
t
0.035 0.06 0.939
Z
t1
1.101 0.934 0.424
4.727* 2.756 0.087
Chosen Model
2
DFE
C. Impact of Minority Shareholder Protection, SPMIN (Z)
on

(i) Stock Market

Y (LPPPCY) 3.178*** 3.002** 3.207***
Z (SPMIN) 0.987 10.377 1.623
u 0.198** 0.352*** 0.159***
X
t1
0.462*** 0.411*** 0.471
Y
t
1.123* 1.363* 0.585
Y
t1
0.905*** 0.895 0.888
Z
t
1.316 0.608 0.397
Z
t1
0.998 0.519 0.065
6.636** 14.877** 5.365**
Chosen Model
2
PMG
Y (LPPPCY) 5.954*** 5.633*** 6.746***
Z (SPMIN) 0.057 4.759 1.68
158

1
PMG MG DFE
u 0.269*** 0.379*** 0.226***
Y
t
2.806 4.159 2.74
Z
t
0.331 0.414 1.792
16.432*** 26.177** 15.789***
Chosen Model
2
PMG
Y (LPPPCY) 3.436*** 2.604*** 3.326***
Z (SPMIN) 0.082 4.307 0.172
u 0.529*** 0.519*** 0.41***
Y
t
1.904 1.801 1.293
Z
t
0.677 0.386 2.189
Z
t1
2.969 3.272 4.219***
18.632*** 17.162*** 13.966***
Chosen Model
2
PMG
3

Y (LPPPCY) 1.025*** 0.007 0.114
Z (SPMIN) 1.084 10.23 2.545*
u 0.428* 0.613*** 0.322***
Y
t
1.625 1.631 2.149**
Y
t1
0.659 0.174 0.05
Z
t
3.082 4.898** 0.321
Z
t1
1.625 1.863 0.175
Z
t2
0.901 1.138 1.479*
3.169* 1.832 0.071
Chosen Model
2
DFE

* Significant at 10 per cent level.
** Significant at 5 per cent level.
*** Significant at 1 per cent level.

1. The regressors are estimated from the following longterm relationship and its error correction form.
Longrun Relationship:

X
it
=
i
Y
it
+ t
i
Z
it
+ q
it

Error Correction Form:

p1 q1 r1
X
it
= u
i
(q
it1
) +

E
ij
X
i, tj
+ E
ik
Y
i, tk
+ Et
ij
Z
i, tl
+
i
+ |
it

j =1 k = 0 l=0

where is the difference operator, u
i
is the groupspecific errorcorrecting speed of adjustment term,
ij
,
ik
and t
ij
are the coefficients of the lagged variables,
i
is the countryspecific effect and |
it
is the
159

disturbances term. The existence of a meaningful longrun relationship with a stable adjustment dynamics
requires u
i
< 0.

2. An appropriate model is chosen on the basis of a series of Hausman tests.
3. Due to nonavailability of data, the period of analysis is 19802005.

5. Summary and Conclusion
Analysing the available data of the legal origin mother countries over a long time span, 19702005, our
study finds that the civil law countries (France and Germany) provide more minority shareholder protection.
Furthermore, our study questions the related proposition that law matters; it finds no clear evidence in favour of
a favourable effect of shareholder protection on stock market development. Using dynamic panel data models it
concludes that only one aspect of shareholder protection matters for stock market development; it is minority
shareholder protection which is observed to have a longterm favourable effect on only one indicator of stock
market development, namely the number of firms listed in the stock market relative to total population. Perhaps
the minority shareholder protection discourages firms to list their shares in the shortrun (we got shortterm
negative relationship) but in the longrun it popularizes the stock market giving an incentive for firms to rely more
on stock market. To sum up, our study based on longitudinal data for four OECD countries does not support the
proposition that commonlaw countries provide more protection to their shareholders which in turn promote their
stock market developments.

Acknowledgements
I am grateful to L'Institut d'tudes Avances (IEA), Paris for funding this study and equally thankful to
Professors Ajit Singh and Simon Deakin for encouraging me to further my research by involving me in the
project, Law, Finance and Development by means of several visiting fellowships at the Centre for Business
Research at the University of Cambridge, UK) between 20072010.

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162

PROHIBITION OF PARALLEL IMPORTS AS A HARD CORE
RESTRICTION OF ARTICLE 4 OF BLOCK EXCEPTION
REGULATION FOR VERTICAL AGREEMENTS: EUROPEAN LAW
AND ECONOMICS
-

Nikolaos E. ZEVGOLIS
+

Athens University of Economics and Business, Athens, Greece
nzevgolis@epant.gr
Panagiotis N. FOTIS
+

University of Central Greece, Athens, Greece
pfotis@epant.gr

Abstract
This paper attempts to highlight the main principles of Competition Law (regulatory and case law
framework) covering the prohibition of parallel imports and to reveal the main effects of it on the competitive
structure of the market. Especially, the regulatory framework relates Block Exception Regulation 330/2010 with
Block Exception Regulation 461/2010 in order to determine whether prohibition of parallel imports constitutes a
hardcore restriction or not, while the economic analysis evaluates it in a vertical market with few suppliers &
buyers which sell goods to the final (domestic) consumers. The results indicate that the prohibition of parallel
imports by upstream sellers cause vertical restraints to the domestic customers of the buyers. In any case, this
paper focusing mainly on consumer welfare, does not necessarily link parallel imports with the notion of parallel
trade and/or parallel exports as well as it does not provide the pros and cons of parallel trade.

Keywords: Antitrust Law, vertical restraints, block exception regulation, market imperfection, consumer
nondurables, repeated games of Oligopoly Theory.

JEL Classifications: D43, K21, L13, L43, L67.

