Friday, July 11, 2014
The ultimate commitment problem
Today I discussed in a workshop in Barcelona a paper by Jon Stern and Martin Cave on regulatory options for Scotland under two scenarios: independence and enhanced devolution. I said that I agreed on most of what the paper says, and I added a few more insights. I said that it is a paradox that the drive for independence, which is largely based on a rejection of the UK inherited from the Thatcher years, actually a priori says nothing about removing the main aspects of the Thatcher model of utilities regulation, based on privatization, independent regulation (from government) and a license system. The Scottish government only plans to slightly change the structure of regulatory agencies by merging the sectoral regulators. However, in the long run, a sovereign Scotland could in theory change much more, like the ownership of the companies and the degree of regulatory autonomy from government. If a new country can be created by majority rule, the new country will probably be able to do many more simpler things by the same rule. It is an interesting paradox that there is so much discretion embedded in the British legal system that the same prime minister can call a referendum to break the country and another one to abandon the institutions of the single market. The high regulatory quality of British regulatory agencies exists (and would hardly be replicated by Scottish agencies) because there is general awareness that utilities face an underinvestment problem due to time inconsistency of regulatory promises. But actually investors (not only utility investors, but also investors in human capital) face more basically the threat of expropriation of their specific investments by a government that can suddenly facilitate reneging on the basic structure of the state. By the way, today The Economist has pronounced his final verdict on the idea of Scottish independence: it is a bad idea.
Wednesday, July 9, 2014
Don't make predictions
Before commenting on predictions and the world cup, it is healthy to stress the obvious: as John Carlin says in his twitter today, it is a bad morning to wake up in Brazil, but it is much worse in Gaza: Israel puts the German massacre in perspective. My apologies to the reader.
Nate Silver, the author of "The Signal and the Noise" had correctly predicted the result of the last US presidential election in all 50 states. That gave him confidence to expand his almost "solo" web page in the New York Times "five thirty eight" into an industrial project where he hired lots of full time experts and was sold to the ESPN network. Now the whole enterprise looks more like an example of over-confidence bias.
Silver and his expanded project are devoting a lot of effort and space to the soccer World Cup in Brazil, with plenty of interesting material. The main message of their predictions, though, was that Brazil were the favourite, much more than what betting markets were predicting. Even yesterday, Silver argued that the probability of Brazil beating Germany was 65% percent, accounting for the injury of Neymar and the suspension of Silva. After the 1-7 defeat of Brazil, the famous statistician has reacted to his own failure with this interesting piece.
It turns out that soccer is more difficult to predict than electoral politics. Political events in general are also difficult to predict: the Great War, the fall of the Berlin Wall, and others, were hardly predicted by anyone some months in advance. To avoid bombings and disasters, better spend your time mobilizing against them than trying to predict them.
Nate Silver, the author of "The Signal and the Noise" had correctly predicted the result of the last US presidential election in all 50 states. That gave him confidence to expand his almost "solo" web page in the New York Times "five thirty eight" into an industrial project where he hired lots of full time experts and was sold to the ESPN network. Now the whole enterprise looks more like an example of over-confidence bias.
Silver and his expanded project are devoting a lot of effort and space to the soccer World Cup in Brazil, with plenty of interesting material. The main message of their predictions, though, was that Brazil were the favourite, much more than what betting markets were predicting. Even yesterday, Silver argued that the probability of Brazil beating Germany was 65% percent, accounting for the injury of Neymar and the suspension of Silva. After the 1-7 defeat of Brazil, the famous statistician has reacted to his own failure with this interesting piece.
It turns out that soccer is more difficult to predict than electoral politics. Political events in general are also difficult to predict: the Great War, the fall of the Berlin Wall, and others, were hardly predicted by anyone some months in advance. To avoid bombings and disasters, better spend your time mobilizing against them than trying to predict them.
Sunday, July 6, 2014
Louis Van Gaal, a free man
The Dutch manager does not care about what public opinion thinks. That does not mean he does not care about what others think, since it is not infrequent to see him talking to his players or his assistants. The Netherlands may not win the World Cup, although at several times during the Cup they have been the non-American team with the highest probability to do so, despite clearly not having the best individual players. No, but they will not win, because otherwise it is a whole industry of Van Gaal critics, headed by Cruyff and Valdano (who have not managed a team for almost 20 years now and who spend most of their time playing golf or talking to a microphone), that would be discredited. And also, because the impossible Leo Messi plays for Argentina, and not for The Netherlands. That, the Dutch winning, cannot happen, there is too much at stake.
