Mercatus

Notes On The Road

2007-04-13T07:53:00.000-07:00

So here I am, back in India after a couple of years, doing research for a project in the relatively rich rural district of West Godavari in Andhra Pradesh. Some biased observations based on the few data points here.

Train prices are increasingly affordable and hence demand outstrips supply. For the first time, I was ready to book First class AC Tatkal to catch a project deadline and yet tickets were not available.

Cities like Hyderabad and Bangalore have traffic bursting at the seams. Apparently, Bhimavaram, a rich district wanted its own airport but politics dictated otherwise. Increasingly different transport solutions will be sought and have to be supplied.

Main roads in West Godavari are very good. I wonder about the contracting system in place for their maintenance. Gautam Bastian told me some interesting road factoids. Highways are intentionally made curved so as not to have drivers sleep off. Some well maintained roads in Orissa are oddly ill-maintained at certain stretches along the road. Turns out it is so because the road contract was given based on points marked on maps. The slight difference on the map between the parts of the road provided to two different contractors translates into no-man's land in reality and nobody maintains it!

Autos present a particularly blind-spot for policy-makers. Every city has had its share of strikes and passenger complaints because autos dont charge by the meter. And it is obvious why it will happen moreso. Meter fares are distance-based. In reality fares are hugely a function of getting return passengers. Which again is a function of spatial density of the auto-using populace. That is why sometimes it is difficult to take an auto from the Secunderabad station to Paradise (a commerical area) in the morning. Because all the traffic is towards that area and very little away from it. And similar problems for areas on the outskirts of the city. The regulation-imposed fare creates heartburn for passengers because they consider autodrivers violating the "law." What do you think? Towns in rural India seldom have digital meter based fares. Can we learn something from the dynamics there?

The Hussain Sagar is a pleasure in Hyderabad. Having greenery or water in the midst of a city is thandak for sore eyes.

Greenery reminds me of the farms in West Godavari. Green fields everywhere, and relatively prosperous people ... the gift of the river Godavari.

It is not odd to find statues of actors like Balakrishna in West Godavari district. However one particular statue of a foreigner kept coming up at odd places and it intrigued me. Curiosity unbound, I enquired about him. Turns out to be Sir Arthur Cotton, the man behind the prosperity of the West Godavari district. His entrepreneurial efforts in the 19th century led a famine-affected district turn into one of the most fertile parts of AP. No wonder some farmers invoke him before beginning their work. Read more about him here. And despair why his efforts have not been replicated for the drier parts of AP like Telangana.

Internet speed is so bad that the Reliance internet card for connectivity on-the-go seems really cool because it is something I could not do even in the US.

The decent hotel where I am staying in small-town Tadepalligudam has the clock faster by 20 minutes because the manager says it makes the staff more active!

It is a joy to see Shahrukh and Raju Shrivastava on TV instead of the YouTube.

It is increasingly becoming difficult with the moral dilemma of whether to give or not to give to beggars.

It is a great time to be a teen. You can dream BIG!

The Unknown Education Revolution in India

2007-03-08T04:20:00.000-08:00

This is an op-ed piece of mine that appeared in today's issue of Mint. In response to the photo-post Photo-state of schools in an urban slum in Delhi, there were a few comments and emails deploring the state of schooling. I couldnt present the empirical side of the story, that there are improvements happening on ground. That there has been progress made through the regulatory cracks of schooling.So I wrote this article to present the other side of the story.

Unknown Education Revolution
There is a silent and telling revolt against the poor performance of government schools

Naveen Mandava

Walking around the hot summer streets of Sangam Vihar—Delhi’s largest slum colony sprawled over 150 acres and home to 4 lakh people—in 2005, Aditi Bhargava noticed that almost every street had a school.

These schools were often just holes in the wall or a room with a few benches populated by eager children. They were not government funded or subsidized, nor did they have world-class facilities.

These were low-budget schools, where poor parents paid small amounts extracted from their meagre wages in the hope that their children would get a good education, a promise too rarely delivered at the “free” government schools. View photographs in the Photo-state of schools in an urban slum in Delhi post.

Aditi’s discovery piqued my interest in this phenomenon. I realized that Sangam Vihar was not a path-breaking exception but part of a mainstream, silent and telling revolt against the poor performance of government schools.

Independent research continues to report strides both in the quality and quantity across all private schools in urban and rural areas. Most people in urban areas and at least 28% of the rural population already have access to private schools.

The surprise is not in the absolute number of schools, but their proliferation rate. Nearly 50% of the rural private schools accounted for in the study conducted by Harvard economists Michael Kremer and Karthik Muralidharan were established after 2000, and nearly 40% of private school enrolment is in these schools.

This massive expansion of private primary schooling across India is a harbinger of the Unknown Indian Education Revolution. The survey found that more than 80% of government-school teachers send their own children to a private school. When government teachers don’t trust government schools with their own children, it’s time to sit up and take notice.

So what is fuelling this extraordinary surge and what is the quality of education being imparted? The key to understanding this surge lies in the low entry barriers.

Schools need a “recognition” status so that they can issue valid “transfer certificates” to students leaving the school. But what the recognition status primarily ensures is that teachers are paid according to relatively high government salary scales.

In reality, a primary school doesn’t strictly need “recognition” from the state to start business. Also, rural schools don’t read too much into the transfer certificate. So the rural market for primary education is comparatively unregulated vis-à-vis to secondary education. This is similar to the software industry in India. The government’s light regulation of the sector helped it become an engine of growth.

It is not just the rural rich who are moving to private schools. Studies have found that a large mass of parents are shifting because of the low quality of government education, and concern for their children’s future.

Regulatory gaps and dissatisfaction with government schools are the key factors driving the demand for private schooling. There is already evidence of such a surge in Punjab, Haryana, Uttar Pradesh, Andhra Pradesh, West Bengal, Karnataka, Meghalaya and Delhi. In seven districts of Punjab, 86% of the private schools are unrecognized.

A majority of these private unrecognized schools are operating outside the scope of policymakers’ radars. It is a “don’t ask, don’t tell” situation. Officials think of it as a fringe phenomenon. Consequently, these schools do not make it into any of the education statistics compiled by education departments.

Private schools benefit from being “unrecognized” because they save on labour costs. Teacher costs are the largest expense in the schooling sector. State governments easily spend 90% of their total budget on teachers. In contrast, private-school teachers are paid one-fifth to one-tenth of government salary levels and have more flexibility to innovate and improve learning outcomes.

Studies carried out in India all share the common conclusion that private-school students outperform their government-school counterparts. For example, in a 2005 Delhi study, James Tooley found that children in low-budget unrecognized private schools did 246% better than government school children on a standardized English test, with around 80% higher average marks in mathematics and Hindi.

There are important lessons here for education policymakers in India. Education entrepreneurs need to be encouraged by removing rules that hinder the establishment and operation of schools in the primary, secondary and higher secondary areas of education. Competing schools will create choices for parents, improving access and quality for all. The government can then focus its limited education budget on the neediest sections of society.

Inadequate education in India is not only a funding problem but also a result of over-regulation of the school market. The burgeoning market of low-budget private schools has enormous potential to do public good.
Naveen Mandava is a doctoral fellow in Public Policy Analysis at the Pardee RAND Graduate School in the US. The school is part of the RAND Corporation, a non-profit research organization.

Photo-state of schools in an urban slum in Delhi

2007-01-19T17:09:00.000-08:00

Circa May 2005, Aditi Bhargava, an ex-intern of mine did a short exploratory study of schools in Sangam Vihar in Delhi. The study was part of an internship program at the Centre for Civil Society. Sangam Vihar is one of the largest slum townships in Asia with a population of about 4 lac. The basic research question was this: what and how are the schooling opportunities of the poor there? While her paper by itself demands study, I thought the photographs could speak a lot more.

Government schools in Sangam Vihar

This Primary School is run by the Municipal Corporation of Delhi (MCD) for Classes I-V, and is located in I-block of Sangam Vihar. With 1000 students and 24 teachers out of which only 10-12 are present at a time, this school has been in existence since 1991 on the same premises. A rainy day for these children means a holiday from school.

Parents crowd around the Head Master’s Office in the ‘tent’ school during admissions.

A class in progress at the ‘tent school’ in I-block, Sangam Vihar.

This Primary MCD School is located in J-2 block of Sangam Vihar. This school has 1000 students with a total of 10 teachers. This photo was taken when class was supposedly in progress.

This is a photo of a class in another higher secondary government school in the same area. This classroom has been recently painted. Often it happens that government school expenditures are allotted strictly to line-items. So a budget for painting cannot be diverted to more productive needs if the Principal desires.

The area has about 3-4 government schools but still demand outstrips supply.

Private Unrecognised Schools in Sangam Vihar

An unrecognised school is one which doesnt have licence or permission from government and is not in accordance with government-framed regulations.

A sign on the building of an unrecognized school, advertising its facilities.

A ‘Computer Lab’ at the Quasi-recognised school in G-block of Sangam Vihar. The computers somehow seem more decoratory than functional.

Aditi interviewing the parents of the schoolkids. She is responsible for all the photos and undertaking the actual research.

That is me interviewing the parents. Most of them were highly enthusiastic about the education of their children. Not surprisingly, they wanted private school education at government school rates!

Three observations kind of hit you directly and have important influence on the policy understanding of Indian education.

1. The public conception of government schools can be very different from reality, and well, quite wishful. The standards that the government sets for private schools are often not followed by itself. The MCD government here has limited resources and a leaky implementation mechanism.

2. There is a booming private schooling market here. A school atleast in every gully! Of course, the quality is highly variable. Some are better than the government school but quite a few arent as well. Parents prefer to send their children to these private schools unless they want free/low-cost government education. It maybe that parents are buying into the "advertisements" and lack information to compare quality among various schools and choices.

3. Licensing restrictions in any good/ service generates its own "black market". And this private schooling black market is what we witnessed. Are these licensing/ regulatory barriers necessary?

