Current Affairs

India fact of the day

by on October 14, 2014 at 2:38 pm in Current Affairs, Travel | Permalink

$74 million: That’s the amount India spent on its Mars program. Modi described it best when he said the Sandra Bullock-starrer Gravity cost more to make than India’s Mars mission. NASA’s Maven mission, admittedly more complex, cost $671 million in comparison. European Space Agency’s 2003 Mars Express Orbiter mission cost $386 million. Japan’s failed mars mission cost $189 million.

Rs 7 per kilometre: That is how much the journey to mars cost India. That is cheaper than an auto ride in Delhi, which will cost you, if you are lucky, Rs8 per km.

From Saptarishi Dutta, there is more here.

Graduate students in economics will instantly know Jean Tirole from his textbook, The Theory of Industrial Organization. In this textbook, Tirole brought game theory to the study of industrial organization–the study of firm behavior in different market structures (competition, duopoly, oligopoly, monopoly). First published in 1988 this textbook has been the dominant one in the field since that time. (Tirole has also written excellent advanced textbooks in game theory and finance which together have made him one of the most influential teachers of graduate students everywhere). The new game theory provided new answers and new questions. We can see in this prize the continued working out of the game theory revolution in different areas in economics. First the prizes went to the founders (Nash, Selten, Aumann, Schelling) and then to applications of the new theory in different areas (Hurwicz, Maskin and Myerson for mechanism design, Vickrey for auctions). This is probably the last one in this line as behavioral approaches take over and game theory runs out of steam.

A theory prize!  A rigor prize!  I would say it is about principal-agent theory and the increasing mathematization of formal propositions as a way of understanding economics.  He has been a leading figure in formalizing propositions in many distinct areas of microeconomics, most of all industrial organization but also finance and financial regulation and behavioral economics and even some public choice too.  He is a broader economist than many of his fans realize.

Tirole is a Frenchman, he teaches at Toulouse, and his key papers start in the 1980s.  In industrial organization, you can think of him as extending the earlier work of Ronald Coase and Oliver Williamson with regard to opportunism and recontracting, but applying more sophisticated and more mathematical forms of game theory.  Tirole also has been a central figure in procurement theory and optimal contracts when there is asymmetric information about costs.  The idea of mechanism design runs throughout his papers in many different guises.  Many of his papers show “it’s complicated,” rather than presenting easily summarizable, intuitive solutions which make for good blog posts.  That is one reason why his ideas do not show up so often in blogs and the popular press, but they nonetheless have been extremely influential in the economics profession.  He has shown a remarkable breadth and depth over the course of the last thirty or so years.

His possible pick had been heralded for some numbers of years now, this award should not be considered a surprise at all.  You will note that the Swedes mention Jean-Jacques Laffont, who died a decade ago, and who co-authored many of the key papers in this area with Tirole.  Such a mention is considered a nod in the direction of implying that Laffont, had he lived, would have shared in the prize.

Here is Tirole’s home page.  Here is Tirole on Wikipedia.  Here is a short biography.  Here is Tirole on scholar.google.com.  Here is the press release.  Here is background from the Swedes.  Here is the 54-page document on why he won, one of the best places to start.  Here is the Twitter commentary.

One idea of Tirole’s I use frequently has to do with renegotiability.  Let’s say a regulator and a monopolist agree to a scheme of regulation and provision, creating some surplus for both parties.  As time passes, will each side of that bargain stick with the original agreement?  A simple example here is the defense contractor.  After a procurement contract is written, sometimes the supplier has the incentive to conduct a hold-up, to report that costs are higher than expected, and to ask for more money in return for timely fulfillment of the contract.  Of course this is a contract breach, but if no other supplier can step in and do the job, it may be optimal for the government to give in to these demands to some degree.  The question then is: how should the contract best be designed in advance, so as to prevent this problem from popping up later on?  Or should the renegotiation simply be allowed?  Anyone wishing to tackle these questions likely would start with the papers of Tirole on this topic.  For one thing, these papers help explain why a second-best optimal contract may offer some rents to agents and appear to give the agent “too good a deal.”