Enough has been said about Van Gaal's work and his tactical decisions, including yesterday's in replacing the goal keeper to improve the odds at the penalty shoot-out (Cruyff is one of the fathers of the theory that shoot-outs are a lottery and that nothing can be done to prepare for them, according to Ben Lyttleton in "Twelve Yards"). But one thing that is happening in front of everybody and no-one has mentioned is that, as opposed to all other managers, Van Gaal spends all the match seated on his bench, instead of walking or standing nervously in the "technical area" provided for managers next to the pitch. All other managers, instead of observing and taking notes like Van Gaal, shout and move propelled by "action bias", because the social norm is that it should seem that they try to improve the performance of their teams -although there is nothing they can do once the ball starts rolling. I am sure managers did not behave like this before all games were on live TV. But the Dutch manager is free from social norms, and that gives him another edge to make more rational decisions.
My happiness will not be absolute because of course it is impossible that The Netherlands win the World Cup, but in the meantime, I enjoy the best experts in world and Dutch soccer praise the genius of Van Gaal, like Simon Kuper in this article or David Winner in this interview.
(Post scriptum 1-July 10th: even free men make mistakes. Van Gaal should not have decided that a defender kicks the first penalty in the shoot-out against Argentina. According to Apesteguia and Palacios Huerta, kicking first gives a psychological advantage that obviously you lose if you fail to score. That's why the best players should be the first to kick. The Argentinian manager, Sabella, knew that and decided that Messi had to kick the first penalty.
Post scriptum 2 -July 11th: Louis van Gaal says two of his Netherlands players refused to take the first penalty against Argentina; against Costa Rica, the first penalty was kicked by Van Persie, but against Argentina he had been substituted because he was exhausted.
Post scriptum 3 -July 13th: The Netherlands finish third after beating Brazil by 3-0 and not losing a single game -they were beaten by Argentina in a penalty shoot-out. They have scored 15 goals and conceded 4 in the whole World Cup).
Enough has been said about Van Gaal's work and his tactical decisions, including yesterday's in replacing the goal keeper to improve the odds at the penalty shoot-out (Cruyff is one of the fathers of the theory that shoot-outs are a lottery and that nothing can be done to prepare for them, according to Ben Lyttleton in "Twelve Yards"). But one thing that is happening in front of everybody and no-one has mentioned is that, as opposed to all other managers, Van Gaal spends all the match seated on his bench, instead of walking or standing nervously in the "technical area" provided for managers next to the pitch. All other managers, instead of observing and taking notes like Van Gaal, shout and move propelled by "action bias", because the social norm is that it should seem that they try to improve the performance of their teams -although there is nothing they can do once the ball starts rolling. I am sure managers did not behave like this before all games were on live TV. But the Dutch manager is free from social norms, and that gives him another edge to make more rational decisions.
My happiness will not be absolute because of course it is impossible that The Netherlands win the World Cup, but in the meantime, I enjoy the best experts in world and Dutch soccer praise the genius of Van Gaal, like Simon Kuper in this article or David Winner in this interview.
(Post scriptum 1-July 10th: even free men make mistakes. Van Gaal should not have decided that a defender kicks the first penalty in the shoot-out against Argentina. According to Apesteguia and Palacios Huerta, kicking first gives a psychological advantage that obviously you lose if you fail to score. That's why the best players should be the first to kick. The Argentinian manager, Sabella, knew that and decided that Messi had to kick the first penalty.
Post scriptum 2 -July 11th: Louis van Gaal says two of his Netherlands players refused to take the first penalty against Argentina; against Costa Rica, the first penalty was kicked by Van Persie, but against Argentina he had been substituted because he was exhausted.
Post scriptum 3 -July 13th: The Netherlands finish third after beating Brazil by 3-0 and not losing a single game -they were beaten by Argentina in a penalty shoot-out. They have scored 15 goals and conceded 4 in the whole World Cup).
Thursday, July 3, 2014
What do we know about PPPs
An interesting academic article:
Iossa, E.; Martimort, D. (2013), “The simple microeconomics of public-private partnerships”, CEIS Tor Vergata Research Paper Series, 6 (12), 139.
Link: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1271082
This article presents a basic theoretical framework that is extended to analyze a variety of important topics in PPPs. The basic theory and its extensions are used to examine stylized facts and empirical evidence on the topic.
