Questions for Discussion in Class

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Questions for Discussion in Class

Economic Organizations and Markets &Economic Institutions and Markets

Note: These slides, based on previous courses, are provided only as an indication and should serve as study guide. They

will be modified both before and after class

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Block I. Individual behavior

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Topic 1. New cognitive perspectives

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Sweet tooth(love for sweet food)

▪ Why do we like sugar and fat?

▪ Is such preference optimal?

▪ How do we deal with it?♦ Look for examples of culture, institutions, education, self-

control, rationality, emotions

▪ Does it determine our weight?

▪ What can you do as…♦ … a manager? At Danone? McDonald’s? Searle Inc.? ♦ … an economist? At the Ministry of… Health? … Education?♦ … student?

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Generalizing sweet tooth

▪ Instincts present

▪ Poorly adapted b/c environmental change

▪ Cultural complements regain adaptation♦ Often relying on instincts

▪ Influence does not mean determinism

▪ Similar traits? All questions applicable?

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Same questions about…

▪ … jealousy?

▪ ... xenophobia?

▪ ... happiness?

▪ ... education?♦ Which education is most important—academic or

“informal?”

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▪ Why do we humans need families?

▪ What does our species specialize in? And where does its success lie?

▪ For this specialization, how should our minds work? As a generalist processor?

▪ How is our mind designed?

▪ When and where was it designed? With what consequences?

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▪ Who participates most in class – the men or the women?

▪ Why?♦ Nurture♦ Nature

▪ How could we verify the various explanations?♦ E.g., segregated classes

▪ What are the consequences for career development?♦ Now: what can be done to improve the sex deficit♦ In future: foresee contingencies, prevent men from deciding

for women (someone has to decide, who?)

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▪ Do we like to try out new teaching methods?

▪ Why are we especially and irrationally adverse to loss?

▪ Are we able to instinctively watch over social interactions?

▪ What is the function of culture and institutions?

▪ Does explaining conduct (such as a genetic inclination towards violence) mean we condone it?

Culture—e.g., “market” culture

▪ Do market interactions make us less cooperative? ♦ Folklore?♦ Evidence?

▪ Are markets fragile?♦ Do emotions act against the market?♦ E.g., home evictions, debtors’ forgiveness, etc.

Freedom

▪ Concepts of freedom♦ To satisfy our instincts or to govern them? ♦ What should we do if we want to be free?

▪ Does education make you free?♦ Which education?

• Recording or thinking? Doctrinal?

• Academic or informal? Informal = self-control?

♦ What about “Tiger Moms”?• Is there a lesson for us? Competition? Environment?

• Were we “Chinese” years ago?

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Optimizing topics 1 & 2

▪ Getting recipes for management (e.g., “Homo Administrans”, Nicholson)?

▪ Opening your mind, to complement you “toolkit” for self-control and social interaction

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Topic 2. Business implications of evolutionary psychology

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Outline of “Business Implications of Evolutionary Psychology”

▪ Organizing exchange♦ Opportunism and ‘Farsighted contracting’ in TCE♦ Moral hazard in principal-agent theory, etc.

▪ Management♦ General management ♦ Managing people♦ Marketing ♦ Finance

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What are the “building blocks” of your beliefs on human nature?

▪ Experience♦ Family?♦ Friends?

▪ Formal education♦ School? ♦ University? Homo economicus? Is it a SSSM?

▪ Others?♦ Religion?

▪ What about “nature”, e.g., mind’s hardwiring???

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Biological “effects” on behavior and, in particular, management

▪ Do they replace, add or interact with the environment?

▪ Interaction complexity applications?♦ Management? (“Homo Administrans” examples)

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email

▪ “I am ... from your class of Economic Organizations and Markets (group 2), I write you in order to comment some aspects of The Economist's article "Homo administrans". In the article, despite the fact that the author states that nurture and nature explain the differences between individuals and that both are important in order to determine our character, he just focus on showing experiments that seems to defend that biology is the only determinant of our character, almost without influence of our environment.For me this is contradictory not just with his initial affirmation but also with other studies that suggest the importance of nurture to define our personality traits. For example, a couple of days ago I read an article which says, briefly, that environment helps to determine our character and that the role of genes seems to be help to determine the paths that people take in their environment (if you want to read it carefully here is the link: http://voices.yahoo.com/the-role-nature-nurture-shaping-human-behavior-2255780.html)”.

