Sunday, January 27, 2013

Good insights in the UK

I presented my work with Pau Castells on political connections at the Centre for the Market and Public Organization (CMPO) in Bristol last Thursday. And I presented a preliminary version of my analysis of the Spanish government's project to merge the sectoral regulators with the anti-trust authority at the City University Conference on Regulation and Competition in London on Friday. At Bristol I got very constructive criticism on the need to provide more robustness to our two results on the research on political connections: i) that the level of politicization of large firms in Spain is higher than in other countries, and ii) that this level is negatively correlated with firm value. We'll keep working, and let the data speak. In London, I could share ideas on institutional architecture with experts on regulatory governance and former colleagues of mine at the London Business School's Regulation Initiative some years ago, Jon Stern and David Currie, among others. Lord David Currie was the first chairman of the telecom and media regulator, OFCOM, and will the first chairman of the new Competition and Markets Authority, which results from the merger of the Competition Commission and the Office of Fair Trading. I asked him whether he thought that larger multidimensional agencies made monitoring and accountability more difficult, hence jeopardizing independence from political "principals" (politicians and voters), and he interestingly replied that, in his view, merging agencies that deal with converging industries, or that do clear complementary work, actually strengthens independence, but that merging agencies that regulate too disparate things, like energy and communications, would run into the risk I was mentioning. During the conference, a participant that attended my presentation asked me if I thought it was credible that the chairman of a Spanish company that was obliged to sell an important asset as a result of a decision by a competition authority in the UK, had gone to a cabinet minister to ask him to intervene, and this minister answered to him that he couldn't do anything. I told him that it seemed credible to me, and I was left wondering if he offered anything to the minister in exchange for his request, given what seems to have been common practice in Spain.

Sunday, January 20, 2013

Optimal regulatory independence

The Spanish reform of regulatory architecture that tries to merge most sectoral regulators (except the financial ones) and the competition policy authority is still being debated in Parliament. The initial proposal has been criticized by most experts and by the European Commission, because it tries to merge too many different things, it reduces regulatory independence and it most probably will facilitate regulatory capture. I wish to focus here on regulatory independence because I know the literature well and have modestly contributed to it. Independence helps solving commitment problems and allowing the recruitment of experts, it is good in general for institutional credibility. However, it does have drawbacks, mainly in terms of coordination with the rest of government. In addition, when the policy issue must face distributional issues, it is better if it is left to normal democratic procedures, since only democracy has the legitimacy to adjudicate distributive controversies. It is then bad policy to try to homogenize the level of regulatory independence of regulatory areas that have different levels of commitment needs (because the degree of asset specificity is different) or that have different degrees of interaction with the rest of government, or where the distributive concerns are very different. Electricity and telecommunications in Spain, for example, should have different degrees of regulatory independence, and not a common, low level of independence as the one planned by the Spanish government in the current reform proposal.

Sunday, January 13, 2013

The social cost of political connections

As I told my audiences this week in Chile, there is increasing evidence (in the US, Spain, France and Italy), that the common practice of appointing former politicians in the board of directors of large firms is negatively correlated with the value of these firms. A possible explanation of this (which requires further inquiry) is that managers use their discretion to make mistakes due to behavioral biases, in the absence of immediate feedback from their actions. For example, they recruit politicians because of an availability bias or an attribution bias. One could stop here, and think that since it is a strategic mistake by firms, it will not have any cost for society at large. One could think that if firms do not create any value for shareholders with these actions, it means that they do not succeed in using former politicians to capture public policies in their favour. However, that may be in the short run. In the long run, to the extent that some of the firms in which political connections are more widespread belong to regulated sectors, the cost for the firm of its mistakes may end up spilling over consumers and tax payers. That is because in regulated sectors (such as network or financial industries), regulators may be dragged towards covering the losses of the badly managed firms or even bailing them out, as has been notorious with many financial institutions in the recent past. And of course, there is a cost in terms of creating an increasing distance between politicians and voters.

Saturday, January 5, 2013

Cass Sunstein and regulation

Preparing my forthcoming presentations in Chile and England on the political economy of regulatory institutions, I have been reading about Cass Sunstein and his work. Sunstein is a US legal scholar from Harvard University (previously, in Chicago University), who was also between 2009 and 2012 the head of the unit, the Office of Information and Regulatory Affairs (OIRA), supervising regulation in Obama’s White House. He was called for that the “regulatory czar”. Sunstein was a controversial figure during his tenure, and his academic work, although with very high standards, has also been surrounded sometimes by controversy.
As head of OIRA, Sunstein was criticized by progressive consumer groups because he tended to side with large firms more often than not. Although in favor of a balanced cost-benefit approach to regulation, he also was and is in favor of a light regulatory touch.
His work as a scholar is very illuminating. He is the co-author with economist Richard Thaler of “Nudge”, the bible of behavioral economics as applied to regulation and public intervention. He has a recent paper summarizing his initiatives in a behavioral direction during his tenure at OIRA. His concern with transparency and making life easy for consumers is to be praised. However, in this same paper one can see how he easily bends in favor of big business (and big politicians or their families), as when he extols the virtues of what he exaggeratedly calls “public-private partnerships” like the initiative between Wal Mart and Michelle Obama against child obesity.
Prior to his experience in the administration, Sunstein was involved in a very interesting controversy with social psychologist Paul Slovic and other scholars, about the role of expert independent agencies in regulation, with Sunstein in favor of an important role for them and his critics in favor of constraining this role. Actually, the role of OIRA not only in this administration, but also in Republican administrations since the Reagan era, has been seen not as coordinating regulation with a cost-benefit approach in mind (something for which the presidency is not necessarily well equipped, as explained in this fascinating paper), but to make sure that regulation responded to the political (and fund-raising) priorities of presidents, as suggested by this article in the Huffington Post.