Monday, February 29, 2016

The myth of sovereignty in the UK and Europe

I couldn't agree more with this article by Toubeau and Murkens. This is the best part: "constitutional transformations since 1997 have reduced the UK government’s policy reach in Scotland, Wales, and Northern Ireland. Devolved governments now have the power to pass laws in a number of policy areas from healthcare, education and housing, to transport and policing that differ from those passed by Westminster. More importantly, consider clause 2 of the Scotland Bill 2015 by which the Scottish Parliament and the Scottish Government become ‘a permanent part of the United Kingdom’s constitutional arrangements’. If passed, this clause will entrench devolution against the legislative reaches of the Westminster Parliament – which is nothing short of revolutionary in constitutional terms. So with respect to the government of regions now ruled by devolved bodies, the Westminster model has also effectively ceased to exist. Put differently, the major political changes and constitutional reforms of the past 20 years have given rise to practices more typical of a federal system than of the Westminster model, such as the sharing of power, the decentralisation of authority, and the coordination of policy between different parties and governments. In the absence of a better name, Vernon Bogdanor has referred to the new settlement as the New British Constitution. These domestic transformations and their effect on the rising practice of power-sharing should inform the UK’s relationship with the EU. The reality is that, much like at home, sovereignty and power in the EU are shared between the political union and its constituent parts."

Thursday, February 25, 2016

Why is modern sport so corrupt?

Transparency International has a recent report about corruption in sports organisations. Here's what it says about why modern sport is so corrupt:
"Sport is a public interest, played and viewed by billions, whose tax dollars often fund the hosting of major sporting events. Sport is also organised on the historic principle of autonomy, however, and sports organisations – whether international organisations, regional confederations or national associations – are subsequently afforded ‘non-profit’ or ‘non-governmental organisation’ status in most jurisdictions. This allows them to operate without any effective external oversight (or interference, depending on perspective). The statutes of most sports associations therefore require that reforms are initiated and approved by the same individuals who will be most directly affected by them. It stands to reason, then, that the murkiest sports will be the most resistant to self-incrimination and change.
Even the corporate structures of sport are largely archaic. The administration of sport is often overseen by ex-athletes with little prior experience in management, operating through very linear hierarchical organisational models. While these models may have worked in the past, many international sports organisations (ISOs), regional confederations and national sports organisations (NSOs) have simply not kept pace with the huge commercial growth of the sector, and have even chosen not to adapt in order to protect certain self interests, including high salaries, bonuses and virtually limitless tenures.
Finally, this insular environment is facilitated by the countries that host these organisations, such as Switzerland and the United Arab Emirates, which traditionally afford favourable legal status and generous tax breaks in order to attract and keep ISOs resident.  Changes to tighten legal accountability are under way, but these are usually tempered with caution since ISOs may simply relocate if the screws are tightened."

Wednesday, February 24, 2016

Updated version of "Behavioral Regulatory Agencies"

I finished an updated version of the paper on "Behavioral Regulatory Agencies" that was presented in earlier versions at Bristol and Paris, and I uploaded it in my web page. Comments are very welcome. Here's how it starts:

"The analysis of the bounded rationality of agents involved in policy-making has recently enriched the literature on behavioral economics (see review in Section 2 below). Indeed, it would be an inconsistency to assume that agents behave with bounded rationality in a market context, but that they are perfectly rational when they intervene in the design and choice of collective solutions.
In this article, I apply this basic insight to a well-known problem in the literature on regulation: the time inconsistency of regulation in the face of sunk investments, and the associated potential solution of delegating into an independent regulator. This problem has been analyzed theoretically and empirically, and is recognized to shed light on public intervention in infrastructure industries such as transport, energy or telecommunications.  In their classic book on regulatory reform in the UK, Armstrong et al. (1994) argued that the task of regulators in these industries would be easy except for the presence of asymmetric information, potential regulatory capture and commitment problems. The recent literature suggests a fourth source of difficulty (which is complementary of the others): the behavioural biases of regulators.
There is a parallelism in the evolution from welfare economics to political economy and the evolution from behavioral economics to behavioral political economy. Traditional welfare economics was criticized by the Public Choice School because of the asymmetry between assuming self-interested market agents and benevolent policy-makers. However, this school broadly interpreted this asymmetry as providing a rationale for reducing to the minimum public intervention (Stern, 2010). A more agnostic synthesis was provided by the more general concept of political economy, where all agents have similar motivations but there is no bias in favour or against public intervention: quite generally, the assumption of self-interested agents changes, but does not necessarily eliminate, public intervention. It is precisely from political economy models that the suggestion to alleviate time inconsistency in policy with delegation emerged. In an analogous asymmetry, early analysis of public policy using behavioral insights assumed that bounded rationality only affected agents operating in market contexts, but not perfectly rational policy makers who could supposedly nudge the former into behaving in ways that were good for their long run selves (see among others Sunstein, 2006, Thaler and Sunstein, 2008, Thaler, 2015, and their critics such as Kahan et al., 2006). Some of the critics have been right in highlighting this asymmetry, but getting close to the risk of arguing that assuming boundedly rational policy-makers would justify removing public intervention in many contexts. Again, a more agnostic behavioral political economy would assume similar at least potential degrees of bounded rationality in all agents, which would most probably modify public intervention, without necessarily eliminating it (in some cases it might, in others it might increase the need for some collective intervention; in many cases, I conjecture that it would modify the intervention)."