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“Pruned” email

▪ “I am ... from EOM class. I write to comment on the ‘Homo administrans’ article. Despite it states that both nurture and nature are important in explaining human behavior, it just focus on experiments that seem to defend that biology is the only determinant, almost without any environmental influence. You may see http://ow.ly/sUlkE”.

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Analysis “Homo Administrans”

▪ Contents: ♦ Research grounded on biology (nature) effects♦ Emphasizes interaction nature-nurture. E.g.,:

• “Genes do not operate in isolation. Environment is important,…, they interact in subtle ways”

• Describes research on such interaction: Arvey: “Business-women, it seems, are born. But businessmen are made”.

♦ Cautions on the limited explanatory power (2 last paras.)

▪ Puzzle: It is perceived as contradictory or biased ▪ When reading new info

♦ Confirmatory (100% nurture) “of course”, no complaint• I.e., do you subject nurture argument to the same standard?

♦ Conflicting (interaction nature & nurture) complaint!!!

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How to deal with homo sapiens? (endowed with cheating detectors, emotional commitments, etc.)

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Questions on functional management

▪ Leadership♦ Is self-deception effective? In what areas?♦ Why do leaders usually feel alone? What do we ask them?

▪ Finance♦ Why do people continue to fall for pyramidal frauds? (e.g.,

Madoff, Foro Filatélico, preferentes, etc.)♦ Why do speculative bubbles keep happening?

▪ Marketing♦ Why do customers not like it when brands change their

logos?♦ Is advertising that addresses men sexist? And advertising

that addresses women? Any examples?

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Managing your career

▪ Which emotions threaten your career?

▪ How can you train yourself (“nurture”) for...♦ Postponing gratification?♦ Interacting better with others?♦ Speaking in public?♦ Keeping control over your career?

▪ How would you deal now with your partner? ♦ Making a deal, establishing “safeguards”?

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How is to achieve work/life balance?

▪ What regrets are expressed by many managers, both men and women?

▪ Are they the same?

▪ Why?

▪ How can they be remedied?

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Example: Who deals best with self-esteem?

V. See this Subject in Sintetia

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How should our studies change?

▪ Groups: ♦ Size? Continuity? Identity? Competition?

▪ Exams: ♦ Necessary? How often?

▪ Homework: ♦ Necessary? Effects?

▪ Provision of information on: ♦ Type of exam? Ranking in the class?

▪ Change: Teaching method?

▪ Others? Can you help UPF make students more rational? Meaning by rational? Improve self-control?

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Application for topics 5, 6, 7

▪ What is the role of “emotions” in understanding and regulating markets, politics, institutions, and business firms?

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Block II. Economic Organization

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Topic 3. Incentives

Are incentives “effective”?

▪ What do we mean by “effective”?

▪ Yes, they are, but, unexpected results b/c two main sets of reasons♦ Quality versus quantity: Kerr in Business Econ:

“Getting B when you aimed for A”• Rat extermination/farming, preventive fires & healthcare,

organ transplants?, army paid by casualties caused, etc.

♦ Human nature—harder problem• Effective use of assumptions & empirical knowledge

▪ Does voluntary cooperation exist? ♦ Examples? http://bit.ly/wt61P6

♦ Do all individuals cooperate voluntarily?

▪ When voluntary cooperation does exist, how do explicit incentives affect it?

▪ Can “strong” reciprocity...♦ ... help us negotiate?

♦ ... create new types of incentive?

♦ ... alleviate the problem of collective action (“public goods”)?

▪ Do you interpret “indignation” as “strong reciprocity”? In Spanish politics? EU politics (e.g., EU-Greece)?

▪ Or more simple emotions, such as anger, rage, envy?

▪ Are incensed citizens, “indignados”, incurring a cost?

▪ Can it channeled productively?

▪ What would happen if we were to fine you for arriving late?♦ What’d happen if we lift the fines 2 weeks later?

▪ How will you motivate your children to make their beds?♦ BTW, do you make your own bed?

How would you interpret it in educational terms?

