<89>Thomas Hobbes would not have liked our topic. The very purpose of his Leviathan was to end chaos and bloodshed, which had been lasting in his country for decades, by the voluntary submission of everybody under a unified and strong state. The law as the primary emanation of the state must therefore be obeyed without exception. That implies a negative attitude towards institutional competition (Hobbes 1668: ch. 26) [1] .

Meanwhile the law has become more indulgent, or more realistic, if you prefer. Nearly every lawyer would admit that setting a rule is not tantamount to changing life in the intended direction. The lower classes do it by simple disobedience. The upper classes and in particular the undertakings can pay for a cunning lawyer and do it legally. The lawyer will often advise them to play the game of institutional competition; lawyers would rather call it circumvention. The economic concept of institutional competition helps to a better understanding of what is going on and it is an extraordinarily useful tool for assembling and organizing legal phenomena that are usually not dealt with in common.

While thus the positive value of the concept is strongly supported by legal empiricism, the normative prejudice of at least many of the economic analysts receives lesser empirical support. The law so far seems to have a more pragmatic attitude: Institutional competition is sometimes uniformly assented to, sometimes it is a means to serve very specific ends, sometimes it is reacted to as an exogenous factor and not rarely it is combated fervently. Behind all this is obviously the traditional public interest model of regulation, to which many economists have important objections (see already Posner 1974). But even for those who share that critique, the following might prove useful since it shows how the law handles institutional competition in day-to-day business.<90>

To be specific, the paper is purely empirical. It is written from the perspective of real-world regulators and outlines their attitude and action vis-à-vis institutional competition. It furthermore uses on purpose a very broad concept of (institutional) competition. It may well be that economists, at the end of the day, might prefer to reserve the term to a narrower set of phenomena. But since it has not been safely established so far that the normative value judgements inherent in the concept of competition on the product markets may be extended to any form of institutional competition, it appears legitimate to use the term here in a way broad enough to encompass all instances in which individuals, organizations and officials may effectively choose among different institutions.

Other, related phenomena have to be left out. Economists have stressed that informal constraints are often more powerful institutions than formal ones (North 1989: 239). Being a legal endeavour, this paper, however, will only shortly allude to the interface of formal and informal institutions (infra 2.3), while informal institutions proper are left aside.

Omitted is furthermore the purely persuasive authority of legal institutions, although the phenomenon has high practical importance. For setting-up a coherent legal system is an extremely costly and time-consuming process. Less developed and especially newly independent states have therefore often chosen to copy a foreign legal order in full or at least to duplicate whole codes. This is true for most former colonies. Even more interesting are cases like Israel, which combines areas of roman origin with others of common law origin. The phenomenon is obviously not irrelevant for international trade. The saying: 'He who has the standard, has the market' applies to whole legal orders as well. Especially the U.S. were aware of the chances and sent a whole army of legal counsels to the newly independent East European countries. Many of these countries, however, seemingly prefer to return to the pre-World War II German roots of their private law. I nonetheless leave the question aside, since the national legislator in this type of competition is the client, while the focus of this symposium is on the rule-maker as the supplier of rules among which is competition.

Even further away from this focal point is competition of whole political systems. Obviously there is such competition. Many assert that the collapse of the Eastern Block was not solely the result of a credible nuclear threat, but that western information policy had a considerable share in it. Under the heading of humanitarian improvements the Conference of Security and Co-operation in Europe CSCE succeeded in opening the eastern markets for some western media products. The eastern population thereby got plenty of opportunity to realise how extraordinarily less efficient their economic <91>system was. But the client, so to speak, in this competition is not even the legislator acting within the constitutional framework, but the constitution giving power itself [2] .

At first sight one might expect that the considerable literature on 'regulation on demand' or on a 'market for regulation' adds to our topic. But this literature is concerned with a different question. It stresses that undertakings are not always interested in less or no regulation. They may wish to overcome a prisoners' dilemma situation or to guarantee the public the demanded quality of a product (Holcombe & Holcombe 1986, Haddock & Macey 1987). They further elaborate on the conditions under which the legislator should meet such demand for regulation (Bongaerts & van Schaik 1984). This discussion touches upon institutional competition only in so far as competing fora for meeting the demand are contemplated (Holcombe & Holcombe 1986).

A last phenomenon shall be neglected in order not to overburden the model: regulatory dumping. It consists of varying regulatory standards according to whether the product remains in the market of origin or whether it is destinated to exportation. In this context, the low standard is an instrument of industrial policy. Well studied is the lenient attitude of most states towards export cartels (Maloney & McCormick & Tollison 1984).

My paper is organized as follows. Section 2. shows how wide institutional competition as understood here is spread and structures the instances as well as the driving forces behind such competition. Section 3. elaborates on the differentiated, sometimes even ambivalent attitude of the legal order towards such competition. Section 4. switches from purpose to action and presents the major instruments by which the law tries to influence the degree of competition. Section 5. shortly looks to meta-meta-rules: is the rule maker free in his attitude and action towards institutional competition or has it to abide by some sort of constitutional standards?

2. Classifications

There are frequent and multifold opportunities to choose among different institutions. Such competition may be classified according to its subject matter (1) and to the connecting factors employed (2). Horizontal instances may be distinguished from vertical ones (3). Competition beyond the reach of the rule maker may be distinguished from instances within its sphere of influence (4).<92>

2.1. Subject matter

The subject matter of competition may be a single institution as shaped by law. Different sets of rules may compete. Finally competition may affect the institutions for applying, not for setting up rules.