Sunday, February 21, 2016

I should also be allowed to vote in the absurd UK referendum

The UK referendum about the "Brexit" option is absurd for at least two reasons. First, as all binary sovereignty referenda in the XXI Century it creates the fiction that there are only two equally reasonable options. In the campaign, the media will give equal voice to people that support reasonable positions and to excentric people that would be in the margins of politics in normal times. Second, only one of the possible choices is the result of an agreement. It is a ridiculous agreement, but it is at least an apparent agreement that gives some credibility and substance to the In vote. But the Out vote would create huge uncertainty in case of victory. The day after would be unmanageable, and some sort of agreement would have to be produced then to facilitate some status to the UK that integrated it in one of the free trade options that third countries have with the EU. But this agreement would have to be accepted by the EU, unless the British want to be a stranded country for the years to come. Although the referendum is absurd, its outcome has effects beyond the UK, and that is a good reason for other people outside the UK having something to say. A victory of the out vote would trigger a new referendum in Scotland, and this would fuel secessionist demands in other European countries. The crisis of the EU as a result of the departure of one of its largest economies would be an enourmous wound to the European project, which received the Nobel Peace price not long ago. The United States and other jurisdictions have expressed their concerns for the outcome of a referendum that takes place only to solve an interal problem of the Conservative Party of David Cameron. I would vote yes to stop all this nonsense, but more than this I believe that the world of the XXI century cannot be build using tools of the past (like the sovereignty binary referendum).

Friday, February 19, 2016

The relationship between competition and welfare is not monotonic

Trying to relate welfare economics to public sector incentives in the course I teach on public economics, I make an effort to explain that competition is good for welfare... but not always. First there is the perfectly mainstream argument that there are market failures such as externalities, asymmetric information and public goods, which make perfectly competitive markets less than efficient. An interesting application of this reasoning is that competition for status creates a negative expernality, as explained by Robert Frank in a number of books and articles. For example, imitative consumption creates a scalation of expenditures that is wasteful and reduces savings or consumption in more productive activities. Also, relatedly, second best theory teaches that if we have market power and some other market imperfection, it is not necessarily welfare improving to increase competition, unless there is another policy instrument. Then competition does not do much in principle to reduce income inequality: if it reduces the power of monopolists, it may increase equality, but if competition creates unemployment or reduces wages, it increases inequality. Governments may want to reinforce the welfare safety net to make liberalization politically more acceptable.Then there are some subtle aspects related to incentives. The first is that at least the traditional textbook spot market is impersonal and ephemeral (Bowles), based on an extrinsic quid pro quo that makes selfish behavior more salient and undermines the role of intrinsic preferences. Competition in the workplace may undermine cooperative behavior, although competition for the job (competitive selection, not nepotism or patronage) or yardstick competition may be good for incentives without necessarily harming team spirit (ask Messi, Neymar and Suárez). Competition for status has negative externalities. Of course, it is easy to think about cases where competition is good for effort and therefore productivity (otherwise, your firm goes out of business), but the higher the competion the lower the profits and the marginal benefit of effort. Schumpeter would disagree that more competition is good for innovation, and that is why we have patents, but there is nothing like the quite life of the monopolist according to Hicks. Pros and cons, not a monotonic relationship between competition and welfare.

Sunday, February 14, 2016

European fragmentation and the lessons from the catastrophic XXth Century

Now that the UK debates about EU membership and that Europe faces economic and political dilemmas because of the refugee crisis and the slow recovery from the last financial crisis, it is a good time to reflect about the history that brought us here. It is important to understand the difficulties of the steps taken to reach the precarious peace and unity that we have enjoyed. Centuries of fragmentation perhaps gave us incentives to innovate, but also led to the catastrophes of the XXth century, so well explained by Timothy Snyder in "Black Earth." Now I'm reading  "To Hell and Back," by Ian Kershaw, a cronicle of Europe between 1914 and 1949. Here's how the introduction starts: "Europe's twentieth century was a century of war. Two world wars followed by over forty years of cold war -itself the direct product of the second world war- defined the age. It was an extraordinarily dramatic, tragic and endlessly fascinating period, its history one of huge upheaval and astounding transformation. During the twentieth century, Europe went to hell and back. The continent, which for nearly one hundred years after the end of the Napoleonic Wars in 1815 had priced itself on being the apogee of civilization, fell between 1914 and 1945 into the pit of barbarism." In chapter 9, Kershaw discusses the role of intellectuals. Not all of them contributed to stop the tragedy (some did, like Keynes). Many of them not only in Russia but also in Western Europe, endorsed stalinism. Many others endorsed fascism, not only in Italy and Germany, but also in other countries. The remedies to the much criticized at the time liberal democracy turned out to be much worse than the problems that had been diagnosed. Kershaw argues that "The belief in spiritual renewal through national rebirth accounts in good measure for fascism's appeal to intellectuals," A manifesto of intellectuals in favour of Italian fascim had been promoted in 1925 by Giovanni Gentile, a distinguished professor of philosophy at the University of Rome. He was ready to boast of fascist barbarity "as the expression of the healthy energies which shatter false and baleful idols, and restore the health of the nation within the power of a state conscious of its sovereign rights which are its duties."