▪ If NYC could fine foreign UN diplomats for parking incorrectly, would they park better? Would they all react the same way?

▪ How should we provide better incentives for university teachers?

▪ How should we provide incentives for university students? ♦ Consequences of bonuses? Fee discounts better?

▪ And for teachers’ evaluations by students?♦ What would happen if teachers were paid

according to students’ evaluations?♦ What have you learnt from the Bocconi study?

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Is corruption present among UPF students?

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What do we think of someone who…

▪ … often misses classes?

▪ … copies in exams? … copies in problem sets?♦ ... copies from you without permission?

▪ … does not return a wallet containing money?

▪ … uses Bicing without paying it?♦ … steals a bike in the street? … your bike?

▪ … slips a friend in for hospital tests?

▪ … gets medicine with a pensioner’s voucher not being a pensioner?

▪ … works while collecting unemployment benefits?

▪ … dodges paying for a ticket on the Metro? ♦ … steals someone else’s Metro season ticket?

▪ … avoids paying taxes?♦ … keeps some of the money collected for a graduation trip?♦ … keeps a commission for organizing a graduation party?

Market and ethics

▪ How does the “market” affect ethical standards?

▪ Empirical evidence for cross-cultural experiments♦ Does voluntary cooperation increases or

decreases when subjects have been living in a developed market economy versus a tribal economy?

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Topic 4. Delegation and divisionalization

Main ideas on divisionalization

▪ Review♦ More or less centralized solutions: driven by control &

information costs♦ Elements:

• Allocation of decision rights

• Evaluation of performance

• Compensation

♦ Hayek: importance of local information

▪ Centralized solutions: expense centers

▪ Decentralized: cost, revenue centers, etc.—units with greater freedom & responsibility

Centralized solution: expense centers

▪ Rules, budgets, subjective eval. of performance

▪ Typical problems♦ Incentives oversized♦ Information asymmetry budget gaming

▪ Transition into decentralized “market-like” solutions (“e.g., internal markets”)♦ Matching demand and supply: locus of uncertainty♦ A lot of central planning (an expense center itself!) to

manage this artificial market, even with weak incentives

Decentralized solutions: cost centers etc.

▪ Key: Adjusting information availability, decision rights and measured performance

▪ Common problem: non-measured variables that need to be carefully controlled: e.g., quality in cost centers

▪ Major issue: transfer pricing♦ Opportunity cost: But which costs to consider as relevant

depends on which decision you are making♦ Common puzzles & mistakes: e.g., allocating joint costs on

the basis of direct labor leads underutilize labor♦ Specific cases: decreasing costs, double margin (problem set)

♦ Interesting: field where microeconomics touches accounting

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Social choice on public services

▪ Market failure ♦ Externalities, public goods, natural monopolies♦ How did they vary from XIX to XXI centuries?

• courts, police, prisons, army, foreign relations

• education, health, pensions, housing, etc., etc.

political intervention♦ Financing and producing public services

• How to organize production? Bureaucracy

♦ Only financing public services• How to contract them? Subcontracting, internal markets

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Delegation and divisionalization (1)Revision

▪ How to organize....♦ ... a company with a single product and a single

market? ♦ ... a company with several products and several

markets?♦ ... a university?

▪ What do we mean by “organize”? Economic divisionalization: ♦ Allocation of decision-making rights♦ Evaluation of performance♦ Compensation

Delegation and divisionalization (2)

▪ How to organize ... ♦ ... a manufacturing department?♦ ... a sales department♦ ... Zara’s China division?♦ ... Bankinter’s insurance business?♦ ... IBM’s strategy department?♦ ... the UPF library?♦ … UPF?

How to organize the Royal Household?

▪ News for Spain: recently set salaries♦ Issues, more generally?

▪ Functions? I.e., “outputs”

▪ What about inputs?♦ Accountability?♦ Bought where?

▪ Budget? ♦ How to set it? What to include?

Politicians’ salaries

▪ Do we discuss ♦ Level?, ♦ Function?, or ♦ Composition?

▪ Extrinsic & intrinsic motivation?

▪ Incentives

▪ Self-selection

Delegation and divisionalization (3): Implicit prices & budget gaming

▪ Discuss: ♦ According to “the head of the heart surgery

department at the Hospital de Sant Pau, seven patients died while waiting for operations there” (El País, 7 June, 2000)

▪ What are the explicit and implicit prices?