Institutions at choice - Sometimes the regulator decides to offer the public a set of institutions which they may choose at will. The most common example is corporation and partnership. German law offers no less than eight primary types and allows for a lot of additional hybrid forms, ranging from the partnership of two or more fully responsible entrepreneurs [3] up to the large public corporation the shares of which are traded at the stock exchange [4] . Similarly, firms and unions as their counterparts may, under German law, choose whether the amount of wages and the conditions of work are specified in conventions for the whole industry or for each firm separately. The regulator may even offer institutions that it has not set up itself. The most important example are transnational contracts. Almost universally the parties have power to submit them to whatever legal order in the world they deem fit.

Competing sets of rules - The bulk of this paper will be concerned with competition among regulation. At this moment two examples will suffice: air pollution under German law is combated by public law [5] , by torts law and by penal law. Can a neighbour to a polluting factory who did not succeed in influencing the licensing authority switch to the private law courts under the heading of private neighbour law, or can he call the attorney general for help (Schröder 1991, Jarass 1991)? The second example stems from the European Union: As a rule, Member states are no longer allowed to close their markets against goods and services originating in other Member states. Consequently, the different regimes of Member states for the production of one and the same or of similar goods and services compete in the form of the products.

Competing institutions for the application of rules - The third type of competition is more visible under Continental than under Anglo-American law. For Continental Law draws a strict line between setting and applying rules. The first is the domain of the legislator, the<93> second the domain of administration and of the courts. Competition for application matters, since application is not a mechanical action, but a hermeneutical one. The authority has to enter the hermeneutical circle, playing ping-pong between the rules framed in abstracto and the case before it. Since the law never fully determines the outcome of this endeavour, applying the law inevitably is progressively developing it.

Competition comes up since the legal order normally creates more than one institution for the application of rules, and since their powers often are not watertight. In torts cases the victim may choose between suing the tort-feasor at his home or at the place where the tort has been committed. When he feels that a public undertaking has gone beyond its public law limits, a private competitor may ask the German public law courts for help, but he may also go to the private law courts pretending that the public corporation by one and the same action has engaged in unfair competition.

2.2. Connecting factors

The major opportunity for institutional competition is created by connecting factors. Each rule has to specify its territorial, historical, personal and material field of application. Additional competition stems from the limited jurisdiction of rule-makers.

Choice among institutions and connecting factors - Sometimes the choice among institutions is totally unrestricted. This is in particular the case for some forms of institutions at choice (supra 2.1.). A case in point is the already mentioned choice of the appropriate organizational structure for a firm. But even in private law, the choice is normally not unfettered. Take the law of obligations: the parties are largely free to give a contract whatever contents they prefer; but they are not free to call a contract agency that, from an objective point of view, is one of master and servant. Freedom of contract does, in other words, not encompass freedom of classification (Gernhuber 1989: 153). The question becomes important whenever the parties to the contract have left unregulated a detail. It is, in our example, supplemented by the statutory rules on agency, not on master and servant.

While in these cases at least a certain influence by those to which the rule is addressed on its application is intended, the actual competition is often very much against the will of the rule maker. It is the work of clever lawyers who have played on the connecting factors of the pertinent rules,<94> thereby switching from cumbersome regulation to a more lenient regime. Experience shows that such a strategy is all the more promising the more complex a regulatory network is. Less regulation is therefore usually more powerful regulation.

Let us have a look at these connecting factors. In theory, every rule has a territorial, a historical, a personal and a material dimension.

Territorial field of application - The territorial validity of the rule normally is identical with the territory for which the rule maker is responsible. To take the German example: Rules by the municipalities are valid within the municipality, rules by the Länder within the Land, rules by the federation within the whole country. But the law makes a difference between validity and application. The rule applies when the case has taken place within the constituency. But is it enough that the  person or interest protected by the rule be located here? Or must the prohibited action have taken place here? Must the defendant live in the constituency? Must there at least be some property so that useless administrative or court proceedings are prevented? These questions have attracted particular scientific interest in transnational cases and are the domain of international economic law (see in great detail Schnyder: 1990). But sometimes they also come up within a federal state. A case in point are German nation-wide private television programmes. The programme providers claim that solely the Land which attributes them a satellite channel is entitled to regulate them, while some regulation authorities argue that the attribution of a terrestrial frequency gives them independent regulatory powers (see in detail Engel: 1993).

Historical field of application - Similar considerations concern time. Again the law distinguishes validity and application. Of particular importance is retroactive application. When the law replaces one regime by another, it normally specifies which cases shall be dealt with by the new rules and which by the old ones. To do so, it states connecting factors. Practising lawyers try to play on those factors according to the interest of their client.

To give an example. Under German public construction law, a construction permit is issued, if and when the planned building is in conformity with the city construction plan. If the city has announced its intention to set up such a plan, the applicant may try to get the permit on pre-plan rules. It then is necessary and sufficient that the building be in line with existing neighbouring buildings. Or he may prefer to place it under the<95> (more favourable) future plan. The law expressly provides for the case and gives the construction authority discretion to follow such a proposal by the applicant (sec. 33 Baugesetzbuch).