A PPP is defined in the context of this article as a long term project (15 to 30 years) for which the public sector contracts with a private consortium, bundling construction of the infrastructure and provision of the service in the same contract.
The basic model merges the literature on PPPs based in incentive theory with more than one dimensions of effort, and the literature based on property rights. In the basic model a key issue is the complementarity or substitutability of tasks. For example, if an investment effort in the quality of the infrastructure contributes to reducing the costs of operating the service, then providing incentives for this effort in a bundling contract contributes to less costly operation. However, if the externality of quality investment on operation costs is negative, then bundling is counterproductive.
The insights from the basic model can be used to analyze what proportion of the revenue risk should be transferred to contractors. If the contractor cannot influence demand (like with prisons), then the contractor should not bear demand risk at all. In cases where the contractor can influence demand risk, this should be borne accordingly by this contractor. This happens with leisure centres, with transportation projects being in-between.
Each section presents either the basic model or an extension of it, and finishes with how the existing theoretical literature has covered this particular issue and what is the empirical evidence about it. In this way, the paper is a good survey of the empirical literature as well, although it reveals an excessive variety of empirical approaches and a lack of strong conclusions as to the impact of PPPs on costs and quality.
The extensions cover quality issues, uncertainty and renegotiations, cost overruns and political problems concerning lack of commitment. In all these cases, it is shown that PPPs have the potential to increase efficiency, but their success depends always on the details of contractual conditions and execution.
This is the paper that provides a more comprehensive review of the existing theoretical literature on PPPs and at the same time of the existing empirical evidence. (The full note can be read here, in the second PPPs newsletter of the Public-Private Sector Research Center at IESE).
Iossa, E.; Martimort, D. (2013), “The simple microeconomics of public-private partnerships”, CEIS Tor Vergata Research Paper Series, 6 (12), 139.
Link: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1271082
This article presents a basic theoretical framework that is extended to analyze a variety of important topics in PPPs. The basic theory and its extensions are used to examine stylized facts and empirical evidence on the topic.
A PPP is defined in the context of this article as a long term project (15 to 30 years) for which the public sector contracts with a private consortium, bundling construction of the infrastructure and provision of the service in the same contract.
The basic model merges the literature on PPPs based in incentive theory with more than one dimensions of effort, and the literature based on property rights. In the basic model a key issue is the complementarity or substitutability of tasks. For example, if an investment effort in the quality of the infrastructure contributes to reducing the costs of operating the service, then providing incentives for this effort in a bundling contract contributes to less costly operation. However, if the externality of quality investment on operation costs is negative, then bundling is counterproductive.
The insights from the basic model can be used to analyze what proportion of the revenue risk should be transferred to contractors. If the contractor cannot influence demand (like with prisons), then the contractor should not bear demand risk at all. In cases where the contractor can influence demand risk, this should be borne accordingly by this contractor. This happens with leisure centres, with transportation projects being in-between.
Each section presents either the basic model or an extension of it, and finishes with how the existing theoretical literature has covered this particular issue and what is the empirical evidence about it. In this way, the paper is a good survey of the empirical literature as well, although it reveals an excessive variety of empirical approaches and a lack of strong conclusions as to the impact of PPPs on costs and quality.
The extensions cover quality issues, uncertainty and renegotiations, cost overruns and political problems concerning lack of commitment. In all these cases, it is shown that PPPs have the potential to increase efficiency, but their success depends always on the details of contractual conditions and execution.
This is the paper that provides a more comprehensive review of the existing theoretical literature on PPPs and at the same time of the existing empirical evidence. (The full note can be read here, in the second PPPs newsletter of the Public-Private Sector Research Center at IESE).
Sunday, June 29, 2014
The World Cup is a waste of money
One of the greatest specialists in the economics of big sports events, Victor Matheson, writes in Five Thirty Eight that public money spent in these events are typically a bad investment, and Brazil is no exception to the trend. He says that with a price tag estimated at $11.3 billion in public works spending
alone, it will take more than just a trouble-free four-week tournament
to justify Brazil’s heavy investment in hosting the World Cup. In terms
of long-run development potential, of most concern to economists is the
$3.6 billion in total spending on the 12 new and refurbished stadiums
that are being used for the event. The overwhelming conclusion of
scholarly research on the subject of stadiums and arenas is that they provide little to no
long-term economic benefits. It’s for this reason that Brazil
originally emphasized that the great majority of the infrastructure
spending for the World Cup would come in the areas of general
transportation, security and communications, with less than 25 percent of total spending going towards stadiums.