Should you penalise a messenger for bad news?

2007-01-18T09:50:00.000-08:00

Public policy writing in India is too steeped in macroeconomics and plain vanilla political analyses. Pratap Bhanu Mehta's writing is a good exception like the article The truth is not in the facts.

What happens when you penalise the messenger for bad news? Think about it.

Here is an excerpt from the article to shed light on what I am talking about.

Just look at Uttar Pradesh’s crime data. During the last two years of his rule incidence of dacoity in UP has fallen by more than 70 per cent; incidence of kidnapping for ransom by more than 60 per cent. Most categories of violent crime are registering drops. According to data work done by the noted police scholar Arvind Verma of Indian University, UP’s crime rates now look closer to what they were like in 1953. In the United States, any politician would die to have such a record on crime control. What astonishing success! ... The unreliability of the UP crime data, alluded to above, tells a story of attempts to induce accountability gone horribly wrong. Even in normal circumstances, the police would rather not register FIRs. One of the perverse consequences of threatening police officers with punishment if crime increases is that the number of crimes registered decreases dramatically, as seems to have happened in UP. So the first issue in any debate on police reform has to be getting internal incentives within the police right, so that there are no internal disincentives to register FIRs. ...

With any branch of government, the central metaphor for accountability is not autonomy, but designing an appropriate system of checks and balances.

I largely regard that as true. If you cannot marketise a public good like police, then having incentives by itself will not make it work. You need to decentralise power, have transparency, critical checks and balances and yes, a good research wing to analyze the crimes.

Where Poetry and Cost-benefit analysis meet

2007-01-12T20:21:00.000-08:00

A Ballad Of Ecological Awareness

The cost of building dams is always underestimated
Theres erosion of the delta that the river has created,
Theres fertile soil below the dam thats likely to be looted,
And the tangled mat of forest that has got to be uprooted.

Theres the breaking up of cultures with old haunts and habits loss,
Theres the education program that just doesnt come across,
And the wasted fruits of progress that are seldom much enjoyed
By expelled subsistence farmers who are urban unemployed.

Theres disappointing yield of fish, beyond the first explosion;
Theres silting up, and drawing down, and watershed erosion.
Above the dam the waters lost by sheer evaporation;
Below, the river scours, and suffers dangerous alteration.

For engineers, however good, are likely to be guilty
Of quietly forgetting that a river can be silty,
While the irrigation people too are frequently forgetting
That water poured upon the land is likely to be wetting.

Then the water in the lake, and what the lake releases,
Is crawling with infected snails and water-borne diseases.
Theres a hideous locust breeding ground when water levels low,
And a million ecologic facts we really do not know.

There are benefits, of course, which may be countable, but which
Have a tendency to fall into the pockets of the rich,
While the costs are apt to fall upon the shoulders of the poor.

So cost-benefit analysis is nearly always sure,
To justify the building of a solid concrete fact,
While the Ecologic Truth is left behind in the Abstract.

--Kenneth E. Boulding

Beauty and the Bias

2007-01-11T14:23:00.000-08:00

Infatuated guy: I think you are the most beautiful person in the world!
Research gal: I think you have a biased sample.

Himalaya view from Kausani

2007-01-07T01:05:00.000-08:00

This is a picture from a recent trip to Kausani in Uttaranchal. This pic was taken from the balcony where we were staying. Look closely at the upper portion of the pic (click it) and you can see the Himalaya peaks.

Once you take in the whole landscape, nothing beats the creeping feeling of the "massiveness" of the Himalayas!

Car ride with a sexologist - 2

2007-01-05T13:13:00.000-08:00

Two distinct events confuse me.

The first is the flashing of breasts that happen at an event like the Mardi Gras. Apparently men dole out beads for flashing here. And greater the number of beads a woman has, the higher is the recognition and attention. Much of it is done in fun and mirth.

The second event is the flashing of breasts that happens on a TV show like the Jerry Springer show here. Here some members of the audience often flash their breasts at the prime participants in the show. But here it has a different take altogether. Here it is intended to convey insult.

What could be erotic in one scenario could also be insulting in another scenario!

Much of the ideas of eroticism are culturally conditioned ones and that often dictates what parts of the female body should be covered. For the Arabs probably the whole female body is one huge walking erotica. For us Indians, even the shoulder of a lady (even a bra-strap) would be considered erotic. The Europeans have a lesser erotic idea of the breasts compared to the Americans who are relatively more prudish about it. Even a simple anatomical part like the navel assumes erotic significance in various cultures.

Expatriates intuitively respond to this cultural signals. Maybe because of this husbands are often okay with their wives wearing anything she wants in US but not the same in India.

What often surprises me is the depiction of clothing in Indian mythology (atleast the Amar Chitra Katha that i was exposed to :-) and how Indian women's clothing has become more conservative than before. This seems quite different compared to other cultures.

Car ride with a sexologist - 1

2007-01-05T04:35:00.000-08:00

After being down in overtly analytical ideas for quite some time I finally hit a fresh way of looking at some things. This is courtesy an intense discussion with a sexologist on course a car trip from San Francisco to Los Angeles. I can see enough fodder for two-three posts on the discussion but first, an innocent question.

"Mommy, I love you."

In the 4-6 Indian langauges that I am aware of I couldnt find the equivalent of the above sentence. A literal translation was possible but not a culturally suitable one, if u know what I mean.

Do all the major Indian languages lack an ability to express that feeling without sounding literal?

I will be darned if it is so.

This reminds me of an interesting behavioral observation by a US colleague of mine.

We went to a big shot IAS guy's home in Varanasi. A pleasant couple and definitely elite. Their son is about my age (late-twenties). He walks into the drawing room where I was speaking with their parents, sits near his mother and puts his arm around her and converses with us. It didnt strike me as anything un-natural. Later the US colleague observed that he found that kind of action (where the son sits like that with his mother) to be rare in India. And it is true. I dont recall seeing anything like it.

It is not as if some cultural expressions of love are better than others. But it definitely points out that the mother-son tactile expressions of love are more expressive and comfortable in some cultures than others.

The 300 dollar man

2006-12-09T22:34:00.000-08:00

Here is a neat little nugget of historical incidence that illuminates the funda of insurance. I learnt about this while watching the movie Gangs of New York. You should watch it if nothing else than simply for Daniel Day Lewis who is a rocker!

This dates back to the time when US would conscript (also called "draft") citizens for its war purposes. Conscription is not your usual voluntary enlistment practised in India. Onto the nugget from Wikipedia.

A military manpower shortage occurred in the Union during the war. Congress passed the first conscription act in U.S. history on March 3, 1863, authorizing President Lincoln to draft citizens into military service who were between the ages of 18 and 35. Copperheads (Democrats opposed to the war) were dismayed by the news. Their main objection was to national service of any kind, but in terms of rhetoric, they attacked the provision allowing men drafted to pay either US$300 or supply a substitute as a "commutation fee" to procure exemption from service, which led to the derisive term "300 dollar man". However, in practice, men formed clubs whereby if one was drafted the others chipped in to pay the commutation fee.

That is a fascinating historical example of mitigating risk through insurance!

Importance of "Utility"

2006-12-08T15:06:00.000-08:00

A government department G with 10 sub-departments complains to a consultancy C about the overwhelming documentation. C does a survey of five documents that the department usually deals in. Based on inputs from the various sub-departments, the five documents are presented in increasing order of importance. One document prepared by one department is specifically targetted for unimportance and its huge contribution to workload. So it is recommended by C to be chopped off from the documentation process. Turns out that document is actually a Right to Information one. Its utility to the various departments may be low when applied on a department-level scale but it has huge systemic utility.

Moral of the story: Blind application of survey to order utilities means missing out on an important component of economic logic. Utilities are intrinsically subjective and difficult to capture across various sets of people. That is a huge limitation of surveys.

SWOT analysis

2006-12-03T09:23:00.000-08:00

Prof: What is SWOT?

Student: ?

Prof: Strength is your wife; Weakness if neighbor's wife; Opportunity is when your neighbor is away; Threat is when you are away!

25 differences I wish I knew earlier!

2006-11-29T11:09:00.000-08:00

Causality versus Correlation
Strategic versus Tactical/ Operational
Possible versus Probable
Absolute versus Relative
Output and Outcome
Risk and Uncertainty
Experiment and Observational
Point estimates (average/mean) versus Distribution measures (median/ variance)
Understanding versus Justifying
Economic profit and Psychic Profit
Average versus Marginal
Variable costs and Sunk costs
Models versus Reality
Reality versus Counterfactual
Data versus Opinion
Credible data versus Non-credible data
Process versus outputs
Design and Evolution
Stock versus Flow
Internal validity and External validity
Random and Randomized
Statistical significance and Physical significance
Principle and Degree
Rule of law and Rule by law
Sex and Making love!

Any additions?

Update:
26. Urgent versus Important
27. Efficienct versus Effective
28. Explain versus Explain away
29. Mutually exclusive issues/ functions and those not so...

Hypotheses

2006-11-22T11:29:00.000-08:00

Hypotheses are as important in academic research as in business consulting.

What diseases can tell us about making girlfriends

2006-11-17T12:42:00.000-08:00

Lunchtime. Somebody into mathematical modelling of epidemiology floated a neat idea.

The most fatal infectious disease is not the most dangerous one.

Dangerous in terms of number of people dying. Think of yourself as a virus in Surat. You initially infect 10 people. Now those people die too soon (let us say in one day) without infecting others. Your fatality number is very limited though your rate may be high. Another case. You infect 10 people and you kill them over 10 days. Now those infected people infect so many others and the fataility is so much more higher. Makes intuitive sense! Go ahead ... think about the case-fatality rate (percentage of infected people dying in a particular time frame) of Ebola virus (90%) and the Dengue fever (20%).

All of use were impressed. And then one chap worked further on it.

