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August 22, 2012

Pareto

Economics of Political Unwillingness

Ajit Karnik of Mumbai University says most policies are inefficient because of political unwillingness. Political will is seen to be lacking when “politicians are unable to commit themselves to ignoring political characteristics and making long-term promises to reward economically efficient choices”.

There are three entities in this political game- the ruling party, interest groups and general public. There are two quid pro quo transactions- first between the party and interest group and second between party and public. In the first, the ruling party offers the interest group, a favourable policy (say, a subsidised public sector output) in exchange for political support. In the second, the ruling party offers the general electorate subsidised welfare amenities (say, basic health care) in exchange for political support.

Simply put, transaction costs (TC) are lower in case of contract between ruling party (RP) and interest group (IG) compared to other Voters (V). The TCs in the IG-RP contract are faced mainly by the IG, which can take measures to reduce these costs through monitoring and a rewards/punishment strategy. On the other hand, the TCs in the V-RP contract are faced mainly by the RP and it seems unlikely that any amount of monitoring and/or punishment strategy will enable reduction of these costs.

This framework can be used to understand many political decisions and indecisions.

Hayek vs. The Development Experts

William Easterly was the recipient of 2008 Hayek Prize given by Manhattan Institute. In his prize lecture, he compares Hayek with the development experts.

Easterly has been a huge critique of top down approach of development. This approach believes the experts know what is in the interest of the poor. Easterly instead vouches for bottom-up approach where people decide what to do. This was also similar to the central tenet of Hayekian thinking.

Hayek’s warnings about the drift toward top-down planning and its misfortune applied to development economics as well. Despite the experts proven wrong, time and time again, the view remains in development and continues to be rewarded as well. The approach remains widespread as our brains are hard-wired to believe in top-down planning. We see intentional behavior by someone at the top even in a bottom-up spontaneous order as beneficial.

This issue remains one of the hotly debated issues in economics. It is likely to continue. One neither sees any decline of top-down experts nor more Easterly kind of economists who criticise the approach.

Photo: Casey Sarin

Do most sons take up their father’s occupations?

The economic jargon for this issue is Intergenerational Occupational Mobility and is really important to understand inequality.

People’s achievements in their lives depend upon two sets of factors – those that are within their control (“efforts”) and those that are not (“circumstances” e.g. caste). People should be held responsible for the former, but not for the latter. In societies with low levels of intergenerational mobility, a person’s family background plays a huge role in his/her life chances. As an economy develops, this mobility should rise and circumstances should not matter. As India is growing, this should apply to India as well.

However, the authors show considerable intergenerational occupational persistence- across all occupational categories, the father’s category is the most likely one that a son could find himself in. But, there are differences across occupational categories- the probability that a son would fall in the father’s category is higher for the low-skilled/low-paying occupations. As expected, mobility is higher in urban areas as compared to rural areas. There is high downward mobility for the reservation groups like Scheduled Castes/Scheduled Tribes.

Comparing internationally, occupational mobility in India lies somewhere between the same for poor underdeveloped countries (of Africa) and the advanced capitalist countries.

Auctions as allocation mechanisms: Case of Faculty Offices

In a paper written in late 1980s, William Boyes and Stephen Kappel explain how the economics department of Arizona State University used auction theory to allocate offices to its own faculty. The university built a new building and some rooms had an outside view with a window and others had no windows. The former were in higher demand but such rooms were limited in supply. The result was chaos.

Each department adopted different strategies but the allocation was inefficient and the faculty grumbled after each such allocation. The economics department allocated rooms using sealed bid auction. Faculty having higher demand for external view room had to pay higher price. The funds collected were kept for scholarships and the likes. The experiment was hugely successful and it reached the university management. They did not like the idea of using money and other such means to allocate rooms. However, since the money was used for scholarships, the criticism disappeared. It was then accepted by the other departments as well. A rare case of economists applying their much advised tools on their own problems.

Can Behavioral Economics Combat Obesity?

Obesity is one of the major concerns for both the American public and the policymakers. Behavioral economics or soft nudges has emerged as a new tool to address this concern. This has created some excitement in the policy circles for its innovative thinking.

Michael Marlow and Sherzod Abdukadirov argue for the opposite and say rise of nudges needs closer examinations.

On obesity, behavioral economics prescribes two solutions. The first mandates information disclosure to counter information asymmetry. Examples of this would be mandating drug companies to go through testing processes and food companies to disclose calorie counts. The second approach increases the costs of “bad” behavior often associated with negative externalities, either through command-and-control regulation, penalties, or taxes. Cigarette taxes and mandatory pollution control devices are examples of this form of intervention.

The authors argue that consumers lack neither information nor the motivation to cut weight. Hence, using nudges does not help. Instead private market has offered solutions for cutting weight without intervention such as low-calorie meals and sugar free sodas. Moreover, as these nudges will, in all probability be framed by the bureaucrats themselves they too are likely to be inefficient.


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