Private Monopoly and Restricted Entry – Evidence from the Notary Profession Frank Verboven (KU Leuven) and Biliana Yontcheva (U of Düsseldorf)
Presentation by Frank Verboven, based on work in progress OECD Workshop on Regulatory Barriers to Competition in Professional Services 18 November 2021
Background on notary profession • Activities • Certify important transactions: real estate, mortgages, inheritance, business registrations… • Legal power of court decisions • Economic importance • Present in 86 countries, 22 out of 27 EU members • EU: 40,000 notaries, 160,000 employees • Belgium: profits per notary approx. 300,000€; total size ≈ public budget on court system • Price regulations • Fixed by law • Especially high for real estate transactions • Entry restrictions • Minimum education and experience requirements • Quantitative and territorial restrictions No competition from other businesses (real estate agents, banks, lawyers) Very limited competition from other notaries
Our research questions • What do the entry and price regulations aim to achieve? • Public interest view: improve total welfare (consumers + notary profits) • Private interest view: benefit notary profits • What is the impact of policy reform? • Liberalize entry and/or reduce prices • Impact on total welfare and redistribution Our analysis helps to inform reforms in OECD countries • Netherlands: liberalization of entry and prices • France: (some) liberalization of entry • Belgium: recent proposal to reduce prices (without adjusting entry process)
Broad empirical analysis: Western Europe • Cross-section of local markets (municipalities) • Austria, Belgium, France, Germany, Italy, Netherlands, Portugal, Spain • Relate the number of notaries per market to population size • Control for other market demographics
• Main findings • Bias towards monopoly markets • Additional entry requires disproportional increase in population size
Detailed empirical analysis: Belgium Dataset • 1150 notary offices (2016) • Addresses, number of notaries per office • Number of real estate and other transactions • Net added value, employment, labor costs
• Market demographics
Distribution of notary offices
Main empirical findings • Impact of entry on demand • Mainly business stealing, some limited market expansion • New locations lead to larger market expansion
• Markups over marginal costs • Staff costs and intermediate inputs • Markups are high, not only for real estate but also for other transactions • Consumer surplus weight in total welfare • Consumer surplus is valued at 20% of profits • Entry restrictions too tight
Price
Markup
Real estate
2053€
817€
Other
1375€
340€
Policy reform: reducing prices • Optimal price drops • Large • Mainly for real estate • Limited welfare gains, but large redistribution • From firms to consumers • Especially to real estate purchasers • Must account for a minimum profit target to ensure geographic coverage
Minimum Price drop profit target Real estate
None
100 million €
Other
Consumer gains
Profit loss
Welfare gain
Real estate
Other
-34% (uniform)
361
178
-507
31
-39%
-23%
418
118
-503
33
-23% (uniform)
239
118
-330
28
-28%
294
76
-340
30
-15%
Note: consumer, profit and welfare changes in million €
Policy reform: relaxing entry restrictions prices • Welfare optimum • More than double number of notaries • Large welfare gains • Price drop of 15% leads to considerable extra consumer gains • Free entry • Excessive at current prices • Close to optimal if also a price drop of 15%
number of notaries
Current
output change
Consumer Profit gains losses
Welfare gains
1569
- 35% price drop Welfare optimum - 15% price drop Free entry - 15% price drop
--
12.4%
555
-524
31
3951
6.7%
292
-171
120
3929
12.2%
534
-392
142
7067
10.8%
469
-415
54
4204
12.6%
555
-414
141
Notes: • consumer, profit and welfare changes in million € • conservative estimates: allowing for entry on new locations generates even higher total welfare gains (about +150)
Concluding remarks • Current regulatory framework • Large regulated markups • Much too tight entry restrictions
Insufficient account of benefits from geographic coverage Large potential for redistribution • Policy reform • Price reductions: substantial redistribution without threatening geographic coverage • Free entry combined with price reductions is close to first best outcome