▪ Were they playing an strategic game?

▪ Applicable to conduct by local, regional and national governments?


▪ How are UPF, TV3, SCS paid and by whom?

▪ What incentives do users & suppliers have?

▪ What incentives do those responsible for budgeting have? ♦ Are they really “responsible” for the budget?

▪ Who does finance the budget? ♦ What incentives do they have? ♦ What information do they have?

• What incentives do they have to find information?

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▪ Who knows most about value and cost?

▪ Budget cutbacks♦ Which is easiest, to cut back the wages of university

teachers, school teachers or metro train drivers? ♦ … cuts in preventive medicine or cardiology?

▪ Cost allocation♦ How do owners’ associations finance collective heating, and

what are the effects?♦ What are the consequences of taxes on employment? And

on consumption?

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Delegation and divisionalization (6):“Internal markets”

▪ How to reform...♦ ... public healthcare? NHS? Shadow invoicing?

• (How are health services for civil servants organized?)

♦ ... primary and secondary education? School subsidies? ♦ ... the university system?

▪ Is there any point in creating an “internal market” of public services if it will only be “disobeyed”?♦ What changes and decisions has the current system of

school subsidies led to?♦ Example: restricting the offer of subsidized schooling when

demand for it increases

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Delegation and divisionalization (7):“Automatic management”

▪ How are the following organized in Spain?♦ ... Notaries?♦ ... Property and mercantile registers?

▪ How were the following organized up to the 1980s...♦ ... courts?♦ ... Primary health centers?

▪ What are the characteristics of these solutions?♦ Powerful incentives? ♦ Civil servants or employees?♦ Degree of regulation?

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Privatization of public services: e.g., Spanish Civil Registry

▪ Why do unions generally oppose it?♦ Read, e.g., “UGT suspects Gallardón has retaken plans to

privatize the Civil Register” ♦ Another example: water in Alcázar de San Juan (20-2-14)♦ Suggest two general explanatory hypotheses:

• X

• Y

▪ What about users? Do they have incentives to inform themselves? To fight?

▪ What about taxpayers? Do they have incentives to inform themselves? …

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▪ What are the consequences of insisting that a department must...♦ ... reduce costs? ... its average cost?♦ ... maximize revenue?♦ ... maximize its profit?♦ ... maximize the return on its investment (ROI)?

▪ What should we think about a positive deviation from standard performance?

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▪ What is the optimal transfer price?

▪ What problems arise in a context of decreasing costs?

▪ How can this be considered in accounts?

▪ Should it include fixed costs?

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Case: Airport fees

▪ “Lack of passengers advises closing down 15 airports”

▪ How should we set the fees to use these 15 airports? On the basis of♦ Marginal cost♦ Total average cost

▪ AENA recently rose fees in underutilized airports such as El Prat or Barajas ♦ Is it sensible? Consequences?♦ Whose interest is such pricing serving? AENA’s owners?♦ How would you apply the transfer pricing analysis?♦ Did Fomento the same for the AVE?

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Delegation and divisionalization (10):Franchising

▪ How many companies make up the +30,000 McDonald’s restaurants? ♦ What sort of companies are they?

▪ What is the point of franchising? ♦ Think, e.g., in which sectors is it mostly found

▪ What are the standard functions of franchisors and franchisees?

▪ For whom does the franchisor perform a policing work?

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Block III. Institutional environment

How to decide on…?

▪ … life expectancy?♦ How do we decide? Individually? Socially?♦ Is there an optimal level? Is the maximum level optimal?

• Individual = market? “Social” = political? Are they the same? Even for vaccination?

▪ … education?♦ How should decisions be made? Individually? Socially?♦ What is the optimum? Is the maximum the optimal level? ♦ Does the optimal way of deciding on these matters change

between basic education and university education?

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Topic 5. Market and politics

▪ The three elements of the economic problem♦ Optimization (Robbins)♦ Information (Hayek)♦ Exchange (Coase)

▪ We are interested in: ♦ Analyzing how they are resolved by the market

and by politics—(BTW, Is the market “social”?)♦ Learning to compare how they do so♦ Understanding how they complement each other

Decisions affecting life expectancy

Individual decisions

Social decisions

Smoking, drinking

Driving speed

Purchase health insurance

Diet

…

Taxes

Traffic radars

“Free” healthcare

Tax on fat, sugar, etc.