1. Introductory remarks
Block Exception Regulation (BER) 330/2010
64
(ex BER 2790/99
65
) states that article 101(1) of the Treaty
shall not apply to vertical agreements, whereas such agreements contain vertical restraints (ar.2) and the market
share held by the supplier does not exceed 30 % of the relevant market on which it sells the contract goods or
services and the market share held by the buyer does not exceed 30 % of the relevant market on which it
purchases the contract goods or services (ar. 3).
Also, BER 461/2010
66
(ex BER1400/2002
67
) declares that article 101(1) of the Treaty shall not apply to
vertical agreements relating to the conditions under which the parties may purchase, sell or resell spare parts for
motor vehicles or provide repair and maintenance services for motor vehicles, which fulfil the requirements for an
exemption under Regulation (EU) No 330/2010 and do not contain any of the hardcore clauses listed in Article 5
of this Regulation, (see below) whereas such agreements contain vertical restraints (article 4).
However, both BERs contain hardcore restrictions that remove the benefit of the block exemption.
Especially, article 4 of BER 330/2010 (see below) outlines the basic categories of hardcore restrictions, for which
the exception provided for in the abovementioned article 2 of BER shall not apply to vertical agreements.
The main question which this paper tries to answer is whether prohibition of parallel imports constitutes a
hardcore restriction of BER for vertical agreements, that is a per se approach. For this purpose, we analyse the
existing regulatory framework in combination with case law in a real economic environment so as to determine if

-
The views expressed herein are purely those of the authors and do not necessarily reflect the Hellenic Competition
Commission. Warm thanks are expressed to Mrs Danielle Apostolatos. Usual disclaimer applies.

64
O.J. L102/1, 23.4.2010.
65
O.J. L336/21, 29.12.1999.
66
O.J. L 129/52, 28.05.2010.
67
O.J. L 203/30, 1.8.2002.
163

the prohibition of parallel imports by upstream suppliers may cause vertical restraints in the downstream market
and especially the customers of the buyers
68
.
The remainder of the paper is organized as follows: Sections 2 and 3 provide as well as evaluate the
main principles of BER 330/2010 & BER 461/2010 respectively. Section 4 combines both BERs, while section 5
highlights some administrative anticompetitive measures. Section 6 imports the theoretical argument into real
economic environment. Lastly, section 7 provides some conclusions.

2. The content of the General Block Exemption Regulation (BER 330/2010)
2.1 Hardcore restrictions
Logically, it would be expected that the prohibition of parallel imports would be explicitly referred as a
hardcore restriction in the content of article 4 of BER 330/10 (Restrictions that remove the benefit of the block
exemption hardcore restrictions). According to this, The exemption provided for in Article 2 shall not apply to
vertical agreements which, directly or indirectly, in isolation or in combination with other factors under the control
of the parties, have as their object:
(a) the restriction of the buyer's ability to determine its sale price, without prejudice to the possibility of the
supplier to impose a maximum sale price or recommend a sale price, provided that they do not amount to a fixed
or minimum sale price as a result of pressure from, or incentives offered by, any of the parties;
(b) the restriction of the territory into which, or of the customers to whom, a buyer party to the agreement,
without prejudice to a restriction on its place of establishment, may sell the contract goods or services
69
,
(c) the restriction of active or passive sales to end users by members of a selective distribution system
operating at the retail level of trade, without prejudice to the possibility of prohibiting a member of the system
from operating out of an unauthorised place of establishment;
(d) the restriction of crosssupplies between distributors within a selective distribution system, including
between distributors operating at different level of trade;
(e) the restriction, agreed between a supplier of components and a buyer who incorporates those
components, of the suppliers ability to sell the components as spare parts to endusers or to repairers or other
service providers not entrusted by the buyer with the repair or servicing of its goods
70
.
It is obvious that there are no specific provisions for the prohibition of parallel imports as a hardcore
restriction. Consequently, according to the basic principle governing BER 330/2010 (as well as the former BER
2790/99), which provides that whatever is not prohibited by article 4 is permitted
71
, it would be expected that the
prohibition of parallel imports is not a hardcore restriction.
However, the significance of parallel trade protection is mentioned in the new Guidelines about vertical
restraints
72
, mainly in paragraph 25, where it is referred as an instance that if after a supplier's announcement of
a unilateral reduction of supplies in order to prevent parallel trade, distributors reduce immediately their orders
and stop engaging in parallel trade, then those distributors tacitly acquiesce to the supplier's unilateral policy.
This can however not be concluded if the distributors continue to engage in parallel trade or try to find new ways
to engage in parallel trade
73
.
In any case, in our view, before someone can come to a conclusion whether the prohibition of parallel
trade constitutes a hardcore restriction or not, it would be wise to examine the following issues: Firstly, the
necessity of focusing on the interpretation of articles 4 content of the Block Exemption 330/2010 and the
consideration of the guidelines about vertical restraints in combination with the content of Regulation 461/2010
and its relevant guidelines, secondly, the possibility that such a point of view would come in contradiction with

68
According to BER 330/2010, 1(i), customer of the buyer means an undertaking not party to the agreement which
purchases the contract goods or services from a buyer which is party to the agreement.
69
Except from (i) the restriction of active sales into the exclusive territory or to an exclusive customer group reserved
to the supplier or allocated by the supplier to another buyer, where such a restriction does not limit sales by the customers
of the buyer, (ii) the restriction of sales to end users by a buyer operating at the wholesale level of trade, (iii) the restriction of
sales by the members of a selective distribution system to unauthorised distributors within the territory reserved by the
supplier to operate that system, and (iv) the restriction of the buyer's ability to sell components, supplied for the purposes of
incorporation, to customers who would use them to manufacture the same type of goods as those produced by the supplier.
70
See O.J. L102/1, 23.4.2010, p. 5.
71
See Dethmers F. & Posthuma de Boer P. (2009) p. 425.
72
O.J. C130/01, 19.05.2010.
73
See para. 25 (a).
164

the settled case law about parallel imports and thirdly, the characteristics of the markets in which parallel trade
prohibition is imposed.