Personal field of application - To this, the personal dimension is added. A rule is valid for every person under the jurisdiction of the rule maker. In the case of the nation state, these are both, all the inhabitants whatever nationality they have, and all the nationals wherever they live. But the rule maker often sees reason to delineate the personal field of application more narrowly by connecting factors. Take German social security legislation. It does not apply to persons with a regular income above certain limits. They are free to take private insurance. Since private insurance for these persons is much cheaper, they have an incentive to make their income look higher in order to evade social security.

Material field of application - While in territorial, historical and personal respect, there is a difference between validity and application, a similar distinction makes no sense with respect to the subject matter of the rule. Any rule must define the questions to which it shall be applied. But the delineament of the material field of application is an important source for institutional competition: By influencing the connecting factor, persons try to opt for a more favourable regime. My example is again taken from German media law. While broadcasting in Germany is under extremely dense regulation, there are only a few scattered provisions on communication services. Media enterprises therefore consider pay-per-view and video-on-demand, hoping to free themselves from broadcasting legislation.

Rule makers with limited jurisdiction - The preceding analysis starts from the standard rule maker, the jurisdiction of which is in principle universal. Institutional competition is then above all the result of meta-rules on the field of application. There are, however, lots of rule makers with limited jurisdiction. An opportunity for institutional competition exists where these jurisdictions overlap. This is particularly frequent in the international arena. States sometimes employ these overlaps strategically. Thus the U.S. were discontent with the work of the World Intellectual Property Organisation and started the trade related intellectual property-negotiations within the Uruguay-Round of <96>GATT (Beier & Schricker 1989). This type of competition is customarily called the battle of the forum.

2.3. Horizontal and vertical competition

So far, we have dealt with horizontal competition, in that the institutions concerned originated in rules by one and the same or by parallel rule makers. If one of the rule makers concerned is subordinated to the other, one may talk about vertical institutional competition (Trachtman 1993: 53 and 80). It may further be distinguished according to whether a hierarchical element is present or not, a question that is sometimes not easy to assess.

Vertical competition without hierarchy - Vertical competition without hierarchy is not fundamentally different from horizontal competition. Such is, for instance, the case where the jurisdiction to legislate within a federal state is distributed among the federation and the members by subject matter. That is the system followed by the German Grundgesetz. The Länder have had a hard time to combat attempts by the federation to overtake ever new parts of their jurisdiction. Particularly dangerous proved article 74 no. 11 Fundamental Code, under which the federation is competent to legislate on 'economic matters' [6] . For nearly any activity may also be executed against money and might then constitute an economic activity (Ipsen 1993: marginal notes 524 - 529). In that instance, the federation tries to take profit from a broad interpretation of the (material) connecting factor. An other example is merger control. While Germany has relatively strict rules, the European regulation is so weak, that within five years of existence no more than one single merger has effectively been forbidden [7] . Whether a merger falls under German or European rules depends on the turnover of the participating firms. German corporations therefore try to find particularly big partners in order to overstep the limit.

Competition with hierarchy - Competition implying a hierarchical element might be called limping competition. The term indicates that both institutions are not on equal footing. The institution with superior rules could take over if and when it feels that the inferior institution leads to unsatisfactory results. Such competition is relatively frequent. Well studied is so called economic self-regulation (Holcombe & Holcombe 1986, Schmidt <97>1993). In Germany the case of package refuse is notorious. The Minister of the Environment has power to oblige retailers to take back old packaging materials within their premises. Retailers have therefore pressed producers to set up a private system that collects package material directly at the households. Of course, without that threat, they would not have created such a costly system. Another example is what German lawyers call co-operative federalism [8] . Under the German constitution, the federation has the unwritten, subsidiary power to regulate inter-land matters, if the Länder themselves prove unable to settle things. Under that threat, the Länder have for instance set up the Zentralstelle für die Vergabe von Studienplätzen, which distributes students nation-wide, thus giving as many as possible the opportunity to take up university education.

Borderline cases - Sometimes the hierarchical element exists, but is weak. That gives the subordinate institution a certain amount of freedom. The most important case is competition among the rule maker and the rule applier. In theory, the rule maker might revoke any new development of the rules by the rule-applier (supra 2.1.). But the legislative process is much more cumbersome than administrative or court procedure. Most alterations of the original rule will therefore persist. The weakness of the hierarchical element can even be introduced on purpose. For instance the appeal against arbitral awards to the courts is possible, but confined to cases where either the arbitral procedure was illicit or where the award was manifestly wrong.

2.4. Competition within and beyond the sphere of influence of the pertinent authority

If the law offers different institutions, the ensuing competition is evidently the will of the legislator. From a superior, constitutional law point of view, also competition within a federal state, competition between the municipalities and the state, and competition between the rule-maker and the rule-appliers is assented to. That the federation, the state as opposed to the municipalities and the rule-makers are somewhat impeded in their action, is the price the constitution willingly pays in order to introduce checks and balances and to further political ends. The pertinent rule-makers and rule-appliers, however, will consider these influences as exogenous and they will try to combat them, lest the constitution forbids such defence or reduces it to a small array of instruments. Entirely exogenous, in that sense, on the contrary, is competition with national institutions from abroad.<98> Not surprisingly, it is here that we will find the richest arsenal of defence instruments (infra 4.). The reason is the relative weakness of public international law. To date, it has not really overcome the Hobbesian 'war of everybody against everybody'.