Some of his key papers focus on asymmetric information about costs.  Say a firm knows its costs and the regulator can only guess.  Ideally the regulator would likely to make the firm price at marginal cost, but the firm will pretend marginal cost is higher than it really is.  The regulator and the firm thus play a game.  Tirole figured out with rigor which principles govern how this game works and what a second-best regulatory solution might look like.  With Laffont, here is his key paper in that area.  David Baron made contributions to this area as well.  Again, there is a potential argument for an “agent rent,” to limit the incentive of the agent to lie too much about costs, for fear of losing that rent if the cooperative relationship breaks down.

Tirole, writing sometimes with Rey, wrote some important papers on vertical agreements and how they can be used to extend market power, for instance when can buying up parts of a supply chain help extend monopoly power?  His paper with Oliver Hart figures out some of the conditions under which vertical acquisitions can help foreclose a market.  With Rey, Tirole surveys the literature on vertical relations and foreclosure.

This early 1984 paper, with Drew Fudenberg, laid out the conditions when firms should overinvest in capacity to deter competitive entry, or when firms should instead look “lean and mean” for entry deterrence.  The underlying analysis has shaped many a business school discussion.

I am a fan of this 1996 paper on how we can think of firms as credible ways of carrying reputations in a collective sense.  For instance the existence of a firm called “Google” transmits real information about the qualities of the people you deal with when you are transacting with members of the Google firm.  This was an important addition to the usual Coasean vision of thinking of a firm in terms of economizing transaction costs.

He has written some key papers on financial intermediation, collateral, and the agency problems associated with lending, here is one well-cited paper by him and Holmstrom. Here is a non-gated version (pdf).  A key argument is that a decline in the value of the collateral in a lending relationship can lower efficiency and also output, and this can help explain some features of business cycles.  This 1997 paper was well ahead of its time and it remains one of Tirole’s most widely cited works.  Arguably it is relevant for recent financial crises.

He has a 1994 book with Mathias Dewatripont on the prudential regulation of banks and how to apply the proper incentives to make sure banks do not take too much risk at public expense.  Obviously this also has since become a much more important topic.  How many of you know his 1996 paper with Rochet on “Interbank Lending and Systemic Risk“?  They show the contradictions which can plague a “too big to fail” policy and the attempts of central banks to maintain a “creative ambiguity” about what kinds of bailouts will occur, using rigorous game theory of course.

With Rochet, he has a well-known paper on platform competition, laying out the basics of how these “two-sided” markets work.  Think of internet or payment portals which must get both sides of the market on board.  What are the efficiency properties of such markets and what are the game-theoretic issues?  In this setting, how do for-profits compare to non-profits?  Competition to monopoly?  Rochet and Tirole laid out some of the basics here, here is their survey piece on the field as a whole.  Alex’s post above has much more on these points, and Joshua Gans covers this area too, here is Vox.

In public choice economics, he and Laffont have an important paper on when regulatory capture is actually likely to occur.  I have yet to see the insights of this paper incorporated into the rest of the literature adequately.  His paper on the internal organization of government considers the relative appropriateness of high- vs. low-powered incentives as applied to government employees, among other matters.  His 1999 paper with Mathias Dewatripont, “Advocates,” shows in game-theoretic terms why something like the Anglo-American system of competing lawyers might make sense as the best way of discovering information and adjudicating the truth.  This paper shows how career concerns affect bureaucratic incentives and what is the optimal degree of specialization within a government bureaucracy.

He has thought very deeply about the nature of liquidity and what is the optimal degree of liquidity in a securities market.  There can be some side benefits to illiquidity, namely that it forces parties to stay committed to an economic relationship.  This must be weighed against the more obvious benefits of liquidity, which include having better benchmarks for measuring managerial performance, namely stock price (see this paper with Holmstrom).  This kind of analysis can be applied to the question of whether the shares of a firm should stay privately traded or be put on a public exchange.  This 1998 paper, with Holmstrom, is a key forerunner of the current view that the global economy does not have enough in the way of safe assets.

Here is his paper on vertical structure and collusion in bureaucracies (pdf).  Here is his very useful survey article, with Holmstrom, on the theory of the firm.