2.2 Prohibition of parallel imports as an effective measure for RPM
The hardcore restriction set out in article 4(a) of the BER 330/2010 focuses on Resale Price Maintenance
(RPM), that is, agreements or concerted practices having as their direct or indirect object the establishment of a
fixed or minimum resale price or a fixed or minimum price level to be observed by the buyer. In the case of
contractual provisions or concerted practices that directly establish the resale price, the restriction is clear cut.
However, RPM can also be achieved through indirect means. Examples of this include: an agreement
fixing the distribution margin, fixing the maximum level of discount the distributor can grant from a prescribed
price level, making the grant of rebates or reimbursement of promotional costs by the supplier subject to the
observance of a given price level, linking the prescribed resale price to the resale prices of competitors, threats,
intimidation, warnings, penalties, delay or suspension of deliveries or contract terminations in relation to
observance of a given price level. Direct or indirect means of achieving price fixing can be made more effective
when combined with measures to identify pricecutting distributors, such as the implementation of a price
monitoring system, or the obligation of retailers to report other members of the distribution network that deviate
from the standard price level.
Similarly, direct or indirect price fixing can be made more effective when combined with measures which
may reduce the buyer's incentive to lower the resale price, such as the supplier printing a recommended resale
price on the product or the supplier obliging the buyer to apply a mostfavouredcustomer clause. The same
indirect means and the same supportive measures can be used to make maximum or recommended prices
work as RPM.
However, the use of a particular supportive measure or the provision of a list of recommended prices or
maximum prices by the supplier to the buyer is not considered in itself as RPM
74
. Nevertheless, it should also be
assessed that in few cases
75
, maximum and recommended prices will work as a focal point for the resellers and
might be followed by most or all of them; in such cases the possible competition risk is that maximum or
recommended prices may soften competition or even facilitate collusion between suppliers.
The strategy of parallel imports prohibition may be seen as a measure which reduces the buyers
incentive to reduce resale price by diminishing the sources of supply. Such a strategy may dangerously raise the
level of selling prices of the products in question, since the elimination of sources of supply restricts the ability of
the buyer to distribute the product in a profitable way. As a consequence of this, the consumer welfare is
negatively influenced.
Consumer welfare may also be negatively influenced in cases where the abovementioned strategy takes
place in markets where the buyers resell the products in question to domestic customers of the buyers. In our
view, such a product market example may have more severe anticompetitive effects since the buyers of the
downstream market are not export oriented firms.
Lastly, by imposing a price floor, an upstream firm increases the noncooperative profits of downstream
firms and makes collusion relatively less profitable. As a result, collusion may be destabilized and the price floor
enables a manufacturer to prevent collusive behavior among downstream firms (Overvest B 2010).

2.3 The argument of exclusive supply
Hypothetically speaking, if someone is in favour of the opinion that the prohibition of parallel imports is not
a hardcore restriction, he or she could argue that, since the prohibition of parallel imports seem to have the same
results with an exclusive supply agreement, therefore de facto constitutes an exclusive supply.
Nevertheless, at this point an absolutely necessary distinction ought to be made: the exclusive supply of
specific products of a trademark is not the same with the exclusive supply of a specific trademark by itself; in the
first case, the exclusive supply of specific products of a specific trademark is legal, since it does not prohibit the
parallel imports of these products of the same trademark; If a retailer can find the same products of the same
trademark by a cheaper source of supply (for instance, a wholesaler or an authorized dealer in an other member
state), he can buy them in order to resell them without breaking the exclusive supply agreement.

74
See O.J. L102/1, 19.05.2010, para. 48.
75
See O.J. L102/1, 19.05.2010, para 227.
165

On the contrary, the exclusive supply of a specific trademark by itself, which actually constitutes exclusive
source of supply
76
and not exclusive supply, should be treated in a completely different way, because it de facto
constitutes an indirect (but effective) prohibition of parallel imports; in this case, the real purpose of the exclusive
supply agreement concerning not specific products but a trademark as a whole is not a non compete
obligation
77
, but to prevent the retailer from finding products of the same trademark in lower prices by other
sources. So, the point of view that prohibition of parallel imports constitutes an exclusive supply agreement and
therefore ought to be allowed as a practice is postponed; an exclusive supply agreement which indirectly prevent
parallel imports is always (inherently) illegal.

3. The content of the Motor Vehicles Block Exemption Regulation (BER 461/2010)
3.1 The content of supplementary guidelines
The necessity for protection of parallel trade in the motor vehicles sector is formulated absolutely clearly
in the Commission notice Supplementary guidelines
78
on vertical restraints in agreements for the sale and
repair of motor vehicles and for the distribution of spare parts for motor vehicles
79,80
. The Commission considers
the protection of parallel trade in the motor vehicles sector as an important competition objective, since the
internal market has enabled consumers to purchase motor vehicles in other Member States and take advantage
of price differentials between them
81
.
The main concept of the internal market is the consumer's ability to buy goods in other Member States.
This ability is especially important as far as motor vehicles are concerned, given the high value of the goods and
the direct benefits in the form of lower prices accruing to consumers buying motor vehicles elsewhere in the
Union. It cannot be ignored that the specific nature
82
of the motor vehicle ought to be taken into account, since it
is one of the most complex products
83
. The Commission is therefore concerned that distribution agreements,
generally but also specifically in this particular sector, should not restrict parallel trade, since this cannot be
expected to satisfy the conditions laid down in Article 101(3) of the Treaty
84
. It is remarkable that the European
Court of Justice (ECJ) in its C338/00P (Volkswagen/Commission) decision clearly ruled that [] a measure
which is liable to partition the market between Member States cannot come under those provisions of Regulation
No 123/85 that deal with the obligations which a distributor may lawfully assume under a dealership contract.
The Court of First Instance properly held in paragraph 49 of the judgment under appeal that, although that
regulation provided manufacturers with substantial means by which to protect their distribution systems, it did not
authorise them to adopt measures which contributed to a partitioning of the market (Bayerische Motorenwerke,

