Tuesday, May 26, 2015

The telecommunications debate

There has been an important debate in the analysis of the telecommunications industry that goes back at least since the mid 1990s. The debate has implications also for other regulated infrastructures, such as energy or railways, and it is about the optimal degree of modularity of the industry. In the past, telecommunications firms were vertically integrated and heavily regulated. Technological progress has made it possible to introduce competition in some segments, but naturally monopolistic bottlenecks remain. Some economists and industry experts believe that the access of entrants to the infrastructure of incumbents should be forced and regulated, following the theory of the "ladder of investment" in Europe: entrants start by using the infrastructure of the incumbent, and little by little invest in more network elements. Others believe that vertically integrated firms should be free to reach agreements with others: In the US, this is the model that has prevailed, after some years with forced unbundling. In a workshop organized by the Institute of Economics of Barcelona and the think tank FEDEA, I discussed an important paper presented by Mattia Nardotto, which analyses the effects of unbundling telecommunications in the UK. In particular it finds negligible effects of unbundling on broadband (fast internet) penetration, and significant effects on the speed of broadband connections. Although there is no claim in terms of welfare analysis, the final view is positive for unbundling. That contrasts with research by Sidak and Vassallo (along the lines of previous work by Sidak) which claims that the short run benefits of unbundling in terms of prices are more than outweighed by long term costs in terms of reduced investment incentives for the incumbent. An interesting issue in the UK is that forced unbundling was accompanied by forced functional vertical separation of the wholesale and retail segments of British Telecom and increased regulatory scrutiny of the wholesale activities, to some extent reversing the privatisation of BT in the 1980s. These are some references I proposed to the audience to relate the paper by Nardotto and his co-authors to these broader issues:
Bacache, Bourreau, Gaudin (2014), Dynamic Entry and Investment in New Infrastructures: Empirical Evidence from the Fixed Broadband Industry”, Review of Industrial Organization.

Briglauer, Frübing, Vogelsang (2015), The impact of alternative public policies on the deployment of new communications infrastructure: A survey.”

Coublucq, Ivaldi, McCullough (2013), Static-Dynamic Efficiency Trade-Off...” in Railways

Frischmann & Hogendorn (2015), “The Marginal cost Controversy,” Journal of Economic Perspectives.

Sidak & Spulber (1997), “Deregulatory Takings and the Regulatory Contract,” MIT Press.

Saturday, May 23, 2015

Three facts about inequality

In the typical sequence of an undergraduate Public Economics course, after talking about efficiency and markets, there is a chapter about income distribution. This is the place where I try to convince my students that inequality is an important topic, as important or more than efficiency. To motivate the topic and the students’ interest in authors such as Piketty, Bowles, Deaton or Stiglitz, I mentioned in class the other day three facts from the book by Branko Milanovic, “the Haves and the Have-nots:”
-80% of income variation is explained by country of birth and by family of origin. The rest is not all effort, as it includes gender, race and other factors related to luck.
-Most probably, all those in the classroom (students and lecturer of a Spanish public university) including myself belong to the richest 5% in the Planet.
-The richest 10% in the world is on average 80 times richer than the poorest 10%.
It seems to me that it is useful to remind students of the basic facts of the world we are in.

Saturday, May 16, 2015

Randomized trials and corruption

There is a debate in the analysis of poverty between those in favour of small incremental reforms based on randomized trials and those in favour of big non-marginal reforms that change the structure of society. I believe that the latter is the spirit of the critique of Martin Ravaillon to the work of Duflo and Banerjee. Of course, small reforms are welcome, but there is always a question about their external validity and there are doubts that they can lend support to any particular theory that may help change things at a larger scale. Perhaps something similar can be said about the reform of politics and the reduction of corruption. Actually the same Banerjee and other authors have some articles that I am reviewing where they introduce similar randomized trials, not only to reduce corruption but also to improve politics by reducing patronage and ethnic-based appeals. Again, all these small reforms would be welcome, but given that corruption reforms depend on the solution to a collective action problem (people only tend to act cleanly if others do so), it seems difficult that one can fix the problem without sweeping reform and a societal ethical commitment to fight it. Many well intentioned reform proposals on corruption based on incentive theory have failed. There are positive experiences with large scale corruption reform, such as those in many US states in the XXth century or those in Sweeden in the XIXth century. These reforms were not brief nor simple. In the case of the US, it is likely that corruption did not disappear, but it mutated into something different: from machine politics to the revolving doors, summarizing in the smallest possible number of words something that took decades and different mechanisms in different places. I am not sure that corruption and patronage can be fixed by appointing an expert committee that concludes that the main problem is in political parties, when political parties are needed to fix de problem. Corruption is a political and economic problem that affects the structure of society, and that is linked to inequality and to excessive political power of big economic interests. Like with poverty, it is hard to imagine that corruption is going to be fixed one experiment at a time.