An overall view of the classifications developed in section 2. results in the taxonomy presented in table 1 [9] .

table 1

3. The attitude of the law towards institutional competition

In forming an attitude towards institutional competition, the regulator first needs knowledge about possible driving forces (1). It is evident that the attitude will not solely rely on considerations of public interest (2). Decisive, however, is the purpose sought by the institution (3). Basically, it is this purpose that determines whether institutional competition is regarded as healthy (4) or noxious (5), a question that is sometimes not easy to settle (6).<99>

3.1. Driving forces

Four classes of actors may influence the actual degree of institutional competition: the entities affected by rules, the rule-appliers, the rule-makers and the constitution maker.

The parties may choose directly, if the institutions are at offer. If not, they have to influence one of the connecting factors. In practice, the credible threat to do so is often enough to bring about substantial changes. To allude again to broadcasting: In 1981 the German Constitutional Court posed so strict conditions for private broadcasting that it seemed practically forbidden [10] . Five years later the court became much more indulgent [11] . Commentators argued that German publishing houses had credibly enough announced to use a Luxembourg satellite in order to broadcast to Germany. They then would have been beyond any German control. In order to preserve at least some regulatory influence, the Court overruled its elder judgement.

It is important to keep in mind, that not only the addressees, but also the rule-makers and rule-appliers behave competitively. They may do so for economic reasons, considering the already mentioned saying: 'He who has the standards, has the markets'. But they evidently also strive for individual political power. Finally, seemingly aggressive competition by the courts is often motivated by the intention to help the parties before them. Unfortunately, lawyers know for long that bad cases make bad laws; courts often willingly neglect that insight.

3.2. Considerations beyond public interest

From the traditional public interest perspective, which I have confessed in the introduction, state practice on institutional competition reveals a number of purposes one would hardly be able to welcome. Others appear somehow neutral. Yet in order not to become myopic, a general theory of institutional competition should keep both in mind.

The rule maker frequently is motivated by protectionism. It may shift substantial power beyond its (visible) sphere of influence. In Germany, the degree has often been deplored to which fundamental political decisions are taken by the Constitutional Court rather than by Government or by Parliament. The political parties seem to be quite content with the development, since it has considerably weakened their control by the electorate. The actual intention of the regulator may remain disguised for a long time. The best example seems to be the European Union. Its policy, over the last twenty years, has commonly been perceived as a huge<100> machinery for deregulation. The major tool for liberalisation seemed competition among the regulation of Member-states. But the more this process comes to an end, the more it becomes visible that the European Union is neither liberal nor federalist. The overall prupose seemingly was to create a sort of tabula rasa, on which a Europe-wide mercantilistic policy can be built.

3.3. The primary importance of the purpose sought by the institution

Sometimes, institutional competition is openly employed by the law. The most important instances are institutions at choice (supra 2.1.) and competition with hierarchy (supra 2.3.). For the remaining instances, competition among institutions is not considered a value as such, but a means to help or to hinder the law to meet the goal for which the respective institution has been set up. It is therefore not trifle, where a general theory of institutional competition takes its empirical evidence from. The focus of the American debate on the Delaware phenomenon (Cary 1974, Charny 1991, Bebchuk 1992) should therefore not mislead economic theory.

Roughly we may distinguish institutions as a pre-requisite for market economy, regulation as a means to overcome market failure, regulation serving other ends chosen by the political system, and redistribution. Let us briefly consider each.

Redistribution is an evident case where each legal order will fervently combat competition (Maloney & McCormick & Tollison 1984: 330). For new beneficiaries from abroad would either diminish the capital available for the original beneficiaries or increase the burden on those who have to pay for the subsidy. This is one of the main reasons why social states usually have a strict immigration policy.

Regulation intended to correct market forces or to change market results normally asks for a differentiated attitude towards institutional competition (see in greater detail Engel 1990). Two regulators may seek different or even contradictory purposes. A good example is antitrust. While German legislation, under the influence of the Freiburg School, has adopted relatively strict rules and set up the powerful Bundeskartellamt to apply them, the attitude of our French neighbours is much more influenced by the fear of American economic dominance. They accordingly welcome huge French and even European corporate groups as a counterpart to would-be American power on the world market. Germany seems to have lost the battle, if we look at the already mentioned European merger control. Were there not this regulation, Germany should<101> be expected to prevent firms from changing the connecting factor in a way that makes French antitrust legislation applicable or French authorities competent. But even if the purpose sought is identical or the foreign purpose appears at least tolerable, regulators often engage in defence activities. For an opportunity for arbitrage may also be created by the mere difference of instruments. This is, of course, a promising case for harmonization.

Finally most legal orders are relatively open-minded with respect to foreign institutions as a pre-requisite for a market economy. It comes therefore as no surprise that most states are, by virtue of their (autonomous) private international law, willing to apply foreign legislation and to enforce foreign court decisions.

3.4. Effects of institutional competition welcomed by the regulator

It goes without saying that the law expects positive effects where it openly offers a choice of institutions (supra 2.1., 2.3.). This subsection is concerned with less evident favourable effects. Economists frequently recommend competition among institutions as a stimulus for innovation. The law seems to be relatively sceptical. More important is the power of such competition to break up political deadlocks and to balance negative effects of public choice.

