Tuesday, October 28, 2014

Is a referendum with three options the solution?

(This is an exam exercise I gave to my MEBA Master students, but here I show the solutions -the exam was yesterday; any similarity with real facts is pure coincidence)
A community of 100 citizens  has three groups: Icons (40 individuals), Fires (35) and Econs (25). Using the data in the next table, which shows the ranking of preferred alternatives among three options (I, F and E) for each type of voter,
a)  Is there a stable winner in votes with two alternatives? Yes, F is the stable winner (so, the Condorcet paradox is absent from this problem).
b) Are collective preferences transitive? Yes, F defeats I, I defeats E and F defeats E (F is a Condorcet winner).
c) In which of the three groups would we find the median voter? Among the Fires. If we organize the population in one segment from the most pro-I to the most pro-E, a Fire has half of the population at one side and half of the population at the other.
d) Under which rules does and does not the median voter’s option  win in votes with three alternatives?
With three options, the median voter only wins if the voting rules are based on the Borda count, that is, if each voter gives points to the three alternatives in descending order of preference. This is assuming that all voters understand the rules, do not change their mind, understand the alternatives, all of them do vote, and they do not do it strategically. If a voter can choose only one of the three options, the winner will be I, which is not the option preferred by the median voter.
The exercise does not take into account externalities of the decision on other populations or commitment problems associated to each of the options (for example, option I may expropriate previous investments in human capital, settling decisions or professional options).
Table

Icons (40)
Fires
(35)
Econs
(25)
First Option
I
F
E
Second Option
F
I
F
Third Option
E
E
I

Sunday, October 26, 2014

Le Pen may win the next French presidential election

Some years ago, French voters had to choose in the second round of the Presidential Election between Jacques Chirac and Le Pen father. Leftist politicians did the decent thing and called voters to vote for “the other candidate”. Monsieur Chirac won. There has been a recent poll that says that in a second round of a presidential election, between the Socialist candidate and Marine Le Pen, voters today would prefer Le Pen. It is only a poll, but it shows that there is a real danger that Madame le Pen reaches the second round and that the right and the center right might prefer her to Monsieur Hollande. That means a real risk that subsequently Mme Le Pen may implement her announced policies of abandoning the euro and calling a referendum to abandon the European Union. That may not happen: to start with, François Hollande may not be her rival; and even in the case of winning, she may become more responsible once in government and refrain from driving  her country (and all of us) to disaster.
But the fact that this scenario has become a possibility shows the urgency of devising policies and strategies to reignite the European project (which is the main target of the likes of le Pen in France and Farage in the UK). This means reactivating the economy in a sustainable way, under the guidance both the European Commission, the European Central Bank and the main national governments. But it also means devising a shared strategy against populisms and nationalists, which threaten to lead the European Project to a terminal crisis. And that would mean finishing the single project that has made possible decades of peace and prosperity after centuries of violence and fragmentation. If the likes of Farage, le Pen, Orban, Grillo and the rest of nationalists and populists keep advancing in the popular vote, what is today the European Union may look more similar to the Balcans or the Middle East, a prospect we thought we had left behind forever.

Thursday, October 23, 2014

Small change is that: small

There is a common thread to the literature on "nudges" in public policy derived from behavioural economics, and the literature on randomized control trials (RCTs) as a new methodology in development economics. Both are based on realistic assumptions about the psychology of citizens and aspire to change things in the margin, leaving aside "big questions" about how society is structured. This is fine as long as there is a recognition that these are small changes, and therefore should not be associated to big reformulations. Jeremy Waldron in the New York Review of Books criticizes the last book by Cass Sunstein, "Why Nudge?" because a single focus on choice architecture (that is what nudging is about) does nothing to alter social architecture. Waldron argues that "choice architects nudge almost everything I choose and do, and this is complemented by the independent activity of marketers and salesmen, who nudge away furiously for their own benefit. I’m not sure I want to live in nudge-world, though—as a notoriously poor chooser—I appreciate the good-hearted and intelligent efforts of choice architects such as Sunstein to make my autonomous life a little bit better. I wish, though, that I could be made a better chooser rather than having someone on high take advantage (even for my own benefit) of my current thoughtlessness and my shabby intuitions."
Some years ago, Martin Ravaillon reviewed the book by Duflo and Banerjee "Poor Economics" because it sells marginal reforms based on randomized control trials as "A Radical Rethinking of the Way to Fight Global Property". Besides the methodological issue that RCTs cannot be the only empirical strategy in a messy and complex data world, Ravaillon argues that "poor countries are not doomed to stay quite so poor, the cycle of self-fulfilling expectations of poor service delivery to poor people can be broken, better public programs and policy reforms can be devised and shown to work, even while many deeper problems of market and governmental failures remain. But please let us not neglect those deeper problems."