You want to have a girlfriend. You have two ways.
Either you propose every girl you meet with a 50% chance of acceptance.There are no friends after rejection of a proposal.
Or you make friends (not girlfriend in the usual sense) with every girl you meet. You dont propose her. Instead you propose her 2 female friends. Again a 50% chance of acceptance.

It turns out that your chances of having atleast one girlfriend in the latter case is 75%.

Working moral of the story. Just like diseases, it doesnt pay to "kill" the relationship with your "host" too fast. So make lots of friends.

And you are right. PhDs dont have a life!

A class without a board!

2006-11-14T21:46:00.000-08:00

If ever I become a professor, this is what I would use to teach in my class ... sketch in mid-air!

Randomness, Sex and the Survey

2006-11-13T17:37:00.000-08:00

A little understood issue is randomness in determining either public opinion or treatment effects.

The India Today, November 13 issue "Secret Desires" uses an invalid method to generalize the survey research for their section on male sexuality "Men in a Muddle." If one goes by the method stated on their webpage, they use street-corner sampling which is basically, convenience sampling and not random sampling. Only random sampling can give rigorous generalizibility. Random sampling would imply that everyone in the target population has to have an equal chance of being selected to participate in the survey or at least a known chance of being selected. Even if we think of their technique as purposive sampling, it still is not generalizable.because they form nonrandom/nonprobabilistic survey methods.

For a succint understanding of why convenience sampling or purposive sampling wont be appropriate read Populations and Samples.

Sample a couple of passages in the article.

In attitudes and values, we stumble across the great hypocrisy reef of India. The modern Indian man-as many as 80 per cent in Hyderabad and Chennai-expects the woman he marries to be a virgin. ... The survey probes further, trying to understand where the sex appeal of a woman lies. The answers go beyond the predictable notion of beauty and identify other factors like intelligence and sexual skills. Chennai and Hyderabad produce a smacker with 12 per cent identifying sex appeal with submissiveness. Small deviations can be seen in Ahmedabad and Ludhiana, where 32 per cent and 40 per cent, respectively, are ready to date or marry a much older woman. ... Most men confess to some homosexual experience-37 per cent have had at least one such experience-but rarely talk about it. ... Most are happy with their sexual experiences but feel upset about sex when it gets repetitive with the same woman or if the woman shows emotional expectations. A large percentage feel they can impose their need for sex regardless of their girlfriend's mood. Men are content with penis size and insist that a majority of their women have orgasms. A large fraction seems to have engaged in group sex and 11 per cent seem bisexual, with Hyderabad revealing a high of 24 per cent. Men prefer long foreplay with different towns itemising different priorities. A happy unity in diversity, not really kinky, but may be a bit too content about performance.

One cannot generalize the results to the target population (the young urban Indian male or even the young urban Indian males for the particular city) based on their convenience sampling method. I am not sure if there are any statisticians at India Today or reporters who understand statistics or can understand what ORG-MARG-AC-Nielsen has been briefing them. Hence the possible mismatch between the performed research and the narrative theme. This is exploratory research at best. Even if they employed highly rigorous methods to make their street-sampling random, all their estimates need caveats like response rate, sampling error and confidence intervals of the stated percentages.

Definitely convenience or purposive sampling is hugely cost-effective but no way generalizable, not one of those stated percentages in the article. The article provides extremely biased information to its readers because it uses non-random sampling methods to provide generalizable findings. Admittedly we are still in an infancy stage in terms of high-quality conducting and reporting survey research but a respected mag like India Today can take the lead on these issues.

Why workers compensation is worth understanding?

2006-11-08T19:14:00.000-08:00

Adequate compensation for injured workers can present quite a puzzle. Especially if one is interested in the ability of markets and is against government intervention. A little background on the issue might help. I have given a short intro to it earlier here. This blog-note updates my recent understanding of the issue. I will mention some of the concepts and realities that are driving the system. More detailed info on workers comp in USA can be found here.

The trade-off between "average justice" and "individual justice". Given that there are huge costs and uncertain benefits in litigation for an injured worker especially (when he is injured) the system tries to provide a certain comp upfront and the rest based on admin rules like calculation of the disability. This approach tries to capture systemic efficiency rather than efficiency in justice at the individual level.

Regulations could turn undesirable at either end of the spectrum. Too much of workers comp (especially insurance premiums) has firms shopping for states with low premiums and injured workers (with little impairment) unduly benefiting. An example of excessive workers comp is the low cost it provides on the worker's mistakes and consequent perverse incentives. A section from a book review is presented here

Price Fishback writes a five-page essay entitled, “Does Workers' Compensation Make for a Safer Workplace?”

Prior to workers' compensation laws, liability for workplace accidents was based on common-law standards of negligence. Fishback summarizes the legal notion of “due care” on the part of the employer, and explains that the employer often escaped liability because the injured worker had accepted the risks involved, had himself been negligent, or was harmed by a fellow worker's negligence. These doctrines “encouraged common-sense prevention of accidents by the parties with the lowest cost of prevention”—often the workers on the scene. And jobs with high risks commanded high wages.

But between 1910 and 1930 most states passed workers' compensation laws that tended to hold employers liable for all serious accidents “arising out of employment.” Fishback explains that, besides driving down wages and job opportunities, these laws sometimes even increased workplace hazard! In coal mining, accidents actually increased. “Since coal loaders and pick miners were paid by the ton of coal, they saw that by working a little faster and taking more risks they could get higher earnings— even though a roof fall injured or sometimes killed miners who tried to finish loading cars before setting new props for the roof.”

From his detailed learning, Fishback serves up a sort of historical bumper-sticker—workers' compensation had high costs and sometimes did not achieve even its primary goal of inducing workplace safety—and shows how this pertains to current liability issues.

On the other hand there are empirical studies and adequate economic theory explaining the deleterious effects of low workers comp. What interests me is that even libertarians have not gone the whole hog on this issue and have instead asked for state-based decentralization of policy bodies and allowing workers to file cases directly against gross safety negligence by employers (akin to the realm of tort law). Their approach has been to take into costs and benefits of a system including the value of a statistical life.

Workers comp based on economic loss and not non-economic loss. As of now most workers comp is based on compensing the lost ability to compete in the labor market. The evaluation of non-economic costs forms a small part of the overall calculus. And yes, It may be disturbing to Indians that the calculation of compensation is based on a formula that rates the disability (scale of 0-100) caused to your body by the injury.

Given the "what to do" is limited, we turn to the "how to do" ... here is where benchmarking and metrics become important to measure and compare systems. System metrics include adequacy, equity and efficiency. The equity issue is especially interesting. It encompasses both horizontal (similar losses should receive similar benefits) and vertical (different losses should receive benefits proportional to those losses).

Once again, the big picture is the movement (in this case) away from "whether the state or the market should do it" to a more research and empirics based approach to policy-making. Maybe that captures the present state of my thinking drift! Also, I havent been able to find much data or studies in India on this front. I would be glad if somebody passes along a few leads.

Yaad rakhna...

2006-11-03T10:48:00.000-08:00

1. Involve Clients in research process and review
2. Involve Stakeholders in findings
3. Distribute findings to opinion leaders before media gets to them so that atleast they dont belittle your side!

All hate being surprised!

How opportunity cost is the mirror side of causation?

2006-11-03T10:24:00.000-08:00

Aha moment! Turns out that op-cost and causation are related to one another through the counterfactual.

Must-reforms for civil aviation in India

2006-11-01T22:02:00.000-08:00

Not unexpectedly, airlines are in cut-throat competition and bleeding each other with the government stepping in to set the house in order. Ajay Shah has written a good insightful piece on the need of competitive markets in Indian aviation sector at Revel in Competition. Read other related articles at his blog here.

Ajay Shah has suggested three reforms which I will interpret as follows

Disband Ministry of Civil Aviation
Open-skies foreign policy
Competition (Unlimited) Commission

There are two more crucial points that could have been added to the reforms on the basis of market allocation of resources.

Dismantle route dispersal guidelines
Commercialize aviation infrastructure

Allow private airports to be set up or speed up the process of airport siting and private financing. Let the rule of law handle the issues of environment and noise. Next, commercialize the Air Traffic Control Systems. As of now, both airports and ATCs are managed and funded by the government. Let them move into the private sector. In the short term, opt for peak-load pricing at congested airports.

A lesson from the deregulation of the airline industry has been that airlines followed the hub-and-spoke model. Development of satellite airports in India can hugely increase airline performance by facilitating this model.

For further understanding of the problems affecting the civil aviation sector in India read the Road Map for the Civil Aviation Sector which does come across as illuminating.

Why did Japan lose the World War II?

2006-11-01T10:27:00.000-08:00

I dont know how I got interested in military strategy. But I picked up a book on it Wizards of Armageddon and out came a couple of gems of strategy-related thought.

In the Sixties the pattern of military thought was abolute retaliation in case of an attack. US generals thought of nothing beyond an all-out attack on USSR if war broke out. And that does seem to be a good idea. Promise all out retaliation in the hope the opponent gets deterred. And even if he as much as start a war, have complete retaliation. This was the idea until Bernard Brodie came along.

He framed the situation like this. USSR attacks a certain US base. US retaliates in toto, indulging in carpet bombing. But if USSR manages to hide even one atomic bomb and then uses it on US, it will be US who suffers. A retaliation mis-match would imply an escalated war and citizens of both nations lose through actions of belligerent generals.

The way out was to have a limited war. If USSR attacks a military base of US, then US should attack a few military bases in return, but not indulge in complete retaliation of wiping out all bases or bombing USSR cities. For if US inflicted large-scale damage on USSR, then USSR would have nothing to lose by going all out against US. In the final run, US will lose. The idea is to retaliate just enough to show the consequences of an "unlimited war" and yet at the same time not to push USSR to the brink. Neotiating through such a "limited war" and not "killing the hostage" will save the US nation from certain suicide.