Unfortunately, cost overruns at the sports venues increased stadium costs by at least 75 over the original estimates. Because of these increases and project delays, Brazil was forced to divert its resources away from general infrastructure projects that may have had greater long-run growth potential in order to focus on a mad scramble to finish the stadiums in time for the first whistle.
Matheson concludes that "The Brazilian national team may do great on the field, but the country’s stadium economics look like a bust. The only thing really going for Brazil is the fact that it may not hold the dubious distinction of building the least economically sensible World Cup facilities for very long. Russia, the 2018 host, is looking to spend nearly $7 billion on stadiums, nearly twice the amount spent in Brazil. And the event moves to Qatar in 2022, where stadium expenditures could be … well, even FiveThirtyEight may not have enough computing power to make those estimates."
Unfortunately, cost overruns at the sports venues increased stadium costs by at least 75 over the original estimates. Because of these increases and project delays, Brazil was forced to divert its resources away from general infrastructure projects that may have had greater long-run growth potential in order to focus on a mad scramble to finish the stadiums in time for the first whistle.
Matheson concludes that "The Brazilian national team may do great on the field, but the country’s stadium economics look like a bust. The only thing really going for Brazil is the fact that it may not hold the dubious distinction of building the least economically sensible World Cup facilities for very long. Russia, the 2018 host, is looking to spend nearly $7 billion on stadiums, nearly twice the amount spent in Brazil. And the event moves to Qatar in 2022, where stadium expenditures could be … well, even FiveThirtyEight may not have enough computing power to make those estimates."
Thursday, June 26, 2014
Homage from Catalonia (to Jeremy Paxman)
One of the great things from having spent time in the UK is to know who Jeremy Paxman is. He is probably the best TV presenter anywhere in the world. I always tried to do whatever I could to receive BBC2 at home anywhere so that I could watch Newsnight. It is hard to think how other countries could have a more independent TV journalist in a public television. Paxman presented his last program in the BBC last week, and in this piece you can watch a selection of his 10 best interviews. Some people believe that he is so aggressive that he represents both the best and the worst in TV journalism. But he was aggressive not in the shouting style that we are familiar with in Spanish talk shows, but in an ironic way that systematically made only the most intelligent people survive his interviews. The BBC will still have many good journalists and very few public broadcasting organizations will match their degree of independence. But Jeremy Paxman will be very hard to replace. Other public TV stations (like the Spanish or the Catalan) will only dream of having the institutional and political contexts where a Paxman can make interviews without interference for 20 years.
Friday, June 20, 2014
Progressive leaders want Scotland in a European Britain
Prestigious leaders such as Menzies Campbell and Barack Obama have been very clear in the recent past in their support to Scotland remaining in the United Kingdom, and the UK remaining in the EU. Now the "No to independence" campaign in Scotland is receiving the support of another very prestigious progressive leader, the former Labour minister and veteran Scottish politician John Reid. Reid says that while the no campaign was not complacent, he believed that once
voters focused on arguments around the advantages of being a member of
the UK, such as financial stability, economic strength and social
justice, in addition to the risks of separation over the currency,
Europe, and the funding of pensions, "we will sensibly take a no vote on
18 September".
Reid said that “The crucial decision will be made by the ordinary men and women of this country. These are people who don’t stand on platforms, wave banners or make speeches."
"They go about their daily business, unheralded and unsung. They love their country as much as any Scot."
“The measure of your commitment to Scotland isn’t about flag waving or how many tweets you send. It’s about acting in the best interests of your country. And I believe that a No vote is in the best interests of Scotland."
Lord Reid spent time as Health Secretary, Defence Secretary, Home Secretary and Secretary of State for both Scotland and Northern Ireland under Tony Blair. He has also been chairman of the Labour Party and Celtic FC.
Reid said that “The crucial decision will be made by the ordinary men and women of this country. These are people who don’t stand on platforms, wave banners or make speeches."
"They go about their daily business, unheralded and unsung. They love their country as much as any Scot."
“The measure of your commitment to Scotland isn’t about flag waving or how many tweets you send. It’s about acting in the best interests of your country. And I believe that a No vote is in the best interests of Scotland."
Lord Reid spent time as Health Secretary, Defence Secretary, Home Secretary and Secretary of State for both Scotland and Northern Ireland under Tony Blair. He has also been chairman of the Labour Party and Celtic FC.
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