76
Exclusive sourcing is something different, since in this case the existence of exclusive distributors is demanded;
according to para 162 of the Guidelines on vertical restraints [O.J. C130/01, 19.05.2010], [e]xclusive sourcing, requiring the
exclusive distributors to buy their supplies for the particular brand directly from the manufacturer, eliminates in addition
possible arbitrage by the exclusive distributors, which are prevented from buying from other distributors in the system.
77
See D.G. Goyder (2004), p. 187. See also para 129 of the Guidelines on vertical agreements [O.J. C130/01,
19.05.2010] referring that: Under the heading of single branding fall those agreements which have as their main element
the fact that the buyer is obliged or induced to concentrate its orders for a particular type of product with one supplier. That
component can be found amongst others in non- compete and quantity-forcing on the buyer. A non- compete arrangement
is based on an obligation or incentive scheme which makes the buyer purchase more than 80% of its requirements on a
particular market from only one supplier. It does not mean that the buyer can only buy directly from the supplier, but
that the buyer will not buy and resell or incorporate competing goods or services [emphasis added].
78
O.J. C138/16, 28.05.2010.
79
See Clark, J., and Simon, S. (2010), pp. 1-13 and Simon, S. (2010), pp. 83-91.
80
The new guidelines about the motor vehicle sector are called supplementary, since they should be read
combined with the guidelines on vertical agreements. According to Clark, J., and Simon, S. (2010), p. 3, [t]he guidelines
carry the word supplementary in their title to signal that they have to be read in conjunction with the General Vertical
Guidelines.
81
See the Commission notice Supplementary guidelines on vertical restraints in agreements for the sale and
repair of motor vehicles and for the distribution of spare parts for motor vehicles [O.J. C138/16, 28.05.2010], para 48.
82
See Karydis, G., and Zevgolis, N. (2009), p.95.
83
As Goyder, D.G. (2004), p.203 has mentioned: The motor car is probably the most complex consumer product of
all, as well as being the most expensive purchase that many consumers ever make. See also Vezzoso, S. (2004), p.190-
191 who wrote: The whole concept was centred on the belief that the car was not an ordinary good.
84
The notion that cross-border trade restrictions may harm consumers has been confirmed by the Court in Case C-
551/03 P, para 67 and 68; Case C-338/00 P, para 44 and 49 and Case T-450/05, para 46-49.
166

cited above, paragraph 37)
85
. That said, the application of a BER 461/2010 should never be used as an excuse
for the partitioning of the market. Besides, compartmentalisation of the market is not included (and cannot be
included) in the purposes of a Block Exemption Regulation.

3.2 Case law in motor vehicle sector
The relevant case law can safely be considered as settled, since the Commission has brought several
cases against motor vehicle manufacturers for impeding parallel trade, and its decisions have been largely
confirmed by the European Courts
86
. This experience shows that restrictions on parallel trade may take a
number of forms (direct or indirect)
87,88
.A supplier may put pressure on distributors, threaten them with contract
termination, fail to pay bonuses, refuse to honour warranties on motor vehicles imported by a consumer or
crosssupplied between distributors established in different Member States, or make a distributor wait
significantly longer for delivery of an identical motor vehicle when the consumer in question is resident in another
Member State. The relative remarks of Advocate General Antonio Tizzano in the General Motors case (C
551/03P) are very characteristic. According to his view, [] such an objective [compartmentalisation of the
single market
89
] can be achieved not only by direct restrictions on exports but also through indirect measures
aimed at deterring a dealer from making foreign sales, particularly by influencing the economic and financial
conditions of such operations. The Court of Justice has thus regarded as inherently restrictive of competition
measures which, like the measure at issue here, make parallel imports more difficult
90
by subjecting them to
treatment less favourable than that reserved for official imports or restricting the buyers freedom to use the
goods supplied in accordance with his own economic interests
91,92
. The Advocate Generals point of view had
been accepted by the ECJ
93
.
The case where a distributor is unable to obtain new motor vehicles with the appropriate specifications
needed for crossborder sales constitutes a particular example of indirect restrictions on parallel trade
94
. In those
specific circumstances, the benefit of the block exemption may depend on whether a supplier provides its
distributors with motor vehicles with specifications identical to those sold in other Member States for sale to
consumers from those countries (the socalled availability clause)
95
.

4. Distribution of new motor vehicles as a point of combination
of the two Block Exemption Regulations
It could be said that the two Block Exemptions, ie 330/2010 and 461/2010, are actually combined.
According to recital 10 of the preamble of the BER 461/2010, with regard to distribution of new motor vehicles
96
,
there are not any more significant competition shortcomings which would distinguish this sector from other
economic sectors (such as vertical relations) and which could require the application of rules different from and
stricter than those set out in Regulation (EU) No 330/2010.
The marketshare threshold, the nonexemption of certain vertical agreements and the other conditions
laid down in Regulation 330/2010 normally ensure that vertical agreements for the distribution of new motor
vehicles comply with the requirements of Article 101(3) of the Treaty. Therefore, vertical agreements for the
distribution of new motor vehicles ought to benefit from the exemption granted by Regulation (EU) No 330/2010,
subject to all the conditions laid down therein.

85
O.J. C138/16, 28.05.2010, para 49.
86
See Case IV/35.733 VW, Case COMP/36.653 Opel, Case COMP/36.264, Cases F-2/36.623/36.820/37.275.
87
O.J. C138/16, 28.05.2010, para 49.
88
See indicatively Bellamy, C., and Child, G. (2001), para. 7-053. See also Korah V. & OSullivan D., (2002), p. 58.
89
Addition made by the authors.
90
Judgment in Cases 96-102, 104, 105, 108 and 110/82, para 6.
91
Judgment in Case 319/82, para 6.
92
Such principles are also to be found in the Community rules governing the application of Article 81 EC to
distribution agreements [already Article 101 of the Treaty].
93
See Courts decision, para. 68.
94
O.J. C138/16, 28.05.2010, para. 50.
95
Joined Cases 25 and 26/84.
96
See the Commission Evaluation Report on the Operation of Regulation (EC) No 1400/2002 concerning motor
vehicle distribution and servicing (28 May 2008), p. 14 and the Commission Communication on The Future Competition Law
Framework applicable to the Motor Vehicle sector of 22 July 2009 [COM(2009) 388].