At the same time one should signal the presence of a large Reserve Force that can be protected from surprise war attacks and that could signal effective retaliation. But the very act of building up a huge reserve force may force the opponent to attack. Also having a huge atomic/ hydrogen bomb base will do nothing to deter an enemey from a micro-war for nations definitely dont want to use atomic bombs for a border conflict. That means having a huge Army on the ground to stave off non-nuclear attacks.

And so the thought process went on ... till Vietnam happened where all this fancy strategising went for a toss. The enemy was not one monolithic rational thinking entity but citizen-guerillas. Then the interconnections between development and security became clear. That security was not primarily a military issue but also stemmed from development issues.

The other interesting one is about Japan in WWII!

Why did Japan quit in the WWII? Hiroshima and Nagaski got bombed. Seems simple. Actually the bombing of Hiroshima and Nagasaki did little to puncture Japan's military might and US had already exhausted its two atom bombs. So why did Japan quit?

Apparently because Japan did not know that US had finished its stock of two atomic bombs. This information gap was crucial for Japan to fear further atomic bomb attacks and quit the war. Actually this may seem obvious but I just thought it may be a good example of incomplete information.

Economists versus Operations Researchers

2006-10-06T10:44:00.000-07:00

A real case study here threw up an interesting thinking style intrinsic to economists/ statisticians and operations researchers (OR). Both had their strengths and weaknesses.

Case study: The government of Qatar gave an open-ended project to RAND to reform their primary and secondary education system. Our case study question was how would one design the research and reform models.

The economists by training in our class started associating labour market requirements with quality of schooling as part of the research phase. The OR guys by training went for the systems approach. They wanted a complete mapping of the system even before they could think about inter-relationships between components. An approach that I would support more in the initial phase.

When the reforms part came, the OR guys would think in terms of putting in neat little blocks of functional units (like those in World Bank "structural reform" presentations) that could reform the education system of Qatar. However, the economist guys would try nail to down the incentives for each functional unit to perform. An approach that I would support more in the latter phase.

It is not a bad idea to dabble in the intellect of different modeling disciplines!

Indian Cinema

2006-06-30T03:59:00.000-07:00

Whenever there is a lull in the news cycle, the U.S. or Indian news media come out with a story about how Bollywood is on the verge of going global. Yet the simple truth is that while French and Italian films are quite easy to find in mainstream video stores in the U.S. (even in Walmart sometimes!), it can be a challenge to find even Lagaan outside of specialty Indian video stores in the U.S. And no Hindi film actor or actress has yet to achieve the same crossover success of Bruce Lee or Jackie Chan.

Yet this is all about the Bombay film industry so far. In the broader sense, Indian cinema has had some success abroad. Samsara, a foreign-produced film made with an Indian cast by an Indian director set in India, grossed $19 million worldwide before even being released in India. Monsoon Wedding, another foreign-produced Indian film, grossed $20 million. So why is it that an Indian film must be financed abroad to be successful abroad?

It could be that, traditionally, Indian film studios were cash-constrained and needed to make "safe," formulaic movies to ensure rapid cash turnover. Or perhaps Bombay film studios do not have the connections and business partnerships to work with distributors abroad. I saw film posters for Monsoon Wedding in the Prague metro when I visited four years ago. I doubt any locally-produced Hindi film has ever had such extensive marketing abroad.

Whatever the cause, it seems that if Indian film is to make inroads internationally in the future, it will be through foreign film studios taking on projects too unconventional for domestic producers. That is, unless the Bombay film industry begins to branch out and starts to take on riskier, more serious projects. There may be a broader lesson here as well. After all, why is it that Bangalore has such a long way to go before it can catch up with Silicon Valley? The fault certainly does not lie with lack of Indian talent.

Collage of Thoughts

2006-06-15T17:21:00.000-07:00

I havent spent much time with my father and mother as if they were a man and a lady separate from the fact that they happen to be my parents. Hmmm...

How do I know what I dont know that I dont know?

Learning to speak in a foreign accent is a bit akin to learning to shit like Hanu-Man with that odd freaking tail in an Indian loo.

Taste lies not in appeal but in craft.

The view from the top of Eiffel Tower looks like this. Multiply it by 30 times to get an idea of the height of Mount Everest.

Piranha like sperms.
Piranha-like sperms

Make sure your children watch a lot of cartoons. Eventually they will watch more cartoon than porn unless ...

I dont like this blogging. Today I wrote stuff in hyperlinks on my paper and spirited the defense of Shakespeare literature in SMS text.

I love sleeping nude. The only guy who saw me so was my Professor who walked into my room. He left college the next day. True! It was a tearful farewell.

I hate VS Naipaul's writing. I think he needs a lesson in causation and correlation like the incident above that could deceive.

How would it be if you found out that your mom was a drug-dealer?

Sometimes I think I hold my words more miserly than my 40 cent Big Blue Bus tokens.

The courage of the gallant soldier inspires me but it is the gutsy mountaineer that awes me.

Never hit a woman.

I slipped a straw into her wound and sipped up her blood.

How come breast milk hasnt found its way into any "mainstream" cuisine?

The secret of creating a successful shoddy product is to create a critical mass of "apparently satisfied" consumers. Such secrets lie behind the marketability of Death Metal, heh! and the motivation of Equality.

Two years back, maybe I would have laughed at a Buddhist monk for a hundred sensible reasons. Today I wont. Even though I dont have one even good reason not to.

There is something wrong with people having to work for 12 months a year.

When Akbar wooed Draupadi ...

2006-06-14T17:41:00.000-07:00

I always felt that India's mythology has been seldom exploited by comedy, except here. Enjoy!

Indya, main aaya!

2006-06-14T17:40:00.000-07:00

Exams finally over! Yay!

Yesterday I dreamt I was

2006-06-04T10:07:00.000-07:00

Spiderman ... in the Sahara!

A view from the sidewalk

2006-05-29T15:46:00.000-07:00

I often took my grandmother out for short walks. These walks were her only "window" to the outside world and she treasured them a lot inspite of her failing health. I couldnt take her to the local park for fear that she would be struck by a Baichung-inspired football shot. So we took a walk around the locality.

The walk wasnt too long, but still it tired her out. It wasnt the hot and humid Kolkata weather. That was still manageable. The biggest difficulty was negotiating the interruptions in the pavement. As it is the pavement was high enough. But when there was a break in the pavement, she had to gather all her strength to bend down and then step up when the pavement-break ended. For a restless 12 yr old, the whole process seemed to be never-ending. I still remember the pain on her face. But I was her favourite grandson and she was generous with sweets, so I didnt protest much. The height of that pavement nearly matched the ones near Panchsheel enclave (by far the biggest ones that I saw in Delhi). More than one feet high! It is tiring to walk up and down on them, to say the least. If I were an ant on the street, maybe I would need a pole vault to jump onto it.

Later when I landed here in California, I observed that there were a lot of old/disabled/ handicapped people around. I found it odd. It didnt take long to understand that systems here are much suited even for them to travel around. And that made their visibility prominent.

Policy-makers in India are never pedestrians. By the time they acquire the trappings of power, roads are just scenes from the car windows en route to a busy day at the office. One has to actually walk on the pavements/ side-walks to know that their height, width and breaks can make life so uncomfortable for pedestrians. Witness the Rajiv Gandhi Setu near AIIMS where pedestrians jitterily walk across the stretch for fear of being run over.

Raj Cherubal articulates the situation much better in his post Sidewalks now. I liked especially his Wheelchair test for sidewalks where he puts forth a test to improve pedestrians' experience of the sidewalk. Especially for physically-challenged people.

Why not ask old people groups ? (Yes I realise old people are no longer called old people. They are, I suppose, differently youthed people or something like that.) But I figured when old people can actually walk on the streets, without the fear of being mowed down by an assorted variety of vehicular manslaughterites, especially because of my patented 'Wheelchair test' idea, that would be respect enough.

When a road and its sidewalks are built, or so claimed by the road and sidewalk authorities, let us unleash the old people on them. Whip out the wheelchairs and test the sidewalks. Count the number of old people and their wheelchair pushers in the test team. Chalk out the routes. A to B. B to C. C to Z. Ready, set, go! After the trip count the number of people in the team. If no one is missing, the team did not have to get down from the sidewalk, etc. test passed. Else failed. Sue government. Take authorities to court. Picket the city corporation. Repeat until success.

Wouldn't that be an inspiring sight ? Large groups of old people and their well wishers testing their sidewalks. Also, no complicated physics, chemistry or mechanical and civil engineering to tell us whether the road and the sidewalk actually works.

Having worked earlier with Raj in a public policy think-tank in India, I look forward to some engaging ideas and thoughts from his blog on urban governance.

From my real-world and academic experience in public policy, I know that nothing works like transparent standards. If a contractor has said that he has made a 3.5 inch deep tar/ cement road. Nothing like whipping out a toolkit to actually dig deep and measure it. The organisation Parivartan in Delhi made a huge success out of this "street-transparency." To add to Raj's suggestions, part of the problem lies with urban policy-makers lack of standards for designing side-walks. Standards imply there will be more thought and feedback for designing appropriate side-walks.

Bargaining with street hawkers

2006-05-22T11:48:00.000-07:00

It was a hot tiring day. I had just finished a series of interviews with street hawkers in front of AIIMS hospital, Delhi. The objective was trying to research them as part of a market economy. I bought a glass of lassi and sat down near Watchbhai. Watchbhai sells watches near the bus-stand opposite AIIMS. After talking with me, he was intrigued why an engineer was interviewing street-hawkers and that it is possible to have a world free of police raj. But I was tired of myself and wanted to know his work. Customers kept dropping in. One of them comes up, and is looking hard and long at all the watches. Watchbhai is talking to me but I suddenly notice that his concentration is focused on the customer's eyeballs. He is following their motion intently but with an air of indifference. The customer seemed to like a particular watch. He asks, "yeh kitne ka hai, bhai?" Watchbhai replies, "Do sau!" And then followed the familiar scene of bargaining. The transaction didnt happen, and watchbhai commenced our conversation again.

