Equal rules or equal opportunities? Demystifying level playing field

Abstract

Pleas for a level playing field, for instance in international trade, are often not well-founded. This is because it is not exactly clear what a 'level playing field' means. But even if it would be clear what the plea would imply, a level playing field is not always desirable from an economic perspective. To clarify the meaning of 'a level playing field' we introduce two specifications of the concept. First, a rules-based level playing field, which means that all firms in a market are treated the same in equal circumstances with regard to legislation, taxes, subsidies etcetera. Second, an outcome-based level playing field, which means that all firms in a market have the same expected profit. This means that, in case firms are heterogeneous, the government compensates the disadvantaged firms (for instance with subsidies). The first conclusion in the report is that a rules-based level playing field is desirable, although there are reasons to deviate from this assumption. The second conclusion is that it is never desirable to pursue a fully outcome-based level playing field, but that it may be desirable to level the playing field to a certain extent in the case of market failure. In case of market failure it is preferable to use symmetric rules (equal for all firms), in stead of asymmetric rules (favouring some firms). The report introduces a framework with questions that can help policymakers analyse level playing field issues. The framework makes clear that in general one cannot tell�whether a plea for a 'level playing field' is justified or not. It is necessary to focus on the policy issues hidden behind the plea, i.e. policy issues concerning market failure, dynamic efficiency, redistribution of income and differences in preferences between countries.