167

Furthermore, since the settled case law about the protection of parallel trade concerns basically the
distribution of new motor vehicles, it is obvious that the protection of parallel imports or exports either
concerning vertical agreements in the new motor vehicles sector or vertical agreements in an other sector is
(and should be) the same: it is about a hardcore restriction, consequently per se approach.

5. Administrative anticompetitive measures measures of having equivalent effect
Nevertheless, in some cases it is a member state (and not the manufacturer of a motor vehicle or a
producer generally) which creates an indirect restriction on parallel trade or negatively influences parallel trade
by specific administrative means; it is about the case of measures having equivalent effect. For instance,
concerning the sector of motor vehicles, the ECJ in its recent decision C170/07
97
(Commission of the European
Communities v Republic of Poland) declared that, by subjecting imported secondhand vehicles registered in
other Member States to a roadworthiness test prior to their registration in Poland, whereas domestic vehicles
with the same characteristics are not subject to such a requirement, the Republic of Poland had failed to fulfil its
obligations under Article 28 EC (already Article 34).
It is estimated that the ratio of the above mentioned decision of the ECJ adds up to its decision C154/85
(Commission of the European Communities v Italian Republic)
98
. In this case the ECJ ruled that article 30 (then
28 and already 34) of the Treaty, prohibiting measures having equivalent effect to a quantitative restriction, is
infringed by an increase by a member state (Italy) in the number of administrative requirements involving the
production of documents necessary for parallel imports of vehicles, whether new or already registered, from
other member states.
Those requirements, which make registration of the vehicles more complicated, longer and most costly,
cannot be justified on grounds of public policy connected with the detection or prevention of dealing in stolen
vehicles
99
, since they cannot be regarded as necessary for that purpose (principle of proportionality). That is, a
case where the information required duplicates that supplied by the authorities of the exporting member state
and less restrictive measures would be sufficient to achieve the desired objective. In reality, it was about an
unacceptable distinction between domestic and imported goods (motor vehicles).

6. The sector of detergents for domestic use in Greece
6.1 National Law
According to the national regulatory framework which rules the sector of detergents for domestic use in
Greece, a Greek wholesaler who intends to make parallel imports concerning detergents is obliged to follow very
strict rules. More specifically, firstly, the free circulation of detergents for domestic use is based on European
legislation (ie mainly on Regulation 648/2004
100
and Regulation 907/2006
101
with the Directives 67/548/EEC
102

and 1999/45/EC
103
, as they have been amended). In Greece the application of the abovementioned legislation is
controlled and applied by the States General Chemical Laboratory and the Supreme Chemical Council.
These two public organisations adopt unjustifiably (in our view)
104
the stricter interpretation of the
provisions in the abovementioned legislation, and the result is that the Greek regulatory framework is formed in a
completely different way in comparison with the framework applied to the rest of the European Union. The
marking (do you mean marketing?) of detergents for domestic use that can be circulated legally in Greece is
significantly stricter in Greece than in other member states (even more in comparison with the corresponding
products circulated in third countries). In practice, the potential importer of detergents for domestic use has to
deposit all the necessary documents
105
between them, the specific content of each detergent in centigrams
to the abovementioned public organisations, in order to be licensed for the imported detergents. Actually, the

97
The case concerns second hand vehicles.
98
[1987] ECR 2717.
99
See para. 14 of the Courts decision.
100
OJ L104/01, 08.04.2004.
101
OJ L168/05, 21.06.2006.
102
OJ 196/1, 16.08.1967.
103
OJ L 200/1, 30.07.1999.
104
In our view, in issues of consumer protection the Greek authorities can not presented as more sensitive then the
German or the French authorities, for example.
105
The authors cannot refer in this paper in full detail all the necessary preconditions demanded for legal parallel
imports of detergents for domestic use in Greece. However, if necessary, they can provide with further details-information
about these preconditions.
168

Greek regulatory framework regarding the sector of detergents for domestic use constitutes a kind of measure
having equivalent effect
106
. It is obvious that under these strict circumstances the legal parallel imports of
detergents for domestic use in Greece are practically almost impossible. The national legal framework for
parallel imports in the specific sector is extremely strict, perhaps the most rigorous in the E.U.
107
.
Due to the above measure having equivalent effect and the concentrations that have taken place, the
sector of detergents for domestic use in Greece constitutes an oligopolistic market where only a small number of
firms are active.
Therefore, the sector of detergents for domestic use in Greece constitutes an oligopolistic market where
only a small number of firms are active, because of the existence of measures having equivalent effect and the
concentrations that have taken place
108
. These activated firms have the possibility to raise their profit margin in
upper levels, due to the absence of competition in the specific market
109
.

6.2 Competitive restraints
The Greek example of parallel import prohibition concerns vertical restrictions imposed in distribution
agreements. There is an upstream and a downstream market in which firms in both markets (sellers
110
in
upstream market and buyers
111
in downstream market) behave in an oligopolistic way. In the upstream market
there are few but large producers/sellers of final goods whereas in the downstream market there are
firms/buyers that sell the upstream firms products to the final consumers (domestic costumers of the buyers).
The upstream market especially involves the production and distribution of daily consumer goods to
retailers
112
, such as detergents for domestic use. Upstream producers may also export the products in different
geographical downstream product markets. Each producer specialises in individual products or product groups,
such as fresh products, or dry food or nonfood products (i.e. detergents). The latter are grouped into small
segments each of which constitutes an individual product market, both from the demand and the supply side. In
each product market a producer
113
may hold a dominant position of economic strength or it is assumed to be the
leader of the market
114
(see Figure 1).
In the downstream market the firms are not export oriented. That is, they distribute the products to
domestic final consumers. Therefore, the clause of prohibition of parallel imports includes both imports (directly)
and exports (indirectly). The downstream firms provide a basket of foodstuffs and nonfood household
consumables sold in a supermarket environment
115
.