That scene struck in my mind and I always wondered what is the right strategy for a customer to purchase a product from a hawker. That curiosity coupled by a recent Game Theory class on price discrimination and a fascinating discussion with an economist colleague elicited a few useful lessons.

While trying to buy something from a street hawker (let us say, books) I always had this quandary. Should I directly ask for the price of the book that I really want (Da Vinci Code) or should I ask prices of random books (including the Da Vinci Code)? In the first case I risk being charged a higher price because the hawker knows my demand for it. In the second case, I probably save time and can mask my demand for it. Masking true intention seems to be a good strategy but not always, as I will explain.

In reality, it comes down to four factors.

1. Number of sellers of the good
2. Possible customers for the good and their type
2. Homogenity of the good or uniqueness of it
3. Visible price discrimination

The worst possible case is to be struck in a situation like the curio shop at the airport where there are no tax rebates. You like a curio but there are no other sellers of the same good. Most are foreigners and can well afford the good. So the seller does not have an incentive to lower the price. And maybe because of other customers around he wont lower the price.

The best possible case is something like the Sarojini Nagar market in Delhi where you want to buy a white shirt. There are a number of hawkers of it. Most other customers are like you (assuming middle-class). They are no foreigners around who can pay higher prices and hence boost the opportunity-cost of the sellers. And if it is uncrowded, better, you can drive a hard bargain. Because the seller doesnt lose other customers if he sells it to you at a slightly low price. Now looking for a non-homogenous good like an unique T-shirt with the face of Al Pacino on it may not give you much chance of a good bargain.

The strategy is to first scan the sellers' market. Find out if there are quite a few sellers who are offering the same kind of good you want and then start bargaining with each. No point masking your desire to possess it. Because you want the seller to know that you do desire it. And if he doesnt sell it, then you are gonna buy it from another place anyway. If it is a kind of unique item not available at other sellers, then mask your desire to buy it. Behave indifferently to it. Since you have concealed crucial information that you are actually interested in it, he will be willing to lower his price.

But the best tip is from my dad for shopping. This applies more to vegetable markets. Stand behind the shrillest-sounding female customer near a vegetable seller. As soon as she strikes a good bargain, jump in and tell the hawker that you want it at the same rate. Few hawkers practice price-discrimination at that point of time.

What can FU do for women?

2006-05-20T13:36:00.000-07:00

First cut thoughts.

Scarcity of something desirable often creates value in a market. So the less women there are, the more valuable each woman would become. But that essentially leads to commodification of women. For the former strand of thought, read How can we cure sexism? Limit the supply of women. For the latter strand of thought read Sthreeling. Reading both of them , it seems we are in a dead-end. Essentially a very depressing scenario if you have seen Matrubhoomi.

Now cut to a conversation that I was having with Mark during one of our sessions. And in course of the discussion he mentioned something insightful. Because kids/ teens here have a high "fallback utlity" (FU) essentially elicits respect for them from parents. So you may not have the extreme case where a parent would very often beat up a kid. For that would mean the teen can run off and start earning on his own, not very difficult compared to India. I have been personally surprised watching parents treating kids like grown-ups here. Fallback utility is a fancy term for your available opportunities given an event. An uneducated woman given a divorce has less fallback utlity compared to a woman with education. Examples that increase fallback utlity are education; economic fredom; civil freedom.

Essentially, if you think of a static scenario with women as objects, then you bow to the laws of supply and demand and end up in a commodities' market. But think of a dynamic scenario where women have increasing fallback utilities (or available opportunities), and the situation wont be so depressing. It will be a far more equal world. It will increase their bargaining power in any kind of relationship. Maybe the role for government is to encourage institutions that provide more fallback utlities to women and for women to increase their fallback utility.

My personal untested hypothesis is that even an unrelated issue that women can afford and drive vehicles of their own can lead to dramatic decrease in eve-teasing. Like Pune and Bangalore. Maybe this is an unintended consequence of the fact that you cannot import cheaper second hand-vehicles from abroad due to high government duties.

Quotes running in my head!

2006-05-20T12:23:00.000-07:00

Of course, unattributable.

Virtue is insufficient temptation.

The average man thinks he is smarter than the average man.

Courage is not absence of fear but managing fear.

Men give me pleasure, women give me satisfaction!

Bad news and good news in education

2006-05-19T17:09:00.000-07:00

Judging education achievement of a nation in terms of enrolment is like asking the number of times you proposed to women. Neither give a good indication of final outcomes! Yet it is an undeniable feel-good if we see children in schools. And we do tend to judge education outcomes in terms of enrolment. But the actual culprit may be drop-out rates which we need to address. You will find it elaborated in the Grand Drop-out Party?, an old article of mine.

Ila Patnaik writes about the "un-education" that is being unleashed by the Sarva Shiksha Abhiyan in What Arjun should focus on.

A series of third party studies reveal a grim picture of how much children actually learn, raising doubts about the effectiveness of the SSA beyond mere enrollment. The ASER study, for example, shows that 44 per cent of children in public schools in Std II to V cannot read simple paragraphs. Nearly 54 per cent children cannot do two-digit subtraction problems. Among older children, 40 per cent in public schools in Std VI to VIII are unable to handle simple division problems.

IF you think the counterfactual is no education for children, you need to read James Tooley's report Private Schools Serving the Poor: A Study from Delhi, India. Read the executive summary to get an idea of what is actually going on in Slum-India. The following is a brief excerpt from Ila Patnaik's article about the study's findings.

The study involved 20 researchers combing 20 sq km of slums in North Shahdara (East Delhi). They report that only 71 out of the 265 schools they found were government schools. There were 19 private “aided” schools, 102 private “recognised” schools and 73 private “unrecognised” schools. However, SSA only concerns itself with the 71 public schools.
Why are people rejecting government schools? Part of the problem might be a greater responsiveness to what parents want. Only 2 out of the 71 public schools were English-medium, and 57 were exclusively Hindi. But parents want their children to learn English. Among private schools, only 55 out of 194 schools were exclusively Hindi. Tooley & Dixon ran standardised tests on 3,495 children, thus obtaining data for 24 children per school on average. In Mathematics, the average score in public schools was 24.5 out of 100. Children in private schools averaged above 40. In languages, the average score in public schools was 14 (English) and 27 (Hindi). The score in private schools was about 50.

I owe my interest in field research to my work with James Tooley on a World Bank project on education in Karnataka. Chuck all reports and expert advice that you hear. Take a brief walk to slums and the better-off rural parts of India. And you will witness the currents of a burgeoning private sector education. And then follow the empirical results. They will make a lot more sense.

Not all is bad news. There is good news that I hear from Delhi. Not many know that there is an arduous licence-permit raj in existence in most cities of India. The objective was to control competition so that existing schools are not "hurt". Delhi was the foremost with 5 year plans for issuing limited number of school licences. Till now. I hear that Arwinder Singh Lovely has lifted the cap on the number of licences. Read about it here. This essentially removes the licence permit requirement. It is a significant step forward to create a competitive market for schooling. I wish this would happen in other cities as well, soon.

Lovely Singh is a pukka politician. When we broached the education voucher proposal to him, he was enthusiastic and said that he would give paanch vouchers free to every girl who is nearing marriageable age or is an orphan! Only a politician can give a vote-bank twist to a market-based proposal.

Veni, Vidi, Vinci - I came, I saw, I banned

2006-05-18T10:23:00.000-07:00

There have been a lot of protests in the blogosphere about the Da Vinci Code ban. Nothing much anew. Most of them take the familiar line of attack on the "freedom of expression." One good situational reason why we shouldn't ban is provided by Nitin's Laughingstock. That you are adhering to fair principles provides high competitive value to nations (And their consequent economic development) in today's scenario. And of course Gawker puts across the sheer irony of it as only he can.

But there is a larger lesson behind the event. The difference between the rule of law and rule by law.

A rule of law will impose restrictions on the powers of the state on certain non-negotiables like freedom of expression. A rule by law may be fair in the sense that it is applicable to all but may still falter on the premise that it curtails non-negotiables. And gives powers to certain groups to exercise it. China is an extreme example of rule by law. India may not have it as bad as China but is very often on the slippery slope leading to the same route of rule by law.

What may be little understood is the over-riding importance of economic freedom over civil freedom. Freedom of expression is a civil freedom. The ability to do (in this case, screen) what you want on a private property is an example of economic freedom. Only economic freedom can allow sustain civil freedom. I am reminded of the Indian Express story during the Emergency days when it was sought to be curtailed on economic grounds (something to do with regulation of newsprint) thus effectively muzzling civil freedom. But apparently, Indian Express acquired newsprint from other sources and continued its tirade. For a more elaborate account of economic freedom and civil freedom in the media during theemergency days, read the Indian Mass Media System: Before, During and After the National Emergency.

A civil freedom will give you the freedom of expression. But without the economic freedom to sustain your "voice" you will lose your civil freedom. And I see that story again being repeated in the less-known case of community radio in India. Read a gutsy tale about it here. And now they have a blog about it as well.

For a good overview of how economic freedom, civil freedom and rule of law intertwine, the article Central Role of Economic Freedom in Democracy should be helpful.

Update
Gaurav Sabnis's deceptively subtle post A Bit About Reservations shows how rule by law over-rides rule of law. In this case, how a decision of the government is exercised in denial of private property rights. Though applicable to all and sundry, it still violates a fundamental freedom. I wasn't aware of the 104th amendment. Must look it up. But do read Gaurav's post here.

The world's most dangerous road!