…

Life expectancy: shorter in USA than Spain

▪ Why?

▪ Which one is optimal?

▪ Might there be decision failures in the USA?

▪ Might there be decision failures in Spain?

Are there “failures” in these decisions? How do these decisions differ? “Failures”, with respect to what? Do these failures also differ?

Individual decisions

Social decisions

Smoking, drinking

Driving speed

Purchase health insurance

Diet

…

Taxes

Traffic radars

“Free” healthcare

Tax on fat, sugar, etc.

…

Hayek on Life Expectancy

▪ What is the “economic problem” with respect to life expectancy? For…♦ Robbins♦ Hayek♦ Coase

▪ What is the relevant information? Where is it located? ♦ What are “scientific” & “specific” knowledge? ♦ Are both types of info present in a diet decision?

▪ What are the root causes of some typical failures?

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Topic 5. Market and politics (1): The role of information

▪ If the economic problem is to correctly allocate resources, what is required to solve it?

▪ Who “should” decide on which univ. / school to go to? (E.g.: single-sex schools)

▪ Who knows most / better about the different schools?♦ Students, parents, teachers, planners, politicians?

▪ Who has the best incentives: ♦ For finding information? For deciding? For Innovating?

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Topic 5. Market and politics (2): How do we value them?

▪ Which schools do politicians choose for their children? Is this relevant?

▪ Who do we want to choose the schools for our children in… Spain, today; Denmark, today; Iran, today; Spain, in 1965?

▪ Do politics / markets decide by majority vote?

▪ How does personal wealth affect decision rights in markets and politics?

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Topic 5. Market and politics (3): Markets or politics?

▪ Who does the market compete against?

▪ Which markets and which politics? ♦ Bad vs. ideal? Ideal vs. bad? Real vs. real?

▪ Danger: implicit asymmetric assumptions on behavior, information, competition

▪ Food for thought: ♦ Identify examples of each type of comparison in the

press and in radio and TV debates♦ Who generally wins when decisions move from the

market to politics? And vice versa?

Economic failures

▪ Rationality Individual Collective optimum optimum

▪ Markets: ? ? ?

▪ Politics: ? ? ?

Politics’ failures

▪ Representation Agency w. self-interest & info asymmetry opportunism, corruption

▪ Collective action misinformed voters, lack of control, prevalence of concentrated, minority interests

▪ Behavioral limitations: emotions, herding, etc.

▪ Tradeoffs w.r.t. to competition (e.g., in terms of stability) Lack of competition

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Topic 5. Market and politics (4):Improving the performance of politics

▪ How can we improve citizens’ information on...♦ ... the value of public services? ♦ ... what we pay for them? (Is this the same as cost?)

▪ What effects do “shadow invoices” have on the transparency of public expenditure?

▪ Should babies have a vote? Their parents? Only the over-21s? Immigrants? Only taxpayers? Should pensioners have just half a vote?

▪ How can we use our instincts to improve political decisions? Herd instinct? Ownership?

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“Vodafone convinces the advertising regulator to oblige all mobile phone cos. to include

Value Added Tax in their advertised prices”(Feb. 7, 2014, http://ow.ly/tntXN)

▪ Are information asymmetries present?

▪ In which markets are they present?

▪ What’s the optimal rule? ♦ Does it depend on the tax structure?

• E.g., what with a constant % rate?

♦ Is it optimal a mandatory or a default rule?

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Topic 5. Market and politics (5): The case of electricity

▪ Has the price of electricity risen?

▪ Do we finance renewable energies with transparency?

▪ Generally speaking, is the policy right or wrong? Costs: ♦ Nuclear, 44 € / MW/h (*)♦ Coal, 72 € / MW/h (*)♦ Fuel-gas, 69 € / MW/h (*)♦ Wind, approx. 90 € / MW/h♦ Photovoltaic, approx. 430 € / MW/h

• Sources: (*) National Energy Commission, 08 http://www.cne.es/cne/doc/publicaciones/cne82_08.pdf

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▪ See also this for a critique

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Topic 5. Market and politics (6)

▪ Are both markets and politics social decision-making processes?