His textbook on Industrial Organization is a model of clarity and remains a landmark in the field, even though it came out almost thirty years ago.

He has written a book on telecommunications regulation (with Laffont) although I have never read that material.

In finance he wrote this key 1985 paper, deriving the conditions under which you can have an asset bubble in a market with rational expectations.  The problem of course is that the price of the asset tends to keep rising, relative to the size of the economy as a whole, and eventually it becomes impossible to keep on buying the asset.  This has to mean an eventual crash, unless the growth rate of the economy exceeds the general rate of return on assets.  This paper helped us think through some issues which recently have resurfaced with the work of Thomas Piketty.  His earlier 1982 paper on speculation is also relevant to this topic.  Most economists think of Tirole as game theory, finance, and industrial organization, but his contributions to finance are significant as well.

Just to show his breadth, here is his paper with Roland Benabou on incentives and when they undermine the intrinsic desire to do a good job.  For instance if you pay kids to get good grades, will that backfire and kill off their own reasons for wanting to do well?  Alex covers that paper in more detail.  This other paper with Benabou, “Self-Confidence and Personal Motivation,” is a great deal of fun.  It analyzes the benefits of overconfidence, namely greater motivation, and shows how to weigh those benefits against the possible costs, namely making more mistakes.  It shows Tirole dipping a foot into the waters of behavioral economics and again reflects his versatility in terms of fields.  I like this sentence from the abstract: “On the supply side, we develop a model of self-deception through endogenous memory that reconciles the motivated and rational features of human cognition.”  Again with Benabou, here is his paper on willpower and personal rules, very much in the vein of Thomas Schelling.

Here is Tirole on intellectual property and health in developing countries, with plenty on policy.

It’s an excellent and well-deserved pick.  One point is that some other economists, such as Oliver Hart and Bengt Holmstrom, may be disappointed they were not joint picks, this would have been the time to give them the prize too, so it seems their chances have gone down.

Overall I think of Tirole as in the tradition of French theorists starting with Cournot in 1838 (!) and Jules Dupuit in the 1840s, economics coming from a perspective with lots of math and maybe even some engineering.  I don’t know anything specific about his politics, but to my eye he reads very much like a French technocrat in terms of approach and orientation.

Jean Tirole is renowned as an excellent teacher and a very nice person.

A New York appeals court will consider this week whether chimpanzees are entitled to “legal personhood” in what experts say is the first case of its kind.

For Steven Wise, the lawyer behind the case involving a chimp named Tommy, it is the culmination of three decades of seeking to extend rights historically reserved for humans to other intelligent animals.

On Wednesday, a mid-level state appeals court in Albany will hear the case of the 26-year-old Tommy, who is owned by a human and lives alone in what Wise describes as a “dark, dank shed” in upstate New York.

Wise is seeking a ruling that Tommy has been unlawfully imprisoned and should be released to a chimp sanctuary in Florida.

A victory in the case could lead to a further expansion of rights for chimps and other higher-order animals, including elephants, dolphins, orcas and other non-human primates, Wise said.

“The next argument could be that Tommy … also has the right to bodily integrity, so he couldn’t be used in biomedical research,” the Boston attorney said.

The full article is here, via Charles Klingman.

David wrote:

the point about unnecessarily fancy infrastructure with weak maintenance is endemic to all the corrupt east asian economies, really

if you want to quickly assess a city’s transport infrastructure, look to see if all the roads have good sidewalks and all the streetlights have a number. the head honcho is only driven past, he doesn’t walk on the pavement – if the project exists only to impress him, then the pavement will be subpar and cracking. if the streetlights are not numbered, then nobody is tracking failures and replacing parts.

Tyler [not this Tyler] wrote:

A week in China often leaves Westerners impressed. So shiny! So new! So big!