2006-05-17T18:27:00.000-07:00

Mountains have begun to fascinate me. It started with trying to plan a trip to Himachal Pradesh. Trying to find the best views of the Himalayas. Now I want to go all over them - Pakistan; Leh;Ladakh; China and of course, Indian sides. I guess I am just a wannabe mountaineer and a faithful armchair mountaineer. Some extreme adventures like wildlife ones dont make much sense to me. There is nothing good about being eaten by a tiger. But falling deep into a gorge has its undeniable thrill. For once you are sure of where you are going, in life!

Now I wanna know all about jet storms, crevasses, gorges, avalanches etc. So far I have gathered mountaineering tidbits that the Nanga Parbat and the K2 are the most dangerous mountains in the world. It is probably more gutsy to climb Nanga Parbat than Mt. Everest.

The Rohtang Pass that connects India to Tibet is one of the most dangerous passes in the world. Rohtang literally means "pile of dead bodies." That it is dangerous has helped cultivate a geographical-cultural divide between Hinduism (India) and Buddhism (Tibet).

And then I learnt about the most dangerous road in the world!

If you had to design a dangerous road how would you make it?

Obviously long. Obviously high. Obviously threatening drop on the sides. Obviously lots of turns. Obviously steep descent of the road itself. Obviously narrow. Well, the world's most dangerous road near La Paz in Bolivia is all that and more. It is named so for its high death rate. Now imagine mountain biking down it. Well, that is what Gravity Bolivia helps you with. Read more about it here.

Samara?

2006-05-17T18:18:00.000-07:00

1 am. Not too late in the night. I glance out of the window of my room. A window that looks onto a huge wall. And a room that none except I live or access. There is a brush of cold air. Suddenly I feel as if somebody is there in my room. It is one of those times when you just feel it. I smile to myself. My mind must be playing games with me. I look down on my laptop. And there is an unmistakable long hair strand of a lady lying on it!

Low-skilled wages

2006-05-14T16:42:00.000-07:00

Why do low-skilled wages differ so much by country? Illegal Mexican immigrants in the U.S. who work at construction jobs can expect to be paid at least $8 / hour or $64 for a full work-day. In many poor countries, by contrast, wages converted at current exchange rates for equivalent jobs might be more like $5 per day, if that. Some of this difference can be explained by the fact that the cost of living in the U.S. is higher than in poor countries but this does not explain the difference away. On the contrary, one of the main reasons the cost of living is so much higher in the U.S. or Western Europe than the developing world is that unskilled and low-skilled wages are much higher.

The standard Econ 101 explanation for why wages rise over time is changes in technology and capital per worker. However, we quickly run into trouble with this explanation as people like waiters and taxi drivers have about the same amounts of capital and technology to work with in rich and poor countries, yet their wages still differ by enormous amounts. Education doesn't seem to be a direct explanation either, since, by definition, low-skilled jobs do not require much education. The standard result from labor economics is that an additional year of schooling raises one's wage by 10% so we would need huge differences in education levels to explain differences in low-skilled wages across countries.

I think once we eliminate all of the false explanations for differences in wages, we get down to two possible explanations. The first is that higher levels of education, more capital, better technology, etc. do not directly raise low-skilled wages but instead channel more people who would otherwise work in low-skilled jobs to the skilled labor force because of higher wages in the skilled sector. The reduction in labor supply for low-skilled workers then raises low-skilled wages.

The second possible explanation is that wages for the poor are more a product of politics than economics. The U.S. and Western Europe have extensive regulations in place to restrict the supply of low-skilled workers such as immigration restrictions, minimum wage laws, licensing requirements, unionization, and the like. Standard economics tells us that these regulations combined will cause unemployment but the magnitude of this effect depends on the size of the pool of unskilled and low-skilled workers. Naturally, the ability to implement these policies depends on a country already having a high-level of average income.

I personally would put more weight on the first explanation but would not completely discount the second. In any case, my view of the evidence is that wage differentials between countries can be best explained by differences in labor supply. This raises its own set of uncomfortable questions, however. Given that all democratic countries feel political pressure to ensure that even the poor have wages above a certain level, does that make protectionism and restrictions on immigration inevitable in the long-run? It would be nice to live in a world where immigration of low-skilled workers has no effect on wages but I'm not convinced that's the world we actually live in. The empirical evidence on these questions for the U.S. is indecisive, but that may be more of a commentary on how tough it is to come to solid conclusions based even on high-quality economic data.

Behold!

2006-05-12T23:30:00.000-07:00

I could never appreciate photographs of mountains earlier. Till I looked down from an aeroplane. And then got seduced forever. Wish aeroplanes were made of completely transparent material! But what does it take to climb Mt. Everest? Just thinking of it throws me into a tizzy.

Think you are standing on top of Mt. Everest. Take a deep breath. How does the world look like from there? Now drag image on the screen here. Exhilarating!

Finally it has bit me!

2006-05-12T19:30:00.000-07:00

Writing has become too self-conscious. That thought struck a chord in me!

I had this fantasy of mine. After a certain period of study, I will stay in place X for one year. Now how will I choose the place. Make a database of the villages of the five continents. I told you it is a fantasy! Spin a top on the map of these continents. And where the top rests, that shall be my place of residence. For one year. It could be anywhere, Mongolia or Mozambique or Ladakh. Even if I have to work as a wood-cutter I shall.

I think that dream of mine has been revived. It started with trying to plan a basic holiday in Kerala in the monsoon. More for the food and uniqueness of place that Kerala offers. There is a also a neat policy-infrastructural lesson that I learnt from a one-week stay in Kerala. You need not have big cities where all the resources are pumped or centralized. Rather you can have lots of small cities and towns which is what Kerala largely is, I believe. I stayed in some Christian institution which served horrible food in limited amounts. But the food on the roadside stunned me. The appams and spicy fish and chicken curry were gastronomic delights. And the country-side. Simply one word. Wow! I resolved to return to Kerala some time in my life. Maybe if the monsoon is not too generous, I will be able to visit Kerala this time.

I think this travel bug started with a car-trip down the Pacific Coastal Highway. I never surmised California could offer such splendid vistas. I have fallen in love with the colours of blue, green, grey and brown. Those are the colours of nature. See this picture and you will better appreciate why I was hypnotised during the whole trip. Photos will be coming soon.

Another pet resolve is growing within me. Can I make a round-world-trip? I think it is more guts than moolah.

There is this pet joke I share with my elder brother. Some astrologer said that he would outlive all of us siblings. And I rib him continuously of his tortoise-life ahead. I had always felt it scary. Living till ninety! There isn't anything that you can do for so long on this planet. Until now. You can never have travelled enough.

Fun with Google Trends

2006-05-11T16:18:00.000-07:00

Here I am, studying for exams and google has to launch its highly addictive and distracting Google Trends . Andrew Sullivan has the scoop on who is doing the most net searches for "sex": mostly people in conservative, Middle-Eastern countries.

Naturally, this neat tool is completely unscientific but still offers a glimpse of what people around the world are browsing on the internet. With more sexually related searches, the pattern repeats: those in relatively conservative localities win out by far. The top four cities for searches on "pornography" are Delhi, Chennai, Salt Lake City and Mumbai. By this standard, Delhi is the smut capital of the world! No wonder there are so many cybercafes there. Salt Lake City puts in a strong showing considering its puny size (not to mention conservative, Mormon ethos) in comparison to these enormous Indian cities.

Finally, net searches for "gay" or "homosexual" are pretty revealing as well. Latin American countries are overrepresented with Chile getting the number one spot. I have no first-hand knowledge of this part of the world but friends from there have told me that male homosexuality is far more stigmatized there than in Western Europe or North America.

I could go on but I encourage you, dear reader, to spend countless hours doing searches of your own.

Suffers on safars

2006-05-10T17:50:00.000-07:00

Every time I change the punchline, I realize I am driving myself into a hole. The punchline captures only a part of what I want to articulate. So this will be a post which won't have a point at the end, only disjointed reflections.

Like the 18 year-old rebel without a cause, I thought it was cool to travel without a plan and take the route untravelled. Till I met the nemesis of my novice "tourist" in an unreserved third class "general" compartment. I had to go from Delhi to Calcutta. Well, I wanted to make it in time for my mother's birthday. And I had a wait-listed ticket. Maybe I should have "bribed" the ticket collector. But I wanted to see how "bad" does an overnight trip in a general compartment really get?

Now I pride my butt (well, atleast did) on its ability to suffer different kinds of safars in India. I had managed to stand (without fainting) in the rear of a truck through a 6hr trip from an obscure village to Belgaum, Karnataka on a road so pathetic it would have made my teen acne face look proud. But it was a fascinating night trip. Me standing holding a rope from the roof of the truck. Sparks flying underneath the vehicle because of the contact that a chain made with the road. And the view backwards from a vehicle. A word of advice. Never sit on the floor of a truck plying on a potholed road. The other trip that I "managed" was the return from an obscure village near Jhansi, Madhya Pradesh. The ricketiness of the bus was unbearable. And I made the stupid decision of not packing up on water. It was not so stupid considering the village that I had been to was Bisleri-less. What made my decision worse was that all water and soft drinks on the way back were eminently suspect. Not surprisingly, in spite of my precautions, I ended up with diarrhoea. And then I had the trip from Tirupati to Chennai on a state bus. I was "cheated" by a bus booking agency in Hyderabad, from where I had started. He told me the normal-deluxe bus would provide me a switch-over at Tirupati. Only the switch-over was to a state bus which I would have to find myself. Plus I had to shell out the state bus-fare as well.

The worst part of a journey is when you think it is over. And then you realize you have the approximately the same distance left as much as you travelled. That was the kind-of case with the Tirupati-Chennai trip on account of misinformation of travel time. God! It was more mental anguish fried under a Tamil Nadu summer and only soothened by popping dozens of orange lozenges.

Reminds me of a 20 km marathon that I undertook in my Sainik School where I stopped at 19.5 km because I thought the race ended there. Till somebody reminded me that 500m was left and that my completion will up the Patel house points. I tried dragging myself. And once even that didn't work, I just rolled myself over for the last 10 metres.