Sunday, October 19, 2014

Paying tribute to Ajax

This Tuesday Ajax Amsterdam comes to play to Barcelona for a Champions League game. I will not miss it. Time to pay tribute to the great Dutch team. At the end of the 1960s and early 1970s this soccer team, under coach Rinus Michels, invented a new style of play that had some roots in Hungary and other places: total football. Players exchanged their positions, defended by attacking and occupying the rival’s half of the pitch, played with a much faster pace than was usual, and were obsessed with the efficient use of space. The star of that team was Johan Cruyff, “The Flying Dutchman”. We Barça fans have a lot to thank to these innovators, because after their experience in Amsterdam, Michels came to coach our team and Johan Cruyff came as a player and settled himself in Barcelona. For some time, Michels was simultaneously the manager of FC Barcelona and of the Dutch national team, which arrived to the final of the World Cup in 1974, being probably the best team ever not to win the World Cup. Johan Cruyff was later the manager of FC Barcelona between 1988 and 1996. Then in the late 1990s another Dutch manager that had led Ajax again to the peak of European soccer, Louis Van Gaal, today in Manchester United, also came to manage FC Barcelona. Pep Guardiola –manager of Barça and today Bayern Munich- played under Cruyff and Van Gaal, and Luis Enrique –the current manager of Barça- played under Van Gaal and was a team mate of Guardiola both as a player and as a manager. The style of play that is today revered in Barcelona has its roots in the great Dutch team.
I am reading the book by Simon Kuper "Ajax, the Dutch, the war," where he explains the history of Ajax, a club linked to the Jewish communities in Amsterdam that were practically exterminated during the Second World War.
Today Ajax cannot aspire to win the top European championship, because the rules of global soccer make it very difficult for teams from small countries to win. According to Branko Milanovic, globalization of soccer input markets has implied more concentration of talent among a small number of clubs, all of them playing in the leagues of the largest European countries. But globalization and the specific institutions of global soccer contribute to a more egalitarian structure among national teams, so that The Netherlands still present very talented teams in each edition of the World Cup. The best Dutch players play in the big teams of England, Germany and Spain from a very early age, but go back to their national team in the World Cup and the Eurocup.
To whet your appetite for Tuesday’s game, enjoy the video of the highlights of the game between Uruguay and The Netherlands in 1974.

Wednesday, October 15, 2014

Lessons from economists

One of the most important findings of the increasing literature on soccer and economics is that players behave in penalty kicks as if they were using a mixed strategy Nash Equilibrium. That means first that they behave as if randomizing, that is, as if instead of choosing kicking to one side or the other, what they choose is a probability distribution, like choosing between tossing a coin, playing the roulette or any other random device, before kicking the ball (and the goalkeeper, before diving). In addition, they randomize in an optimal way, given the choice of the rival. It turns out that this was proved by the Basque economist Ignacio Palacios-Huerta, who compiled an amazing data set with hundreds of penalty kicks. The data set is so rich, that he offers it to football teams, summarizing patterns of kickers and goalkeepers. One of the first to use the advice from Palacios-Huerta were Chelsea FC in the penalty shoout-out of the Champions League Final in 2008. But Chelsea lost. Then the same economist prepared a report for The Netherlands for the final of the 2010 World Cup, but then Iniesta scored that goal in the extra time, making the penalty shoot-out unnecessary. Some say that, although Palacios.Huerta claims that he did not advise The Netherlands in 2014, the Dutch players still kept some of the wisdom they received from previous reports by Palacios-Huerta. But by now it was common knowledge that they had received this advice (and the advice had been publicized in the book "Soccernomics"), so that their rivals could adjust accordingly. As a result, perhaps Argentina, but not Costa Rica, outsmarted them and reached the final, so that The Netherlands had to fight for the third place. But who is happier, the winner of the game for the third place, or the loser of the final? In any case, it is not clear that players do benefit from the advice of the economists. The work of Palacios-Huerta shows that players are extremely rational when they kick penalties, but the way to be rational is to keep the other player guessing, that is, randomizing. If you advise someone who is randomizing he may stop doing so. So there is an air of a paradox in Palacios-Huerta, the person who discovered that players optimally randomize, recommending them to follow patterns. But at least in 2008 the advice failed to deliver.