106
See Dassonville case [8/74, ECR 1974, 837] and Cassis de Dijon case [120/78, ECR. 1979, 649].
107
Probably, this is the reason why the Greek market mainly in the sector of detergents for domestic use is one of
the most expensive (or maybe the most expensive) in the E.U.
108
See Fotis, P., Polemis, M., Zevgolis, N. (2011), p. 76-77 for a review of major concentrations that have been
cleared by Hellenic Competition Commission during the period from 1995 to 2010. Also, See Fotis, P., Polemis, M.,
Zevgolis, N. (2009), p. 219-222 and Fotis P., Polemis M. (2011) for a financial and statistical analysis of concentrations in
Greece respectively during the same period. In Fotis P., Polemis M. (2011) there is a review of the use in economic tools in
merger analysis.
109
See Zevgolis, N., and Fotis, P. (2009), p. 1184-1190. According to the paper, the clause of prohibition of parallel
imports constitutes a hardcore restriction of competition, since, ceteris paribus, it consists of a barrier to entry for potential
competitors. By prohibiting the supply of products of a significant brand name by cheaper sources of supply, the clause has
as its indirect (if not direct) object the maintenance of a minimum level of supply prices and resale prices of the specific
products. As far as it concerns the Greek geographical market, the clause of prohibition of parallel imports aggravates the
already restrictive national regulatory framework which rules the sector of detergents for domestic use, having as its result
the restriction if not the disappearance- of parallel imports of the specific products.
110
Sellers, wholesalers and producers are used interchangeably.
111
Supermarkets and buyers are used interchangeably.
112
A small fraction of the upstream sales are sold to downstream wholesalers. Since that fraction of upstream sales
consists of less than 10% of the total sales in the downstream market, in the remainder of the paper will assume that
retailers are the only buyers of the upstream sales.
113
The same producer or different producers in each product market.
114
Stackelberg product market whereas the other firms of the product market are assumed to be the followers.
115
See for example, inter alia, cases No IV/M.1612 (Wal-Mart/ASDA), No. IV/M. 784-Kesko/Tuko; No. IV/M. 1221-
Rewe/Meinl or No. IV/M.1541-Kingfisher/ASDA.

169

Figure 1. The Upstream & Downstream markets of daily consumer goods

The clause of parallel imports prohibition creates barriers to entry for potential competitors in the
upstream market. The latter leads, ceteris paribus, to a restriction of competition in this market. Potential
competitors with easy and effective entry in the upstream market may possibly prevent an already active firm in
the upstream market from increasing the selling price of the final product to the supermarkets
116
.
Also, the decrease (diminution) of competition intention by the mean of such a clause enforces the
already powerful existence of upstream firms (sellers) with strong trademarks, driving a segmentation of the
specific market in comparison with the rest of the national markets in the E.U. The prohibition of parallel imports
creates almost automatically more available space for the already existing firms in the upstream market, active in
the specific market, to raise or at least stabilize their market share and consequently to enforce their market
power in the national market.

6.3 An example
6.3.1 Competition in the upstream & downstream markets
In the downstream market a supermarket (costumer of buyers) may prefer to import the final good from
different European geographic markets and takes advantage of price differentials between them
117
. The scope of
this strategy is to increase the supermarkets market share via a decreased selling price of the final good
118
.
However, if all the supermarkets exercise the same strategy, the effect on each supermarkets market
share and consequently on its profits, depends on the juncture where the strategy takes place. Generally
speaking, whether each supermarket cannot foresee competitors counteraction, it is possible to overestimate
the potential gaining from the abovementioned strategy.
Additionally, the pursuit of the same strategy for a long period of time by all supermarkets, may lead in a
war of attrition. This refers to a situation where the object of firms in a product market is to induce the
competitors to give up and, consequently, to suffer economic losses in the short run until their rivals exit the
market. In such an environment, firms try to abstain closing plants and giving up market share as they would
increase their costs
119
. This situation in game theory is referred to as a prisoners dilemma
120
.

116
Motta, M., (2009), p. 104.
117
For an example See para. 48 of the Commission notice Supplementary guidelines on vertical restraints in
agreements for the sale and repair of motor vehicles and for the distribution of spare parts for motor vehicles [O.J. C138/16,
28.05.2010].
118
The supermarket will not increase the price of the final good in the future since that will give the opportunity to the
other supermarkets to enjoy increased profits.
119
Sectors characterized by increasing returns to scale and/or large costs of exit in case of high fixed or sunk costs
are among the fundamental examples in which a war of attrition may take place.
120
See Tirole, J. (1998), p. 425-426.
Upstream Producers of daily
consumer goods (Detergents)
Few Oligopolists Sellers
Downstream Supermarkets
Few Oligopolists Buyers
Domestic Final Consumers
Customers of the Buyers
Exports
Foreign Geographic Markets
170

In the upstream market, producers of the final good get the point that downstream firms would not
preferred to engage in a price war since that may ultimately eliminate their profits. At the same time, they realize
that potential explicit or tacit collusive behavior from the supermarkets may cut down their profits, especially in
the case where the upstream market behaves competitively.
Therefore, upstream firms will try to eliminate the possibility of the aforementioned behavior by imposing
vertical restrictions in distribution agreements. Such a policy smuggles away the risk of anticompetitive practices
by the downstream firms and ensures the upstream firms profits in upper normal levels. The final goal of
strategic interaction between upstream & downstream firms is to enhance the producer welfare without
considering the probable reduction of consumer welfare via high prices of final goods.
Downstream firms recognize the increased strategic power of upstream firms with respect to their ability
to bargain better terms in distribution agreements. They also realize that eventually, cooperation with sellers will
reach a settlement which increases their profits.