I guess the "general" compartment travel will have to wait for the next post.

It's someone else's fault!

2006-05-08T18:09:00.000-07:00

Consider the following scenario: You are minding your own business crossing the street on foot when a car approaches and starts honking at you to get out of the way. In anger, you hit the front bumper of his car causing the air bag to mistakenly deploy (Here's the video this idea comes from: it doesn't look like it is staged but I could be wrong -- it is pretty funny either way).

So here's the question: who is liable for replacing the air bag (air bags cost about $1000 to replace in the U.S.): the driver, the pedestrian or the car manufacturer? The case for the car manufacturer paying to replace could be made on the argument that the air bag malfunctioned and deployed when it should not have. Air bags are supposed to deploy at impacts of at least 30 mph when they can reduce injury, not in response to a harmless tap or fender-bender.

On the other hand, the pedestrian has no right to damage the car-owner's property, even given the driver's rude behavior. An air bag deploying in response to a mild impact is unexpected, but hitting the front bumper was the so-called "proximate cause" of the air bag deploying. Under a strict liability rule, the pedestrian would be liable since the idea here is that you are liable for any damage intended or not arising out of actions you have no right to engage in. Under a negligence standard, it is less clear. One would have to show the pedestrian could have or should have anticipated damage arising out of her actions.

Finally, we could argue that the driver should be liable for replacing his own air bag. This is not necessarily because he deserved to have his car damaged but rather because owning a car and driving it around inherently has risks. Auto-parts are sometimes covered by warranty but once the warranty expires, you are more or less on your own. Auto-parts have to meet certain standards to prevent manufacturers from selling junk but there is no such thing as a perfect product.

The point is that there is no clear answer to this although my inclination would be to impose liability on the manufacturer. Different legal rules result in different outcomes and so in order to evaluate each of these different systems, we have to trace outcomes under a wide variety of scenarios.

Bollywood and Indian Economy

2006-05-04T15:07:00.000-07:00

What is common between these films?

Garam Hawa (1940); Naya Daur (1957); Upkaar (1967); Namak Haram (1973); Jane Bhi Do Yaaron (1983); Damini (1993); Gupt (1997); Phir Bhi Dil Hai Hindustani (2000); Rang de Basanti (2006)

As you might have guessed, each of these films portray the socio-economic realities of India in their times or have a relevant policy back-drop in them. Naya Daur has the backdrop of the Industrial Policy Resolution; Namak Haram captures the policy Contract Labour (Regulation and Abolition Act), 1970; Jaane Bhi Do Yaaron stems from the Urban Land Ceiling and Regulation Act, 1976; Damini is about the frustration with the judicial system and Rang de Basanti, well, about the "system" itself. I always wondered if there was a documentary feature that captured the portrayal of political economy in Bollywood movies through the last 50 years.

It took a couple of economists to do that.

When I first saw "Indian Economic Transition through Bollywood Eyes" I was bemused especially by the portrayal of the business-man in the last half-century. Overall, the documentary is not a great one but is definitely novel in its effort. Amir Ullah Khan and Bibek Debroy's Indian Economic Transition through Bollywood Eyes: Hindi films and how they have reflected changes in India’s political economy makes for very interesting reading on the same subject. It offers a different perspective on the attitudes and Acts in India through the last 50 years. I wish somebody would make a really good documentary on this theme.

Cross-posted on the Indian Economy blog.

Population control in history

2006-05-02T18:04:00.000-07:00

Population growth is sometimes trumpeted as one of the main reasons why some countries stay poor. Governments have done everything from forced sterilization to a mandated one-child policy and have spent millions of dollars on propaganda campaigns and education on contraception. Interestingly, attempts to control population growth are much older, however. Much of the rest of this post is inspired by Greg Clark's book The Conquest of Nature.

In Europe over the course of several centuries a system known to demographers as the European Marriage Pattern emerged across much of Europe. This is a social and cultural system with the following characteristics:

1) Women marry late -- that is, several years after they reach the age when they are capable of conceiving.
2) Birth control is generally not used; instead, births are limited by the fact that women eventually die from giving birth or reach menopause.
3) There are strong social norms against illegitimate children to limit births outside of marriage.
4) Married couples tend to live apart from their parents or relatives.

In many Asian societies, on the other hand, a very different system existed. Women married relatively early and so also tended to start having children earlier. Also, married couples in many Asian cultures are much more likely to live with the husband's parents or close relatives. This removes the barrier in Europe that the man be productive and well-off enough to pay rent on a house of his own.

So how did countries like India, China and Japan avoid large-scale starvation due to a population explosion (women are biologically capable of giving birth between 12 and 15 times)? The answer is through either female infanticide or by neglecting the health of female children enough to cause them to die in infancy or early childhood.

This can still be seen in India (especially the North), China and Taiwan where sex ratios are skewed towards male children. Statistically, it turns out the more girls a family in these countries has, the higher the probability the next child will be a boy -- a clear sign that female children are aborted or killed in infancy.

What is interesting to me about this is that these marriage practices were not developed by a demographer or social planner trying to limit population growth. Instead, they evolved through social norms and traditions and as different as these two systems are, they both achieve the same result to limit population growth.

Was this purely accidental or were these systems the result of conscious, if decentralized, efforts to limit population growth by changing social norms?

How do you prosecute a cannibal of a willing victim?

2006-04-28T16:33:00.000-07:00

I advertise for a person who wants to be eaten. Ugh! If you feel disgusted, do not read further.

Let us say a person A accepts the proposal. I film the whole "event" so that there is evidence of consensuality. Should the law punish me?

When I first heard of this event during a seminar in Germany, it boggled my mind. (To be honest I was shit-scared of going out for a couple of days!) But the more I knew about it, a couple of lessons emerged. And I shall construct this incident from memory for the lessons rather than provide a complete factual account.

Meiwes did post an advertisement on the internet asking for a willing victim for consumption. Brandes applied. The process was consensual. This act of cannibalism horrified the nation. You can get a better account of it in Victim of cannibal agreed to be eaten or some of the gory details in Prosecutors plan cannibal appeal.

I will recount the part where it gets interesting. Cannibalism is not illegal in German law. Probably nobody must have thought of making it an offence. There seemed no grounds to arrest him. However the lawyers were determined to prosecute him. They took recourse to a tiny ignored aspect of the law, "desecration of the dead". There was enough video footage to show that he had continued eating even after the man was dead. That was reason enough to start prosecuting him. I found that quite creative on part of the lawyers.

When I Googled up on the case a couple of days back, it seemed the prosecution wanted to press charges for murder and not man-slaughter. But aren't they the same? For that you need to answer this question.

Henry visits Alice and John who are now married. He tries to shoot John but misses him and kills Alice, sitting in a rocking chair behind John. Has Henry murdered Alice?

A market for airport security?

2006-04-25T22:19:00.000-07:00

I haven't followed much on plane and airport security in US or India. In fact, to let up close my cynical self, I believe there will be a private airline crash in India in the near future and all the blame will be put up on markets and private airlines. Whereas the problem may actually lie with the over-worked Air Traffic Controllers! But that is jumping ahead of the story.

Since this is a blog with a focus on policy and market design, we will consider the question of designing airport security. It is based on a comment at the Indian Economy blog, and one which I am sure will find common resonance with you. I reproduce it below.

...the totally privatized and horribly lax security at American airports prior to 9/11. I used to travel out of Chicago’s O’Hare airport all the time back in those days, and I always got a kick out of the young Indian girls “manning” the X-ray machines and digging into handbags.They were freshly recruited from India by Indian contractors in Chicago that had the contract to manage security at O’Hare. They were totally inept. Do we really want to entrust our airport security to young girls, Indian or American, with minimal training?

The problem that we are trying to tackle is designing an institutional mechanism for airport security. How do we take into account the strengths of market-based institutions?

Let me set up a stylized account of the underlying problem. Think of room-mates in a hostel dormitory (with windows) trying to negotiate keeping their room clean from dust. If I keep my portion tidy and you don't, chances are that my portion will soon end up untidy. In either case of you cleaning or not cleaning, my cost of cleaning is unchanged. In a scenario of reduced benefit and with others not cleaning, the behaviour may finally tip to dirtiness of the room. But before you jump in and advocate government-based solutions to the problem, you should consider the authors' take on the solutions in Interdependent Security: Implications for Homeland Security Policy and Other Areas.

The most auspicious mix ... approaches is often to combine a performance-oriented standard or regulation with private market mechanisms such as insurance, and third-party inspections. The regulations are necessary to provide a backstop in ensuring that private incentives are consistent with the public good. The insurance and third-party inspection components reduce the burden of enforcing the regulations by a public sector agency. More specifically, third-party inspections coupled with insurance protection can encourage companies to reduce the risk of accidents and disasters. Under such a program, insurance corporations would hire third-party inspectors to evaluate the safety and security of firms seeking insurance coverage. Passing the inspection would indicate to the community and government that a firm has complied with the safety and security regulations. The firm would also benefit from reduced insurance premiums, since the insurer would have more confidence in the safety and security of the firm.

This system takes advantage of two potent market mechanisms to make firms safer, while freeing government resources to focus on the largest risks. Insurance firms have a strong incentive to make sure that the inspections are rigorous and that the inspected firms are safe, since the insurers would bear the costs of an accident or terrorist attack. Private sector inspections also reduce the number of audits a regulatory agency itself must undertake, allowing the government to focus its resources more effectively on those companies that it perceives to pose the highest risks. The more firms that decide to take advantage of private third-party inspections, the greater the chances that highest-risk firms will be audited by a regulatory agency. Knowing that an audit is more likely induces even the high-risk firms to adhere to standards.

Price discrimination and dating services

2006-04-23T18:46:00.000-07:00

On my last message on dating, Naveen tried to prod me to post more about economic insights on dating. So here is my attempt.