Tuesday, October 14, 2014

Jean Tirole and a better regulated planet

Jean Tirole deserves the Nobel Prize. He has written articles over the past 30 years on a great variey of topics, most of them on applied microeconomic theory. Many of us should thank him for collecting the research in his articles and summarizing it in a number of thick books on game theory, industrial organization, regulation and corporate finance. Tirole means clarity: he writes concisely and effectively, and he is able to explain complex topics, theorems and proofs with the simplest possible language. His book with the late Jean-Jacques Laffont on regulation is now 20 years old, but must still be read by anyone who wants to know the basic problems of regulation and liberalization: asymmetic information, capture, commitment and market power. He has produced multi-disciplinary work at the highest level. For example, half of the book on regulation with Laffont is about the politics of regulation. And he has a fertile line of work with Benabou on psychology and economics. He has also recent work on climate change and institutional issues in the euro zone that perhaps suggests a future book on regulation and international federalism. His institutional work as leader of the Toulouse School of Economics shows the fruits of the collaboration at the highest level between the USA and Europe. As with many good economists, some people will now rush to extract short run lessons from the work of this newly famous economist for the great public. Please handle this with care. Spanish journalists for example have been unable to translate correctly "market power" for the last 24 hours since Tirole was announced as the Nobel Prize winner. There aren't many immediate lessons. Tirole gives lots of insights for example about how real regulation works, but most of his advice is on constitutional rules, and when practitioners arrive to a new office, the rules are usually already in place. Since the global rules for issues like climate change and financial instability do not exist yet, perhaps, if read carefully, some useful lessons can be applied to the institutional architecture of a better regulated planet.

Friday, October 10, 2014

“The Process” by Artur Kafka (or was it Franz?)

The President of the Catalan government, Mr. Artur Mas, is leading a sustained campaign to hold a referendum about independence in Catalonia.
Some of the surrealist elements are similar to the Scottish referendum, like being in denial about sustained warnings by EU officials that any seceded country would have to apply for EU membership and that this would have to be approved by unanimity of all member states.
But other elements of surrealism are really original and unique. The question and the date of the referendum, for example, were agreed without any representatives of the no vote, before the legal framework for the referendum was established.
One of the arguments for independence, before July 25th., was that an independent Catalonia would have better institutional quality and no corruption. But that day the historical leader of the leading nationalist party, Mr. Pujol confessed to had been a tax evader during all his 23 year tenure as president of the Catalan government.
One of the members of the commission in charge of controlling the democratic quality of the vote resigned a few days ago before attending the first meeting because he said that the vote did not have enough democratic guarantees… and was immediately and brutally attacked in twitter by the mob.
Some of the slogans for the yes campaign of the non-legal referendum (this campaign has an official cost of 200,000 euros per week and is produced by an internationally prestigious agency) has slogans like these:
-"A country were the opinion of citizens is listened to”, as if we were now living in a deaf country.
-“A country with the school in Catalan”, which is something that has already been happening for the last 30 years without independence.
-“A country without corruption and budgets cuts”, as if the nationalists had not been at the forefront of corruption and budget cuts.
-“A country with open electoral lists”, as if Catalonia had not had discretion to pass its own electoral law at the regional level and refused to use it because the nationalists wanted to keep the Spanish system because it privileges the rural vote.
Lluis Llach, a retired singer (now also a wine-maker, novelist and friend of famous footballers) and one of the symbols of Catalan nationalism, argues that after Mr. Pujol’s allegations he even prefers independence more now, to “clean up.” And adds in an interview in newspaper El Pais that  he is a nationalist “to be able to be internationalist” (my translation, but please check if I am misinterpreting). Seriously.
FC Barcelona footballers Dani Alves and Gerard Piqué reproduce in politics their lack of coordination on the pitch. Piqué insists that Catalans should be allowed to vote (as if we had not voted around 40 times in the last 35 years) whereas the Brazilian Alves cautions that people should think twice about independence (I prefer not to imagine the bullying in the social networks after just expressing such doubts). I would have predicted that the always happy Alves would have been an exception among the many international friends of Catalonia who have refused to endorse independence in spite of the efforts made to achieve international support, but not even Alves…