Live there a year and you yearn for the Newark Airport…

Douglas Levene wrote:

I live and work in Shenzhen and can add a few observations. First, the food in Shenzhen is generally not very good, and does not compare to Hong Kong or Taipei. Second, a lot of the infrastructure (the subway, the parks) is new and shiny (and there is excellent cell service on the subway), but construction quality being what it is on the mainland, you can expect much of it to look terrible in a short time. Third, although Shenzhen is much cleaner than it was four years ago, it’s still very dirty compared to Hong Kong and Taipei. Fourth, you can’t get decent internet service to foreign (English) language websites anywhere in Shenzhen, even with a VPN. This is probably due to the Great Chinese Firewall. Fifth, it’s very hard to find housing built to Western standards of comfort, size, and cleanliness. Sixth, western style toilets are still a rarity in Shenzhen. That all said, Shenzhen remains the beating heart of the capitalist South and is the best hope for China.

The Nobel Prize in Chemistry

by on October 8, 2014 at 9:45 am in Current Affairs, Science | Permalink

Eric Betzig, one of today’s winners of the Nobel Prize in Chemistry is a team leader at Janelia Farms the stunning Howard Hughes Medical Institute campus located nearby in Ashburn, VA. I’ve been out to the labs at Janelia a number of times for public talks and seen how Betzig’s work creating much higher resolution microscopes has impacted research in chemistry, biology and brain science. The new microscopes can be used to look at the dynamic operation of live cells. Check out some of the “movies” produced by these techniques. Be sure to scroll down and click right to see the movie of chromosome separation (no it’s not an animiation!).

Betzig has had a very unusual career. After working at Bell Labs for six years he quit science to work in manufacturing, optimizing machines in his father’s factory. After 10 years of that he wanted to get back into science but he hadn’t had any publications for a decade so he knew that he couldn’t just ask for job. Instead, he spent long hours at his cottage thinking of the ideas that would bring him job offers and eventually the Nobel.

Hat tip: Monique van Hoek.

Addendum: Here is Derek Lowe with more on the techniques.

In case you had forgotten:

The degree of political participation in Hong Kong is actually at its highest in history. Before 1997, Hong Kong was a British colony for 155 years, during which it was ruled by 28 governors — all of them directly appointed by London. For Chris Patten, the last British governor of Hong Kong, to now brand himself as the champion of democracy is hypocrisy of the highest order.

Only after the return of sovereignty to China 17 years ago did Hong Kong gain real public participation in governance. Today, half of the legislature is directly elected by the public and the other half by what are called functional constituencies. The chief executive, a native Hong Konger, is selected by a committee of 1,200 other Hong Kongers.

Further, Beijing has now devised a plan for voters to elect the next chief executive directly, rather than by committee, in 2017 among candidates fielded by a nominating committee — also made up of Hong Kongers. The proximate cause for today’s upheaval is the protesters’ demand for direct public nomination of candidates, too.

That is from Eric X. Li, all good points.  Please note however that I disagree with the general argument of this piece about inequality and the general tone that everything is fine under Chinese rule.

Occupy Hong Kong

by on October 5, 2014 at 1:17 pm in Current Affairs, Travels | Permalink

I’m sitting in my room, in a hotel surrounded by a moat (literally) up in the New Territories.  It is traffic blockades I fear, not tear gas, I guess that is how you become living in the suburbs.  Last I saw, the game shifted to the protestors playing “dribs and drabs concessions” in response to a line-in-the-sand, “empty out by Monday” demand from the authorities.  Such games can go on for a while, especially since the protestors don’t quite have the coherent leadership and management capabilities to enforce an immediate concession, and so the powers that be will tolerate a good deal of sloth.  In between are the Hong Kong police, many of whom (most of whom?) sympathize with the protestors.  The businessmen seem more skeptical.  If you type “PLA” into the Twitter search function, and not much interesting comes up, probably things are OK.  Those three little letters stand for “People’s Liberation Army,” they look like this.  There exists an equilibrium where this event accelerates a) the pace of reform in China, b) a further crackdown in China, or c) both.

toddler

Other good photos, with different subjects, are here.

This is perhaps today’s underreported news story:

Catalonia’s regional government said Tuesday it was suspending its promotion of an independence referendum, a day after a decision by Spain’s Constitutional Court blocking the nonbinding vote.

Catalonia’s leaders still hoped to hold the vote on Nov. 9, said spokesman Francesc Homs, but meanwhile they are halting the campaign for the referendum to avoid subjecting public servants to possible legal liability for defying the court.