6.3.2 A repeated game among upstream suppliers
and costumer of buyers of detergents for domestic use
Both producers and supermarkets prefer to cooperate rather than to engage in a war of attrition. Also,
both of them are patient, that is, they prefer to get the profits which accrue from the long run time span, rather
than to get the short run returns and they communicate in frequently temporal periods. Therefore, if
supermarkets choose not to cooperate with upstream producers, the short run payoff is less than the long
run profits (see Table 1).

Table 1. One Shoot game upstream suppliers and costumer of buyers (supermarkets) of detergents for domestic use

Buyer (supermarket)
Seller (producer)
Strategies CHEAT NO CHEAT
NO COOPERATION 25, 25 50, 0
COOPERATION 0, 50 40, 40
Payoffs in mil. euro
Cheat/No Cheat: imports/no imports of final good from different geographical areas
Cooperation/No cooperation: distribution agreement/no distribution agreement which prohibits imports of final good
from a different geographical areas

Additionally, an upstream seller will eventually realize whether a supermarket strives to cheat by choosing
not to cooperate while, the profits from cheating are less than the cost of cheating.
The payoffs of buyer and seller are their profits
121
. Consumer welfare increases as soon as all the other
supermarkets in the downstream market do not follow the same strategy. The Nash equilibrium of the static
game reveals that the selling price of the final good remains low since each player simultaneously maximizes its
profit by choosing the dominated Nash equilibrium.
The dominated strategy for supermarkets is cheat and the equivalent dominated strategy for producers is
no cooperation (25>1 & 50>40)
122
. The static game results in a dominated Nash equilibrium even though both
players may increase their profits by communicating between each other (the payoffs for both players are 40).
However, if all the supermarkets follow to cheat, that will trigger a war price among each other which eventually
results in profit losses. Although this is the best scenario for the consumers, firms in both levels of the vertical
chain realize that the best for them is not to independently choose their strategies.
Suppose now that upstream and downstream firms communicate in frequently temporal periods. That is,
the game is repeated in the near future. We assume that the static game of complete information is repeated
infinitely, with the results of all previous periods observed before the current period begins. For each t period the
results for each 1 t preceding periods of the game are observed before the
th
t period begins. In our example
the periods cover different distribution agreements among producers and supermarkets. The results of the
distribution agreements are known to both them before the new period begins.

121
The lower the selling price of the final good, the higher the market penetration and hence the profits of an
individual supermarket.
122
The first column presents the producers payoff and the second column presents the supermarkets payoff.
171

We denote
( )
( ) r
p
+
=
1
1
o the discount factor
123
of producers and supermarkets where is the probability
that the game will end immediately after a period and is the probability that the game continues at least
one more period. The payoffs for each chosen set of strategy by upstream and downstream firms are given by
the 2X2 game matrix in Table 1.
The present value of the infinite sequence of payoffs n t ,......, 3 , 2 , 1 = is given by

t
i
t
payoff payoff payoff payoff

= + + +
1
1
3
2
2 1
......... o o o (1)

Equation (1) reflects both the time value of money & the probability the game will end. Equation (1)
reflects both the time value of money & the probability the game will end. For example, at 1 = t
,
the payoff
worths
( )
( ) r
payoff p
+
1
1
, while in 2 = t it worths
( )
( ) r
payoff p
+
1
1
2
.
Following payoffs in Table 1 we argue that cooperation among producers and supermarkets may occur in
every period of distribution agreements (or, cooperation may occur in every period of a subgame perfect
outcome of the infinitely repeated game) if both sides from the vertical chain commit from the outset that they
choose the high payoff equilibrium (cooperation). Otherwise, they will choose the low payoff equilibrium (cheat)
in the subsequent periods
124
.
Upstream firms will cooperate with downstream firms if the latter do not import the final good from
different European geographical areas. Downstream firms prefer not to import the final good since the profits
from cooperation are higher than the profits from cheating.
A supermarket cooperates if
125
. According to figure 2, the straight distance AB depicts a lump
sum payoff of a supermarket after cheating and the distance shows the reduction of supermarkets payoff if
an upstream producer decides to follow the trigger strategy. A supermarket cheats whether I > B AB and
cooperates if the distance A is higher than the distance (that is, AB > BI ). Figure 2 depicts the payoffs of
the infinitely repeated game among producers and supermarkets according to the aforementioned trigger
strategy.

50

Payoffs

40

25

Figure 2. Payoffs of the infinitely repeated game among producers (sellers) and supermarkets (buyers)

123
The value today of a euro to be received one period later, where is the interest rate per period.
124
This strategy is called trigger strategy.
125
The infinite payoff when a supermarket cheats or cooperates is

or

correspondingly. A
supermarket cooperates if

or
Periods of distribution agreements
A
B

172

Following cooperation, the price of final goods remains in upper normal levels. Supermarkets do not cheat
(import the final good) and therefore the consumer welfare decreases.

7. Concluding remarks
The main question which this paper tries to answer is whether prohibition of parallel imports constitutes a
hardcore restriction of Block Exception Regulation for vertical agreements, that is, a per se approach.
In our view, the answer is yes. The prohibition of parallel imports is a measure which reduces the buyers
incentive to decline resale price by diminishing the sources of supply, and consequently raising dangerously the
selling prices and reducing the consumer welfare. An exclusive supply of a specific trademark by itself (exclusive
source of supply), constitutes the same, since it prevents the retailer/buyer from finding products of the same
trademark in lower prices by other sources. Above all, it constitutes an important anticompetitive objective for
the internal market since it prevents consumers from purchasing products being imported from other Member
States and taking advantage of price differentials between them.
The abovementioned conclusions are further enhanced, at least in some cases, by the structure of the
market and the national law of the member state (measures of having equivalent effect constitute an indicative
example) where the prohibition of parallel imports takes place.