Institutional competition generating, testing and adjusting regulatory concepts - On a Hayek-Symposium it is evident that the innovative effects of institutional competition receive primordial interest. One should indeed expect, from a theoretical point of view, that institutional competition spurs creativity, no less than it does on the product markets (Charny 1991: 441, Vihanto 1992). The legal order should be even more interested in getting reliable information where the aim is not less, but smarter regulation. Take the example of pollution: Political proposals range from the abolition of property rights (for rubbish), traditional police law, private torts law, fiscal instruments up to pollution certificates. Is one concept better than all others? Should the choice be governed by the type of pollution? How great is the impact of the political and legal culture of the country concerned? Moreover, institutional competition should help institutions adjust in time to technical, economic, cultural and political changes of its subject matter (Hutter 1989, Schmidtchen & Leder 1990, Priest 1993).<102>

There is astonishingly little practical evidence, however. Some twenty years ago, most German Länder supplemented traditional law faculties by institutions that integrated theoretical and practical training of law students and that amalgamated traditional legal techniques with social sciences. A few years ago a federal statute converted all these reform faculties into traditional ones without making much profit of their (scientifically well studied) experiences. The main argument of traditionalists ran as follows: Reform faculties had an optimum student-professor-ratio, while one professor was responsible for up to ten times as many students in normal faculties. This, of course, one knew in advance [12] .

Another problem is highlighted by the gradual introduction of private broadcasting in Germany. The Länder agreed to gain experience by a couple of pilot projects. Some Länder claimed greater legislative freedom during the testing phase. The Constitutional Court, however, was reluctant for fear that the test would generate results hard to revert at a later stage [13] .

Breaking a political deadlock - We have still left open the adjustment value of institutional competition. In this respect the law, indeed, seems to be very sensitive. One may, in theory, distinguish two models: gradual adjustment and eruptive breaking of political deadlocks. The first is the task of the administration and the courts when applying the law. The inevitable competition between them and the legislator finds here its justification (supra 2.3.).

While the administration and the ordinary courts should be confined to careful and gradual elaboration on the original intention of the legislator, there is sometimes need for more radical reform. It should, in principle, be for the legislator itself. But the legislator may be paralysed. Thus the Council of the European Union was often unable to act, because it had to take its decisions unanimously. The European Court of Justice stepped in and reached the same result by a broad construction of the EC-Treaty. Similarly, fundamental freedoms as administered by the Strasbourg Commission on Human Rights or by the German Constitutional Court have helped to overcome political deadlocks, as did the US Supreme Court in Wabash, when it curtailed the ability of the states to regulate railroads engaged in interstate commerce (Poole & Rosenthal 1993).

Institutional competition may also help to overcome a related problem: burdensome regulation may overtime become so deeply inrooted in the minds of lawyers that nobody even thinks of smarter solutions (Kübler 1994: 88).<103>

<104>Yet in order to effectively break deadlocks, these competing institutions must be very powerful. All legal orders concerned struggle hard to confine their activities to cases where there is indeed a deadlock. Solutions are not easy to frame, since such a situation is difficult to define in advance.

Balancing public choice - The most important argument in favour of institutional competition seems to be rarely raised: such competition may help to counterbalance the negative effects of public choice (cf. Butler 1985: 166). This is particularly clear in the case of locational competition. While legislators in principle would have an interest in winning the next election by giving preference to consumer interests over the interests of the much smaller number of shareholders, they must be afraid of firms moving away when they overdo.

Table 2 sumarizes the insights gained so far.

Table 2

3.5. Effects of institutional competition to which the regulator would be opposed

When they limit institutional competition, regulators primarily do so in order to prevent circumvention or arbitrage, to protect different markets, to maintain democracy, participation and the sense of responsibility or the individual interests of third parties affected.

Circumvention - If institutional competition is brought about by influencing the respective connecting factor (supra 2.2.), regulators normally regard it as circumvention. In the case of competition among different authorities for the application of rules, they call it forum shopping. Since it becomes more difficult to reach the regulatory goal, the regulator will usually combat such activities. Yet, decisive is, as always, the purpose sought by the institution (supra 3.3.). Take pollution tax: its very purpose is to induce the polluters to avoid the tax by less or even no pollution.

Arbitrage - A specific form of circumvention is arbitrage, to which free-riding and cream-skimming are related. The opportunity for such behaviour is created whenever regulation sets up or protects institutions that could not survive under market conditions. Much attention receives remailing, these days. It makes profit of cross-subsidization within the German postal<105> service. The German postal office charges customers transportation rates for letters that are above costs and uses the profits riped thereby in order to offer highly subsidized services like the deliverance of personal packages or of newspapers. Since the postal service of the Netherlands has adopted a different policy and since the European Union has obliged the postal services of all Member states to forward letters into other Member states at inland rates, remailing agencies have come up that collect letters at large German corporations, drive them by car to the Netherlands and post them there. The Bundespost tries hard, but so far without success, to stop that business.

Unfavourable effects on other markets - Lively institutional competition may hamper competition on the product markets (Bebchuk 1992: 1467). For instance the broadcaster of the German nation-wide TV program RTL complains about allegedly stricter application by the Niedersachsen broadcasting authority of the Interland Treaty on Broadcasting, as compared to the Rheinland-Pfalz authority responsible for its main competitor SAT 1. RTL pretends that it has to compete under different, stricter rules.