Friday, February 12, 2016

Incentives, intrinsic motivation and career decisions

In my classes on public economics I introduce the topic of incentives in public sector organizations, based on work by Dixit, Besley and Ghatak, among others. I start as a benchmark from a canonical agency model where there is one dimension of effort and the determinants of the optimal power of incentives are the cost of effort, noise in the measurement of effort and risk aversion. Then I extend the model to multitasking and several principals, to emphasize some of the difficulties typical of the public sector, which call quite generally for less powered incentives. Then attention turns to intrinsic motivation, and recent research points to the social sources of this intrinsic motivation. A key issue is the possibility of extrinsic monetary incentives crowding out intrinsic motivation. When this is interpreted as caused by social pressures (like status or socially determined self-image), then one example is extrinsic incentives due for example to competition triggering more selfish behavior by some workers, which become imitated by others. In a way, this is a failure of the conditions of the first welfare theorem: asymmetric information (the agency problem) prevents competition from achieving social efficiency because in this case socially desirable behavior is disincentivized. In a related way, the possibility of crowding out may be similar to multitasking, but with an individual interpretation. All of us have intrinsic motivation but also prefer more to less money. Then our different selves can be interpreted as several tasks, and when one of the personas or selves becomes more salient, that makes us neglect other parts of our personality. If we do a bit of introspection, it is easy to realize that certainly a lot of our intrinsic motivation comes from how we see ourselves or how we believe that the others see oneself. That is clear to me in career decisions. When we receive a proposal to do something new (in our job or in a a new job) a key issue that comes to our mind is how that affects our self-image. From the point of view of principals or employers, it is crucial them to select personnel with the right social norms determining this self-image.

Sunday, February 7, 2016

A course on human socio-biology

The title of this post is not exactly the title of the course I will start teaching this Tuesday. The title is "Political Economy", and it will be the second part (about Macroeconomics) of an introductory course in economics for Sociology students. I have been thinking about ways to motivate their interest in the subject. Although the textbook is the one by Krugman et al., which is more than enough material, I will try to add comments and references to topics that are related to the broader social sciences and to Sociology in particular. I will also try to find strategies to relate the contents to media news, along the lines of the book by the late Peter Kennedy on understanding macroeconomics from the news (recommended to me by my great sociologist and statistician friend, Daniel Guinea). To study social insects (such as bees or ants), we do not distinguish between sociology and economics, but we (or biologists) understand that they are organized in complex societies to better solve their problems of resource allocation and distribution. In the interacting global economy I am not sure that one can study macroecomics in a separate way from social influences and dynamics, as I do not know how we can study sociology without understanding how we allocate and distribute our scarce resources in a way that promotes or harms well being. That is why I am reading interesting articles on social capital, networks and structures, and how they are related to economic development, by authors like Durlauf, Granovetter or Dasgupta. The latter's "Very Short Introduction" to Economics is a masterpiece of clarity on the impossibility to separate economics from other social sciences, as well as the impossibility to separate microeconomics of macroeconomics.

Thursday, February 4, 2016

Global soccer and the nation-state

In my soccer and economics class I was asked in the two groups I have the same question: what would happen to the participation of FC Barcelona in the Spanish League in case of Catalan independence. My answer went more or less as follows. In the very unlikely case of Catalan independence, most probably the borders of soccer jurisdictions would not correspond to the borders of political jurisdictions. Either FC Barcelona would be invited to remain in the "rest-of-Spanish" league (and the club and even those fans that are pro-independence would be happy to accept) or it would be invited to participate in the French league, or who knows, perhaps even in the English Premier League. The overlap between sports and political boundaries already takes place in soccer, for example the Scottish having their own league and national team without being politically independent, although they do not participate independently in the Olympic Games. The Welsh have their own soccer national team but their club teams participate in the English leagues. Hopefully, in the future this will matter little because we'll have a true European superleague (also, hopefully political independence will matter less because we'll have a united, federal and sovereign Europe). Monaco participates in the French league, and Canadian teams participate in the mostly US Major League Soccer and in the NBA in basketball. National flags and anthems still matter a lot and are part of the show of World Cups, games and tournaments among national teams, but perhaps in the future (or is that already happening?) one of the few remaining roles of the current nation-states will be to wave a flag in the soccer World Cup and in the Olympic Games.