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[27] O.J. C130/01, 19.05.2010, EUROPEAN COMMISSION, Guidelines on Vertical Restraints. Available at
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[28] O.J. L102/1, 23.4.2010, COMMISSION REGULATION (EU) No 330/2010, of 20 April 2010, on the
application of Article 101(3) of the Treaty on the Functioning of the European Union to categories of vertical
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175

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176

Journals
Biannually

Editor in Chief: PhD Mdlina Constantinescu
CoEditors: PhD Russell Pittman and PhD Eric Langlais

Journal of Advanced Research in Law and Economics provides
readers with high quality and empirical research in law and
economics. The Journal publishes analytical studies on the impact
of legal interventions into economic processes by legislators, courts
and regulatory agencies. Finally, important developments and topics
in law and economics analysis will be documented and examined in
special issues dedicated to that subject. The journal is edited for
readability; lawyers and economists, scholars and specialized
practitioners count among its readers.
Journal of Advanced Research in Law and Economics, starting
with its first issue, is indexed in RePEC, IndexCopernicus, CEEOL
and EBSCO databases.
Web: http://www.asers.eu/journals/jarle.html
email: jarle@asers.eu

Journal of Advanced Research in Management Biannually

Editor in Chief: PhD Andy tefnescu
CoEditor: PhD Rajesh K. Pillania

The Journal aims to serve researchers, scholars through prompt
publications of significant advances in any branch of management
science, and to provide a forum for the reporting and discussion of
news and issues concerning management science.
Journal of Advanced Research in Management starting with its
first issue is indexed in RePEC, IndexCopernicus, and EBSCO
databases.
Web: http://www.asers.eu/journals/jarm.html
email: jarm@asers.eu

Journal of Advanced Studies in Finance Biannually

Editor in Chief: PhD. Laura tefnescu
CoEditor: PhD Rajmund Mirdala

The Journal aims to publish empirical or theoretical articles which
make significant contributions in all areas of finance, such as: asset
pricing, corporate finance, banking and market microstructure, but
also newly developing fields such as law and finance, behavioural
finance, and experimental finance. The Journal will serves as a
focal point of communication and debates for its contributors for
better dissemination of information and knowledge on a global
scale.

Journal of Advanced Studies in Finance, starting with its first
issue is indexed in IndexCopernicus, RePEC, CEEOL and EBSCO
databases.
Web: http://www.asers.eu/journals/jasf.html
email: jasf@asers.eu
177

Journal of Environmental Management and Tourism
Biannually

Editor in Chief: PhD Cristina Barbu

Journal of Environmental Management and Tourism will publish
original research and seeks to cover a wide range of topics
regarding environmental management and engineering,
environmental management and health, environmental chemistry,
environmental protection technologies (water, air, soil), pollution
reduction at source and waste minimization, energy and
environment, modelling, simulation and optimization
foenvironmental protection; environmental biotechnology,
environmental education and sustainable development,
environmental strategies and policies, etc.
Journal of Environmental Management and Tourism starting
with its first issue is indexed in RePEC, IndexCopernicus and
EBSCO databases.
Web: http://www.asers.eu/journals/jemt.html
email: jemt@asers.eu

Journal of Research in Educational Sciences Biannually

Editor in Chief: PhD Laura Ungureanu

The Journal is design to promote scholary thought in the field of
education with the clary mission to provide an interdisciplinary
forum for discussion and debate about educations most vital
issues. We intend to publish papers that contribute to the
expanding boundries of knowledge in education and are focusing
on research, theory, current issues and applied practice in this
area.
Journal of Research in Educational Sciences starting with its
first issue is indexed in RePEC, IndexCopernicus and EBSCO
databases.
Web: http://www.asers.eu/journals/jres.html
email: jres@asers.eu

Theoretical and Practical Research in Economic Fields
Biannually

Editor in Chief: PhD Laura Ungureanu
CoEditor: PhD Ivan Kitov

Theoretical and Practical Research in Economic Fields
publishes original articles in all branches of economics
theoretical and empirical, abstract and applied, providing wide
ranging coverage across the subject area. Journal promotes
research that aim at the unification of the theoreticalquantitative
and the empiricalquantitative approach to economic problems and
that are penetrated by constructive and rigorous thinking.
The Journal starting with its first issue will be indexed in RePEC,
IndexCopernicus and EBSCO databases.
Web: http://www.asers.eu/journals/tpref.html
email: tpref@asers.eu
178

Conferences Proceedings

Proceedings of the ASERS First online Conference on
Worlds Economies in and after Crisis: Challenges, Threats and
Opportunities

Coordinator: Laura TEFNESCU

Format: 17cm x 24cm
ISBN: 9786069238608

The Real Environmental Crisis
Effects in Tourism Development, Conflicts and Sustainability

Coordinator: Cristina BARBU

Format: 17cm x 24cm
ISBN: 9786069238639

Competitiveness and Economic Development:
Challenges, Goals and Means in a Knowledge based Society

Coordinator: Andy TEFNESCU

Format: 17cm x 24cm
ISBN: 9786069238646

179

Books Collections
Management and Environmental Protection

A book edited by PhD Cristina Barbu
European Research Centre for Managerial Studies in Business
Administration, Spiru Haret University, Romania

cristina.barbu@spiruharet.ro
http://www.asers.eu/aserspublishing/books

To be published by ASERS Publishing in CDROM format with ISBN.

Submission: Closed
Download Call for Book Chapters at:
http://asers.eu/asers_files/books/Call%20MEP.pdf

Beyond Creativity and Innovation in the
Times of Knowledge Economy

A book edited by PhD Madalina Constantinescu
European Research Centre for Managerial Studies in Business
Administration, Spiru Haret University, Romania

constantinescu_madalina2002@yahoo.co.uk

Submission: Closed

http://www.asers.eu/asers_files/books/Call%20BCI_KE.pdf

Mathematical Models in Economics

A book edited by PhD Laura Ungureanu

European Research Centre for Managerial Studies in Business Administration,

laura.ungureanu@spiruharet.ro

Submission: Closed
http://www.asers.eu/asers_files/books/Call%20ASERS_Book%20MME_extended.pdf

180

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URL: http://www.asers.eu/aserspublishing
ISSN 2068696X

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