▪ Easier to see politics as social decision-making?

▪ Is A. Smith’s finding intuitive?Individual optimums Collective optimal

▪ When does the market fail? Only the market?

Rationality Individual optimums Collective optimum

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Topic 5. Market and politics (7): Transaction costs & property rights▪ Externalities▪ Coase Theorem: zero TC irrelevant▪ What is Coase’s contribution to the “economic

problem”?♦ Property rights

incentive to produce and use information♦ Institutions

reduce transactions costs specialization productivity

♦ Comparative analysis of realities (politics vs. markets, public/private provision, alternative regulations)

Land owners vs. mountain bikers: Property rights? Externalities? Transaction costs?

Similar cases with bikes in cities’ sidewalks?

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Externalities are reciprocal

▪ Nonsmokers on smokers

▪ Bicycles on cars

▪ Pedestrians on bicycles

▪ Punctual students on latecomers

▪ More examples ???

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“If you run over a wild boar, you’re guilty”(El País, Feb 13, 2014)

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Allocation of liability

▪ What are the consequences that the law makes either the land (or animal) owner or the driver (or car owner) liable?

▪ Optimal levels of accidents, boars, cars, fences, speed, precaution…?

▪ Will such levels be affected by alloc. rule?♦ Are transaction costs high? (sensible here?)♦ If high, who is in the best position to decide? ♦ Optimal for: abandoned pets? Wild animals? In hunting

areas? In highways? ♦ Optimum changes with technology (e.g., use of chips to

define property rights on pets)

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“Murdered for eating popcorn while watching “Black Swan” (Riga, 22-feb-2011)

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Analysis of the Riga crime

▪ Externality failure: noise from eating popcorn♦ Rights:

• To eat popcorn• To not be disturbed by someone eating popcorn

♦ Allocation of rights clear: popcorn on sale in the cinema♦ But transaction costs were prohibitive. Really?

▪ Rationality failure (?) ♦ Going to prison is excessive cost & noise was not avoided.

All that was achieved was to satisfy the wish for revenge♦ Does the wish for revenge deter to the extent that there is no

failure if we assume interactions are repeated?♦ Was it less rational to kill the victim after the film had

finished?

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▪ How can we correct failures of rationality in people who are inclined to be violent?

▪ Can we apply this criterion to other failures on rationality?♦ Example: If we protect “weak” parties to a contract, what

incentives do they have to inform themselves & stop being weak?

▪ Is it easy to distinguish between strong and weak parties after the event?♦ E.g., today’s victims of fraud are yesterday’s big investors

▪ Who is most rational – the consumer or the citizen?♦ E.g.: Speed limit of 110 km/h on highways

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Poaching wildlife

▪ Why? What to do?♦ Key variables?

▪ Does allocation of property rights fully solve the problem?

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▪ Is the number of pollinating bees optimal?

▪ Why do streets get congested?

▪ Why fish stocks get depleted? ♦ Why is this not the case in Scotland?

▪ Why is the air polluted? What can be done?

▪ Would it be enough to define and allocate property rights? What does Varian omit?

Topic 5. Market and politics (10): How to evaluate market vs. political solutions?

▪ Examining their real performance♦ We should not compare

• A real market, imperfect, governed by self-interest

• An ideal, perfect politics governed by angels

♦ Nor should we compare an ideal market with real politics♦ Are real cases determined by politics, markets, or… both?

▪ Assuming human beings are similar w.r.t.♦ Opportunism: Madoff & Nixon; Jobs & Obama♦ Rationality: consumers & voters

▪ What do progressives and classical liberals often assume about politics and markets?

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Topic 5. Market and politics (11): Demonstrations

▪ Cognitive patterns (from Topic 1) ♦ Herding?

♦ Perception of the mass as the majority?

♦ Do we have a worse perception if demonstrators are “from the other side”?

▪ Do they cause external effects? In politics? ♦ Are they positive? How are they taken on board? Subsidies?

♦ Are they negative? How are they taken on board? Responsibility?

▪ Competition: ♦ Do they reduce entry barriers? Do they strengthen minorities?