Similarly, institutional competition may have an unfavourable effect on the market for corporate control. The question has received much attention in the U.S. Competition among incorporation regimes has been blamed to give managers an opportunity to insulate themselves against shareholders' influence (cf. Butler 1985: 164 - 166).

Democracy, participation and sense of responsibility - Competition among jurisdictions makes it more difficult for the legislator to bring about those changes it has been elected for. Competition among the rule-maker and the rule-appliers takes power away from the rule-maker. Usually the rule-appliers are not directly responsible to the electorate. The opportunity to play on institutional competition is mostly not equally distributed in the population, but the wealthy stratum and in particular firms have - through well-trained lawyers - much easier access to it. Institutional competition can therefore serve as the tool for taking away benefits from the general public that it ought to have according to the will of the legislator. Finally, as has already been mentioned (supra 3.2.), institutional competition may serve as a pretext for inefficient government and it may deteriorate the sense of responsibility of those in power. None of these arguments will suffice to support a fundamentalistic struggle against institutional competition (North <106>1989: 242). But these arguments should be kept in mind when assessing the adequate degree and form of institutional competition.

Individual interests of third parties affected - Finally, no legal order will be content with having superior rules at the end of the day; it will also be concerned with the costs of the rule-making process for individuals. Such costs may take the form of simple external effects on the products or control market; we have already alluded to the alleged 'race to the bottom' in U.S. corporation law, that would in particular have been to the detriment of small shareholders and of creditors (Bebchuk 1992: 1485). More interesting are the costs of institutional competition itself. Well studied is reverse discrimination. It comes about whenever European Union law obliges Member states to let products into their markets that have been produced at standards below the ones in vigour in the country of destination. Since less regulation is normally tantamount to less costs, the home industry perceives a competitive disadvantage. Undertakings affected for long try to rely on fundamental freedoms in order to alleviate their situation (König 1993).

3.6. Ambivalent Features

Last but not least we should point to a few features of institutional competition that may, according to circumstances and interests, either support an argument pro or contra such competition.

Institutional competition helps unifying the law in that onerous legislation can be evaded and is given up at the end of the day; we have seen the example of the European Union. But unification may be endangered, if all but a few small jurisdictions have developed a uniform standard, because firms will avoid the quasi-general standard and make profit from the more comfortable solution of the few. That is the case of regulatory havens.

Institutional competition will, as any competition, bring about new information that could otherwise not be obtained. It thereby enhances transparency on a general level. But since the process of regulation on the inferior level becomes tilted, institutional competition simultaneously decreases transparency.

Finally, institutional competition has distribution effects. It may shift business and income to a powerful jurisdiction, since the latter has succeeded in forcing less powerful countries to adopt its home solutions - the markets normally will follow. On the contrary, a small jurisdiction can <107,108>effectively attract business and income by regulatory dumping. That is sometimes its sole competitive edge.

Table 3 summarizes the section.

Table 3

4. Instruments for combating unwanted competition

If a legal order expects favourable effects from institutional competition, it is relatively easy to foster it, even if the conditions are beyond its sphere of influence: the legal order may give foreign products and producers easy access to its market, and it may allow its own nationals to act under foreign rules or to go abroad. If institutional competition within the framework of a legal order turns out not to bring about the effects it has been introduced for, the legal order may, in principle, recall it at any time [14] . Much more intricate is defending an institution against unwanted competition. The state practice may be classified according to form (1) and substance (2).

4.1. Form  

Defending an institution against competition is easiest, if and when the competing institution is under the influence of a legal order superior to both institutions. We might call that situation semi-exogenous competition. In exogenous competition proper, the legal order may choose among autonomous and co-operative solutions.

Semi-exogenous competition - Semi-exogenous competition is typical for institutions set up by different members of a federal state. The defending member may then have access to federal law and institutions instead of employing the techniques available in the international context. Federal law may even prevent members from making use of these traditional instruments. The point is well illustrated by the law of the European Union, which in that respect behaves like a federation. The EC-Treaty expressly forbids that Member states close their markets against products or investments from other Member states, and it further rules out any treatment discriminating against such products or investments. The Member state affected by unjust or even allegedly illegal competition is therefore confined to suing the originating state before the European Court of Justice, a few protection clauses notwithstanding.<109>

It should be noted, however, that the superior legal order will not necessarily behave like a disinterested arbiter. It on contrary may curtail competition among inferior units in order to increase its own sphere of action. What looks like supervision of horizontal competition may thus turn out to be competitive vertical action.

Autonomous defence against exogenous competition - Unilateral defence against unwanted institutional competition is traditional power policy. It may reach the diplomatic level. The U.S., for instance, have made use of their economic (hiddenly even of their military) strength in order to force their main trading partners into laws against insider trading and money laundering that largely follow the American blueprint, thus excluding what they regard as international circumvention of their domestic rules. But small countries may engage in unilateral defence as well. For they may have power vis à vis the individual who would otherwise play on institutional competition. Such is in particular the case when the individual has property in the defending state, or when it does business in its markets. Property and business relationships may then be taken as hostages.