There is more here.  Here is an El Pais in English story about how they hope to fight back and continue anyway, but it sounds like a losing cause.  Here is a story on a protest march to defend the referendum idea.  Developing…

I see a whole bunch of candidates here, each backed by a broadly plausible psychological story:

1. They are more ruthless than we realize.

2. They are more like us than we realize.

2b. #1 and #2.

3. They have longer time horizons than we imagine.

4. Due to extreme political constraints, they have far shorter time horizons than we think.

5. They are more inured to the risk of economic depression and hardship than we grasp.

6. They are more obsessed with parallels to earlier Chinese history than a typical Westerner would find natural.

7. They are less rational than social science rational choice models would predict, having one or two major blind spots on matters of critical importance.

8. The Chinese see themselves as weaker and less stable than we see them.

9. All of the above.

10. Good luck.

A poll last week by the Chinese University of Hong Kong showed that 46.3% of the city’s residents opposed Occupy Central while 31.3% supported it. But the group has more support among the young. According to the poll, 47% of people under 24 back Occupy Central compared with 20.9% of those ages 40-59.

There is more here.

Swiss voters on Sunday rejected a plan to ditch the country’s all-private health insurance system and create a state-run scheme, exit polls showed.

Some 64 percent of the electorate shot down a plan pushed by left-leaning parties who say the current system is busting the budgets of ordinary residents, figures from polling agency gfs.bern showed.

Going public would have been a seismic shift for a country whose health system is often hailed abroad as a model of efficiency, but is a growing source of frustration at home because of soaring costs.

“Over the past 20 years in Switzerland, health costs have grown 80 percent and insurance premiums 125 percent,” ophthalmologist Michel Matter told AFP.

There is more here, and for the pointer I thank Samir Varma.

HongKongshare

That is from Ian Bremmer on Twitter.

The game-theoretic dynamic of such situations is of course not always a happy one.  Pro-semi-autonomy views in Hong Kong feel desperate and are losing leverage.  China feels it can play tough, because it sees it is gaining influence.  And the equilibrium is…?

We’re again seeing the return of magical thinking in the economics profession and elsewhere.  Limiting climate change is indeed worth doing, but it is not close to a free lunch.  Eduardo Porter makes the relevant point quite nicely:

“If the Chinese and the Indians found it much more economically efficient to build out solar, nuclear and wind, why are they still building all these coal plants?” asked Ted Nordhaus, chairman of the Breakthrough Institute, a think tank focused on development and the environment.

China’s CO2 emissions increased 4.2 percent last year, according to the Global Carbon Project, helping drive a global increase of 2.3 percent. China now accounts for 28 percent of the world’s total emissions, more than the United States and the European Union combined.

“I don’t think the Chinese and the Indians are stupid,” Mr. Nordhaus told me. “They are looking at their indigenous energy resources and energy demand and making fairly reasonable decisions.”

For them, combating climate change does not look at all like a free lunch.

Note that doing something about air pollution and doing something about carbon emissions are two distinct issues.  America did a great deal to clean up its air, for instance when it comes to the dangerous Total Particulate Matter, but has done much less to lower its carbon emissions.  It is no accident that the former is a national public good, the latter is mainly a global public good.  China, India, and other developing nations may well go a similar route and simply keep emitting carbon at high and perhaps even growing rates.   If you lump everything together into a general “the benefits of getting rid of air pollution,” you will be missing that nations can and probably will make targeted clean-up attempts that leave carbon emissions largely intact.

By the way, here is yesterday’s report from India:

“India’s first task is eradication of poverty,” Mr. Javadekar said, speaking in a New York hotel suite a day after a United Nations climate summit. “Twenty percent of our population doesn’t have access to electricity, and that’s our top priority. We will grow faster, and our emissions will rise.”

India is the world’s third-largest carbon polluter, behind China and the United States, and Mr. Javadekar’s comments are a first indication of the direction of the environmental policies of the new prime minister, Narendra Modi…

In coming decades, as India works to provide access to electricity to more than 300 million people, its emissions are projected to double, surpassing those of the United States and China.

If you haven’t tried crossing the street in India, you don’t know much about how hard it is to fix the problem of carbon emissions.