▪ Regulation: Why so different from one country to another?

Topic 5. Market and politics (12): Applying insights from topics #1, 2, 3 into #5

▪ We have seen♦ Bounded rationality: e.g., limited “steps of reasoning”♦ Role of emotions: e.g., voluntary cooperation, strong reciprocity

overcoming collective action ♦ Herding behavior: does it influence social change?

▪ Do we define fairness in equal or in proportional terms? ♦ Correlates with economists’ normative (what to do) and positive

(how things are) positions (see Randazo & Haidt clipping)

▪ Role of culture, values and beliefs in society? ♦ Possibilities of markets and institutional reform such as, e.g., labor

market liberalization, stronger competition in politics♦ Cultures and values, a hard constraint, at least in the short term?

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6. Institutional support for private contracts

Topic 6. Institutional support for private contracts (1): Basic concepts

▪ Promises as the content of exchange

▪ When are promises defined?♦ Ex ante / ex post♦ By contract, by law (default vs. mandatory rules; retroactive)

▪ By whom?♦ All parties, third party, one party (standard-form contracts)

▪ How are promises enforced?♦ One party (moral enforcement)♦ Second party (in a repeated exchange), or indirectly

(representation)♦ Third party (market vs. judicial enforcement)

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Topic 6. Institutional support for private contracts (2)

▪ What are “default rules” for?♦ E.g. marriage and separation of property♦ Do they play a greater role? E.g., “salience”

▪ What are “mandatory rules” for?♦ From a normative point of view (“what should be”)♦ From a positive point of view (“what is”)

▪ What are judges for?♦ Normative view♦ Positive view

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Topic 6. Institutional support for private contracts (3). Two examples

▪ Freezing residential rents♦ Key questions? I.e., type of rule?♦ Short term effects? Through which contracts?♦ Longer term effects? Through which contracts?

▪ Rule freeing a mortgagee from the remaining debt when giving up the property (dación en pago)♦ Retroactive or prospective?♦ Default or mandatory? Which default rule?

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Topic 6. Institutional support for private contracts (4): Labor

▪ How is it organized: Market or politics? “Corporatism”?▪ Taxes: amount, transparency, progressiveness

♦ E.g., Social Security charges “paid by the Employer”—see Vox

▪ Contract regulation♦ Retroactive “rights”? ♦ Default or mandatory rules?♦ Individual or collective?

• If collective, nationwide, province-wide or at firm level?

▪ Content of exchange♦ Wages: amount? Is this relevant?♦ Work conditions♦ The meaning of “free dismissal”: bargaining for severance pay

• Human capital, expropriation, “new productive model”

▪ Enforcement: asymmetrical, impartial, judicial?

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Topic 6. Institutional support for private contracts (5): Ryanair

▪ Court rules that “Ryanair cannot charge 40€ for printing a boarding card”

▪ Type of rule?

▪ Consequences?

▪ Relevant assumptions?♦ Competition♦ Types and homogeneity of customers♦ Others?

Topic 6. Judges (6): Solution or problem?

▪ How do parties want ex ante for judges to decide ex post? Counterfactual hypothesis

▪ How do parties want ex post for judges to decide?

▪ Judges’ difficulties solutions?♦ Self interest: corruption, morality♦ Cognitive: e.g., hindsight bias

• Example: mortgage interest rate “floors”

Advices from Don Quixote to Sancho (a)

▪ “Try to find the truth in the rich man’s promises and gifts, and also in the poor man’s sobs and complaints”♦ (“Procura descubrir la verdad por entre las

promesas y dádivas del rico, como por entre los sollozos e importunidades del pobre”)

Advices from Don Quixote to Sancho (b):

▪ “Never follow the ‘law of fit’. It is usually followed by the ignorant who think they are sharp”♦ (“Nunca te guíes por la ley del encaje, que suele tener

mucha cabida con los ignorantes que presumen de agudos”)

♦ Law of fit: a decision taken by a judge based on whatever takes his fancy, without recourse to legal provisions

• (Ley del encaje: “la resolución que el juez toma por lo que a él se le ha encajado en la cabeza, sin tener atención a lo que las leyes disponen” (Covarrubias))

Topic 6. Institutions… (7): Extractive elites: rationale or excuse?