Co-operative defence against exogenous competition - Where they lack power, states will strive for co-operative solutions. More importantly, co-operation is usually more effective and less costly than unilateral defence. The classical co-operative tool is a treaty. There are plenty of them on international trade matters, be they bilateral or multilateral. Treaties are difficult to adjust to new developments, however. Where subtle management is required, states will set up an international organization and give it power to recommend or even to decide. The gradual development of GATT into the Multilateral Trade Organization MTO is a good example.

Finally, an instrument one might label limpingly co-operative has considerable practical impact: reciprocity. States have access to it when nationals or products of each state are present on the territory of the other. They then legislate to the detriment of foreign nationals and products, but the provision expressly provides for its removal, if the legislating state is satisfied that its own nationals or products receive favourable treatment in the other country. This is again a hostages' solution. But the hostage is neither personally responsible for the attacked competitive behaviour of its national state, nor could it even influence it. The question has therefore been raised whether reciprocity is in line with fundamental freedoms of the individuals and firms affected [15].<110>

4.2. Substance

If we now turn from form to substance, we find four major defence techniques: blocking, marginalizing, bundling and corridoring.

Blocking - Having framed the problem as one of unwanted exogenous competition, the evident reaction should expectedly be as powerful defence as is available. There is indeed some blocking experience, but it is not very numerous.

Most attention received the UK blocking statutes directed against what this country considered as an unwarranted intrusion by the U.S. into its economic sovereignty. These statutes went so far as to expressly forbid and sanction a behaviour that was mandatory under U.S.law (for the details see Lowe 1988). Similarly severe are Australian, UK and Canadian 'claw-back'-clauses. They react to US-court decisions in antitrust cases. Under US antitrust-law the plaintiff is entitled to treble damages. The claw-back-clauses allow Australian, British and Canadian defendants to sue the original plaintiff for recovery of the extra two thirds (Schnyder 1990: marginal note 133).

An elegant blocking technique has been invented by Canada. The country was concerned by the impact of U.S. TV programmes from across the border on its national culture, and, of course, on its media industry. Since it is costly and politically touchy to prevent the reception of terrestrial broadcasting by a disturbing signal, Canada instead influences the economic foundations of transborder broadcasting: Canadian firms may not deduct advertising costs from their income tax when they place spots in U.S. programmes directed to the Canadian public (Matte & Jakhu 1987: 81 s.).

Instead of outright blocking, defending legal orders may also make institutional competition dependent upon authorization. Such is in principle, the attitude towards foreign judgements. Most procedural codes ask for express recognition of every single foreign judgement before it may be relied on or even enforced [16] .

Marginalizing - Fully insulating a legal order from institutional competition is tantamount to realizing autarky. Even Albania had to give up that policy, its costs are extreme. Moreover, institutions often need not absolute protection in order to fulfil the purpose for which they have been created.<111> Legal orders are therefore often content to make sure that the choice of foreign institutions remains a marginal phenomenon.

Thus, German insurance law, long before the overall EC liberalization, allowed for foreign insurance by correspondence, provided the foreign insurer did neither advertise in Germany nor deploy personnel in the country. Similarly, the European Convention on Broadcasting, signed under the auspices of the Council of Europe, entitles broadcasters to Europe-wide distribution of their programmes, but obliges them to abide by the advertising legislation of the country of destination when their programme is specifically directed to this public [17] . The spill-over of programmes directed to the public of the originating country and pan-European programmes thus are under a more liberal regime, since they will normally not have more than a marginal impact on the domestic broadcasting order.

Marginalizing is also behind private international law. The apparently extremely liberal attitude towards foreign private law and foreign decisions is acceptable, since the connecting factors are determined in a way that excludes a massive influx of foreign institutions. Thus freedom to bring a contract under whatever legal order the parties deem fit is confined to transnational contracts; contracts with no international touch, and that is the absolute majority of contracts, fall under domestic contract law. Of course, a legal order may go beyond, as the U.S. and the UK do when they allow corporations to incorporate wherever they prefer. German private international law is less liberal and accepts only incorporation in the country from which the corporation is effectively managed [18] . Evading German corporation law thereby becomes marginal: the company must change the place of effective management. Couched in terms of competition theory, this is a rule making demand for other institutions less elastic.

Bundling - The elasticity of the demand for competing institutions is also reduced by a related technique, which one might call bundling.

It has been observed that institutions are mostly bundled products (Trachtman 1993: 79): A limited corporation as opposed to a partnership are both complex legal institutions which the parties, grosso modo, must elect as such. If the company, under U.S. legislation, incorporates in Delaware and not in New York, it in principle has to accept the totality of Delaware corporation law and not just a single rule it might be specifically interested in. If the plaintiff in a torts case goes to the courts of the place where the defendant has its residence, and not to the place where the tort <112>has been committed, he has to accept the court procedure as such and may not supplement a judge or a procedural rule by one from the other place.

Often the defending legal order is content with the (low) natural elasticity of institutional demand. This is particularly true where the only way of changing institutions is to permanently change the residence of a natural person. If people move at all, they usually do so since they have found a new and better job [19] . Strategic changes occasionally happen when the place of residence dramatically deteriorates its school system. Even then people hesitate, since other places cannot easily make a credible commitment in the durability of a better school system: after the next elections it might be changed. The reluctance to move may be well explained in terms of transaction costs economics: The choice of residence is an investment with very high (pecuniary and non-pecuniary) sunk costs.