Sunday, May 10, 2015

The man Tories fear most also wants a more federal Britain

The goal of equal freedom will have to wait in the UK, but perhaps the goal of a better federalism supported by the Labour Party is closer than expected. Today, the MP Chuka Umunna, whom Janan Ganesh of the Financial Times described as "the man Tories fear most," has said in the BBC program “Andrew Marr Show” (I can watch it again in Barcelona now!) that he is in favour of more federalism in the Isles. Marr himself, a Scottish journalist, seemed very keen on federalism, as he insisted on the idea to several of his guests (and nobody, including Nicola Sturgeon of the SNP and David Davies of the Tories, rejected the idea).
I am not sure that a return to New Labour is the response to the defeat last Thursday. Will a turn to the centre restore the faith of voters who have chosen nationalist parties such as UKIP and the SNP in working class districts? In centre left parties there are always more moderate and more radical components, and in modern societies the most logical outcome is a permanently negotiated balance between the different factions. I don’t think that will substantially change in the UK. But what Labour needs desperately is to openly discuss an institutional project that gives coherence to the internal arrangements between nations in the UK and to its relationship with the European Union. Chuka Umunna, perhaps the British Obama, seems to agree. So do intellectuals and journalists of the calibre of Timothy Garton Ash (as well as Will Hutton or Phil Stephens), who has made a number of proposals towards a “Federal Kingdom” to conclude that “All this is inseparable from the matter of Europe. After all, the essential British argument over the EU is about who does what at what level. That’s what people will be looking at in the probably paltry results of Cameron’s self-styled renegotiation with Brussels. But another word for such multi-layered arrangements is, precisely, federalism.”

Friday, May 8, 2015

How to improve economics

Today I told my students in a course on Public Economics what I think about the ideas of the students' group "Post Crash Economics," at least as these ideas had been portrayed in a newspaper in Barcelona this week. My opinion is that the debate initiated by this group is important and that academics and students should have this debate in the classrooms and outside them. I happen to sympathize with many of the ideas of the group, especially that economics cannot be separated from its historical and institutional context, and that the history of economic thought should occupy an important space in the economics curriculum. I also agree that economics should have a closer dialogue with other disciplines (not only social sciences but also natural sciences, physics or computer science). I agree in part with the criticism that neoclassical economics holds a kind of excessive monopoly over the approaches that are taught at universities. I agree that other approaches should also be taught, such as behavioural economics or evolutionary economics. But my agreement with this criticism is only partial, because I believe that neoclassical economics has evolved in very interesting ways in the recent decades, and its frontiers are really fuzzy at this stage. The neoclassical tent is today very large and plural, and encompasses economists such as Paul Krugman, Joseph Stiglitz and Gregory Mankiw. I disagree with at least two of the arguments that have been made by some members of the group. On the one hand, I do not think that modern economics makes an excessive use of mathematics. Economists (myself the first) should not use less, but better, mathematics, and of course they should also use narratives and know about philosophy, law, history and psychology. Mathematics is not right wing, it is a powerful scientific tool. Economists and other social scientists should aspire to the same levels of scientific rigour than other sciences. After all, we are only investigating the interactions of members of one of the animal species that have populated the planet in a small corner of the universe. On the other hand, I don't think that there is an excessive influence from American universities in economics. American universities are the best, and scientists trained or working in these institutions dominate every scientific discipline. American economics departments, in fact, are more plural than many Spanish or European ones. And all the approaches that can rival neoclassical economics as a dominant paradigm (such as behavioural or evolutionary economics) have also started in the USA.