▪ Is rent extraction, opportunism in economic or social interaction rare or prevalent? E.g., shirking in agency: ♦ Rents extraction by “the elite”?♦ Collective action by voters?♦ Is corruption more prevalent among rich or poor people?♦ Does it change if we think on tax evasion, benefit capture,

redistribution politics?

▪ Should we allocate responsibility for political failure to the elite or the people? ♦ How should we think about it? I.e., whatever current

allocation how to allocate it productively?

Topic 6. Institutions… (8): Culture & Institutions

▪ “Cultural explanations are useless. E.g., we Spaniards now drive much more slowly”♦ Was there info asymmetry on speeding? Sustainability♦ Adaptation: “Catholic” measures (ex ante control of all)

▪ Do institutions produce our culture? • More in long run? E.g., the Reformation as institutional change

▪ Does culture constrain institutions? At least, change

▪ Is this important for institutional “transplants”? ♦ Danish labor “flexicurity”? Finish schools?

Spanish values as compared to those in main EU countries

▪ Responsibility♦ We value less how democracy works, politicians &

institutions; but we are also the less informed♦ Only country in EU where citizens blame more Northern

than Southern Europe for the crisis

▪ Social preferences♦ With Italy country with strongest / weakest belief that the

State / the individual should have the primary responsibility for ensuring a a decent level of life”

♦ Least support for the market economy

▪ Source: Study on World Values, FBBVA, April 2013

Spain according to the World Justice Project’s “Rule of Law Index”, as compared

to other rich countries

▪ Same corruption level but we punish corruption less http://ow.ly/shmrv

▪ We monitor governments less

▪ We carefully guarantee individual rights, mainly in labor area, but hardly monitor government

▪ We suffer a deficit in the enforcement of judicial decisions, as well as more judicial delay

▪ Finally, our laws are less stable

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7. The function of business in society

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Topic 7. The function of business in society (1)

▪ Can you name a film that portrays business, entrepreneurs, business managers in a favorable light?

▪ How are they usually portrayed?♦ Objectives, morals, personal relations, etc.?

▪ How are big and small, rich and poor, strong and weak companies portrayed?

▪ How are politicians portrayed?♦ Politicians versus citizens?

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▪ Which have the best reputation – banks or savings banks (“cajas”)?

▪ Which have most mortgages – banks or savings banks?

▪ Which have received most public aid – banks or savings banks? Read, e.g., this (ES)

▪ What “social work” did/do the savings banks?

▪ What is the consequence for a bank of announcing big profits?

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▪ What is “corporate social responsibility”, CSR?

▪ Is CSR♦ Necessary for correcting market failures?♦ Democratic?

▪ Does CSR affect corporate control?♦ What happens if an agent has several different objectives?

▪ Does the “moral circle” apply to companies? ♦ Whether small or large? ♦ Whether they have a reputation or not? ♦ Does it entail risks?

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▪ Is there a conflict between social and individual responsibility? ♦ What can/should we do if “Nike” trainers are the product of

child labor?

▪ Is there a conflict between morality and rationality? ♦ Can morality be rational to different degrees?♦ Examples: Are the consequences of the following relevant?

• Child labor

• Aid in famine,. E.g. mosquito nets

▪ How does the sale of “indulgences” work?

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Topic X. How do we think?

▪ What do Friedman and Arrow say in their articles?

▪ Which of them do you agree with?

▪ Which of them do you think is more “political”?

▪ When we come up against arguments that go against our beliefs, do we tend to consider them more or less “political”, “ideological” or “immoral”?

▪ How to move from beliefs to ideas?

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Topic Y. Bye, bye

▪ Recurring Topics♦ Gap between demand and skills and attitudes

• Can we apply the statement made by Guzmán de Alfarache: “It was difficult for me to learn to serve when I had been taught to give orders”? (“Se me hacía duro aprender a servir habiendo sido enseñado a mandar”)

♦ Cost and fear of freedom, especially in ourselves

▪ Advice♦ Be vigilant on the gap, examine experiences and react fast♦ Be free:

• Think, instead of following others like in a herd

• Choose, instead of tying yourselves to a chain of unconscious decisions

Documents

Questions for Discussion in Class