The users of institutions sometimes engage in unbundling. Such activities are frequently combated by the legal order. Thus transnational contracts may normally not be legally placed under the so called lex mercatoria, the law of international commerce as developed by the business community itself (Spickhoff 1992). For state contract law, for liberal it may be, always contains a couple of mandatory provisions in order to protect the weaker party or third persons. If the parties to the contract choose another state contract law, however, the dominating party cannot entirely avoid legal control.

In business practice, the most important technique for unbundling is setting up a corporate group. The separate legal entity of the subsidiary allows to insulate the remaining firm from legal influence. This is particularly effective in the case of multinational enterprises. Strict legislation on corporate groups is therefore an important technique for reducing the elasticity of demand for institutions.

A last example are rules of origin that are typical for external trade in goods. Since, for instance, the importation of consumer electronics from Japan to the European Union is burdensome because of high tariffs and of quantitative restrictions, the Japanese manufacturers have tried to circumvent these restrictions by assembling their products within the European Union. The Union has defended itself by rules of origin asking for a relatively high degree of value added within the Community. Otherwise the products are treated as if they came from abroad.

Sometimes the legal order even packs bundles thicker than they naturally were, in order to shelter its institutions from competition. A case in point for a long time was insurance. The German statute on insurance did not only force foreign insurers to take residence in Germany. Once they did, they furthermore were prohibited to serve German customers on a correspondence<1113> basis from their headquarters [20] . A similar result is reached by the appropriate choice of the connecting factor: It is for instance easier to change the place of residence than to change nationality.

Corridoring - Marginalizing and bundling reduce the number of cases in which institutional competition takes place. Corridoring, to which we turn now, reduces the impact of competition on domestic institutions, once it takes place. If one again uses economic language, one might talk about measures that reduce the elasticity of the offer.

The most sophisticated examples are to be found in the law of the European Union. Let us have a closer look at the Directive concerning construction products [21] . The free circulation of such products within the whole European Union is impeded by two types of obstacles: by national rules restricting their marketing and by prescriptions for construction. Difficult to remove is the second type of obstacles, since Member states have a legitimate interest to prevent buildings from later collapse and to protect the health of inhabitants or workmen. The Directive makes market access dependent on the following conditions: the Directive itself states basic security requirements; these requirements may be detailed in a Community document at the request of any Member state; the originating state is obliged to allow the marketing of a construction product only if the product abides by the common European standard or has been approved in concreto by a European authority set up for the purpose; the conformity of every single entity of the product with these standards is tested and certified in a manner that is regulated by the Directive; if the Member state of destination has legitimate reasons to believe that the producer or the Member state of origin violate the Directive, it may exceptionally forbid the use of the product.

Corridoring is not confined to the European Union, however. Another example may be found in the German Constitution. Although the Länder have the character of proper states with their own constitution, they are not entirely free to adopt whatever constitution they please. Art. 28 II Basic Law obliges them to keep in line with fundamental federal principles like democracy, rule of law and the social state. Moreover their constitution may not hamper the workability of federal organs within which the Länder are represented, and they may not deny minimum solidarity with their fellow-states.

Even where the law gives considerable leeway for institutional competition, one corridoring technique is hardly abolished: Protection clauses cater<114,115> for unforeseeable detrimental effects. In private international law one talks about ordre public. Similar clauses are contained in Arts. 36, 56 and 115 EC-Treaty or in Art. XIX to Art. XXI GATT.

Table 4 gives an overall picture of section 4., including pertinent aspects of previous sections.

Table 4

5. Meta-meta-Rules

So far, the law has been treated as empirical evidence: for the diversity of institutional competition, for the attitude of states towards it and for the instruments employed when they wish to combat unwanted exogenous competition. Of course, not only economists can take profit from the analysis, but also lawyers when they are framing new rules on institutional competition; we have already mentioned that rule-appliers potentially always are in the position of subtly reforming the law (supra 2.1.).

But institutional competition might also directly be addressed as a legal problem, since there are rules on the admissibility and on the form of such competition. One might call them meta-meta-rules. In order to operate, they either are part of a superior legal order or they take the character of general principles that amalgamate specific rules.

It would stretch beyond the limits of a conference paper (and beyond the interest of the audience present) to go into the details. A few sketches must suffice. Meta-meta-rules may foster or discourage institutional competition. Fostering effects have constitutional guarantees of autonomy for federal states, municipalities or autonomous unites like the universities. Discouraging effects have rules that guarantee a minimum of homogeneity like the just mentioned Art. 28 II German Basic Law. Meta-meta-rules may look at the economic effects of institutional competition. It has been argued that lax regulation is a hidden subsidy (Trachtman 1993) and that making profit from a regulatory slope is a case of unfair competition (Oesterhaus 1992). Finally, fundamental freedoms may work in both directions. The access to the opportunities of institutional competition may be within the field of application of a fundamental freedom. For instance, freedom of association might oblige the state to develop a sufficient range of corporate forms and to guarantee easy access to them. On the other hand, freedom of property might protect persons from becoming a hostage under the guise of reciprocity.

Thus a coherent legal theory of the admissibility and framing of institutional competition is still to be written - but certainly not without making profit of this symposium.<116>