Sunday, May 3, 2015

We are all Melungeons

I have been reading most of the book "The Invisible History of the Human Race," written by the Australian journalist Christine Kenneally. It is a book about how the combination of DNA and history shape our identities and our futures. Many of our traits depend on random events in the past, migrations and human decisions taken centuries ago by our ancestors. Culture influences DNA because decisions such as migrations create bottlenecks in the sense that small populations leave a place and then expand and reproduce somewhere else, where they meet others. For example, most non-African humans have some Neanderthal ancestor. DNA also influences culture because physical traits have been used to stigmatize some groups and discriminate. With modern technologies, it is possible to know more about the past of current groups. It is very interesting that our genetic background is necessarily diverse and complex, difficult to classify, the result of many previous combinations of genes. However, given the limitations of our rationality, we tend to think of human groups as discrete groups, with sharp distinctions between us and others. I found the case of the Melungeons group in Tennessee very interesting. The origins of this group are largely mysterious. They have darker skins than whites, as well as other distinctive physical traits, but they are not African or Native Americans, although their ancestors probably combined with these. The legend says that they may be the result of some small group from the Mediterranean arriving to North America at some point in the remote past. The book also reviews the work of economists such as Nathan Nunn and Karla Hoff, and economic historians such as Voth and Voigtländer, who have specialized in the enduring effect of the past on the current beliefs, choices and preferences of populations. For example, regions of Africa that were more affected by slavery showing lower levels of truth today, or the caste system in India projecting a long shadow up to the present although its legal aspects have been eradicated, or parts of Germany where there had been more progroms in the Middle Ages having been more prone to anti-semitism in the twentieth century.

Thursday, April 30, 2015

Multinationals and regulation

I have been reviewing the literature on international expansion of firms in general and in regulation for a paper revision. Research on the relationship between firm internationalization and performance focuses on the exploitation of firms’ capabilities/resources that are difficult to replicate, so as to overcome the “liability of foreigness”. In these cases, the firm across several countries is used to exploit the specific assets, rather than the market, due to the difficulties of attaching value to the assets separately from the firm, transaction costs determining the optimal form of expansion (joint ventures, alliances, acquisitions…). These resources may be technological or marketing techniques which explain most of the expansion of multinational enterprises (MNE) from developed countries, or other non-conventional capabilities (such as political skills) that may explain at least in part the expansion of contemporary MNE originating in less developed countries.
Economies of scale or scope must be balanced with dis-economies of size or complexity, which may explain why some studies find a trade-off between international expansion versus product diversification. When costs and benefits are not carefully balanced, the consequence is a diversification discount: more diversified firms being associated with lower shareholder value. When managers are not well aligned with shareholders, they may be interested in more diversified and larger companies to benefit from empire building, beyond the optimal size from the point of view of firm value. However, the diversification discount may also show up in data sets because the characteristics that push a firm towards optimal diversification are characteristics that lower firms’ profits (such as more product market competition in the home market).
Some studies hypothesize and find evidence consistent with a non-linear relationship between geographic diversification and performance, probably S shaped, where the success of the strategies is related to the experience of the firm, the business cycle and the evolution of technology and competition.
 In industries where at least some segments are subject to regulation or at least to license conditions, geographical diversification strategies are mediated by regulation. Regulatory policies may constrain the international activities of regulated incumbents, and also the entry of foreign operators. The same firm operating in different markets may face different regulatory regimes, thereby sending the best managers and other assets where the regulatory regime allows higher profits.
Some scholars have also pointed out the specific characteristics of the market for corporate control in regulated industries, which also shapes the structure and performance resulting from internationalization. On the one hand, deregulation and regulatory reform have been found to be associated with mergers and acquisitions waves, with the persistence of regulatory elements constraining the efficient performance of the market for corporate control. On the other hand, the behavior of some incumbents has been used to illustrate the free cash flow theory, by which managers of sectors with limited growth opportunities in their core segments but stable cash flows tend to re-invest in new but not necessarily profit-maximizing markets instead of giving back the cash-flows to shareholders.