I have used online dating services in the past. For those of you who are unfamiliar, on most of these sites, you can upload a picture and post a description of yourself for free but if you want to send messages to potentials, you have to pay a subscription fee. It turns out, in my experience anyway, many women listed on these sites do not pay the subscription fee. For us guys, on the other hand, in order to fulfill our role as pursuers we have no choice but to pay the fee.

This got me thinking that it would be much more efficient for all of these services to price-discriminate: that is, allow women to become full members for free while charging men. It would cost the site next to nothing to allow women to send messages on the system. Additionally, the more active women there are on the site, the more valuable it is to men to become paying members -- and the more a dating site could potentially charge men. In economics jargon, more women create what is called a positive network externality.

For women, on the other hand, they may be much better off belonging to a site where men have to pay to become full members. Paying the subscription fee is what economists call a signaling mechanism. It shows you are someone with at least some disposable income, you are established enough to have a credit card and that you attach some value to starting a relationship. Less diplomatically, it helps weed out shady and disreputable characters.

Finally, I should point out that there is at least one dating site that has thrown politically correct caution to the wind and does exactly this. I just saw an ad for it yesterday hence the inspiration for this post: it is called Mate1. Moreover, the same logic explains why some bars and clubs offer discounts or free entry to women.

Culture and its contradictions

2006-04-22T17:52:00.000-07:00

Tom Palmer's post on the roudy British has prompted me to write about something usually ignored among economists and economics graduate students: culture.

The starting point for thinking about any culture is the realization that culture deals with interactions between human beings and humans are, to put it bluntly, hypocrites. All of us. Hence Britain is known internationally as both the land of refined politeness and drunken yobbishness. Americans, depending on who you ask, are either stuck-up prudes or decadent libertines. We are also either outwardly friendly people or isolated individualists. India is a country both of sexual and social conservatism as well as a country where, at least in cities, sexual harassment is truly out of hand (and, as the common retort goes, the country of the Kama Sutra).

Part of this can be explained by the fact that all societies are incredibly diverse in a way that simple generalizations can never capture. Yobs in Britain, even while sober, will never strike you as polite while others may be able to act like perfect gentlemen after a night at the pub.

Nevertheless, I feel that every country has a set of established social norms and customs that some will actively rebel against while others will quietly disobey when it suits their interests. William F. Buckley once observed that just because a majority of the population in a society commit adultery at some point does not mean there is not a recognized rule against adultery in that society.

I know too little about sociology or rigorous study of culture to propose some way of how to actually define what culture is. But I will end this post with a simple observation: the argument that we shouldn't judge other cultures simply because they have their own set of values is highly dubious: often times even the people who make up another culture do not act on their values in a consistent manner.

Can you sell an iTunes on eBay?

2006-04-20T16:43:00.000-07:00

I have always viewed the digital world with a great deal of suspicion. Every time I have tried to make sense of it, I have run into the murky terrain of property rights. But I am fascinated by the "rules of the game" and moreso business models. (Read my post Can academia contribute to business thought? for more on business models.) Because they either innovatively make, use or break the rules of the game. And in the process can illuminate policy-making for uncomfortable terrain. Now that I am having to work on the issue, here is a first take.

There are not many successful business models out there for digital content. I would think of it as a phase of an evolving market. Part of the reason has to do with rights and compensation. I make a song. You buy it and then, your friends copy it. I lose revenue. Next, I make a song. There are n restrictions on copying. I stand to lose the customer. Dilemma! Another "cracker" idea that I heard on the blogosphere was making scanned pdf copies of textbooks and then selling/ sharing them. How can business models protect against these "consumer models"?

Given these kinds of situations, I was intrigued to come across the rapidly developing idea of Digital Rights Management (DRM). I have often thought that it is the headache of the business to comply with customer requirements and create appropriate business models in the digital world. They shouldn't be doing stupid things like taking customers to court for "illegal" downloading. It is their job to create an "enforceable" property right to extract value. That is where DRM comes in. iTunes is one of the successful ones that has created a viable business model around digital content, i.e. music. And even so the software only sells to drive the hardware part of their business. Here is a case study of iTunes.

The test for DRM may well be this. Right now, I cannot sell any "downloadable media" on eBay. See news article eBay mutes iTunes song auction. The reason has to do with eBay's policy, which may be retrogressive in a fast-evolving technology market. I am quite sure that the stand neither helps consumers nor the businesses involved. Can DRM find a way out of this? Apart from the rights aspect of DRM, we have the security issue. Suppose you are a client of mine for 3 months. I provide you a few confidential documents that cannot be copied. Sounds reasonable. Next I install the required technology to make sure that nobody can access those documents after 3 months. In other words, the granted access can "self-destruct". Or the client may require a new grant of permission from me.

The issue gets more complicated if I add my code to your code and then sell it. Should you get compensated? How does one determine it? Hopefully, DRM will enable the development of a sound market in digital content.

Why is life expectancy increasing?

2006-04-16T19:18:00.000-07:00

Cafe Hayek has a nice, brief discussion of Robert Fogel's book The Escape from Hunger and Premature Death, 1700-2100 and Angus Deaton's review of the book in Journal of Economic Literature. I haven't read Deaton's review but have read Fogel's book and highly recommend it for anyone, even if you don't have a background in economics. The book can best be categorized as the intersection of economic history and nutritional science.

If nothing else, the book is full of fascinating statistics, graphs and facts about health and development. For instance:

The health of working class people in England during the Industrial Revolution likely worsened. Higher wages may have compensated workers for the fact that they were likely to die younger and live unhealthier lives.
Life expectancy is statistically correlated with birth weight. It turns out that we can calculate an "optimal birth weight" for different countries, meaning the birth weight that maximizes expected life span. That figure turns out to be much higher for the U.S. than for India. This suggests an average American child given to an average Indian family would be seriously undernourished because her metabolism would be much higher than the average Indian child's.
Income inequality is correlated with inequality in the heights of adults for a given country. Countries like the U.S. and U.K. which have become more equal over the past century have seen an equalization of heights among different social classes. In India or sub-Saharan Africa, there are still large differences in heights across social classes.
People who are shorter and lighter tend to be more likely to die young and are less able to fight off disease and infection. On the other hand, childhood illness is likely to reduce adult height and weight and therefore possibly shortening someone's life span by making that person more likely to succumb to disease. There are therefore feedback effects from eliminating childhood illness or by feeding children more nutritious food.

Fogel seems to put a lot of weight on public health improvements in the late 19th century as an important factor in increasing life expectancy (Deaton seems to think Fogel underplays this; I disagree). I think this is a question still very much open to debate, however. Is economic growth the primary cause of increasing life expectancy or are better sanitation, public health and medical technology more important?

An easy test?

2006-04-15T15:49:00.000-07:00

An interesting forward I received.

One night 4 MBA students were boozing till late night and didn't study for the test which was scheduled for the next day. In the morning they thought of a plan. They made themselves look as dirty and weird as they could with grease and dirt. They then went up to the dean and said that they had gone out to a wedding last night and on their return the tyre of their car burst and they had to push the car all the way back and that they were in no condition to appear for the test.

The Dean was a just person so he said that you can have the retest after 3 days. They said they will be ready by that time. On the third day They appeared before the dean. The dean said that this was a special condition test. All four were required to sit in separate classrooms for the test. They all agreed as they had prepared well in the last three days. The test consisted of 2 questions with total of 100 marks.

Q.1. Write down your name. -----(2 marks)
Q.2. Which tyre burst? -------(98 marks)!!

I wish Game Theory was introduced in class with simple insightful jokes like these!

Speed dating and snap judgements

2006-04-15T13:44:00.000-07:00

The advent of speed-dating and online matching services has led to a wealth of studies about dating behavior and what people look for in a potential partner. A study in the UK (link from Marginal Revolution) claims that women make up their minds about whether a man is a good match within 30 seconds of meeting!

As scary as that sounds (for a single guy like me), the skeptic in me says we should probably not jump to conclusions too quickly. The study was done on speed-daters which are clearly a self-selected group of people. People who speed date do so because they think they can form an impression of someone within a very short period of time. Men and women may also speed date for different reasons. For instance, women may want to sift through a large number of men to find that one perfect match while men may see it as a way to meet attractive women who would otherwise be unapproachable. Different motivations would therefore require different strategies.

Earthquakes and the dismal science

2006-04-13T19:00:00.000-07:00

As the 100th anniversary of the great San Francisco earthquake and fire approaches, I find my mind often dwelling on earthquakes. Berkeley is full of multi-story concrete apartment buildings built during the 1960s catering especially to students. These buildings are very top-heavy and without a seismic retrofit, are prone to collapse and "pancake" in the event of an earthquake with the floors compressing to within a few inches of each other. That is why it is predicted that a major earthquake in the Bay Area (there is greater than 50% chance this will happen within the next 30 years) will kill thousands of people.

So with these cheery thoughts in my head, I naturally start trying to apply the tools of the dismal science I am studying. Consider the following scenario: a building owner is liable for $1 million for every person that dies in his building if it collapses during an earthquake. Also, suppose that his building has 100 residents, 50 of whom would be expected to die in an earthquake. Roughly speaking, the probability of a major earthquake hitting in any given year is about 2% ((1-0.02)^30 is 0.55 so this is an underestimate). That means the expected payout in a given year is 0.02*50*$1 million = $1 million.

In other words, the building owner should be willing to pay up to $1 million annually for an insurance policy that protects him from liability. The punch-line of this is that often times the expense of such liability insurance is much cheaper than retrofitting the building to survive an earthquake.

What should public policy on this issue be? One option would be to force building owners to retrofit their buildings or else have the building demolished. Since the market for rental housing in the Bay Area is competitive and not all buildings are unsafe, owners of buildings not up to code might find it unprofitable to retrofit their buildings since they could not earn that money back by raising rents and instead allow the building to be demolished. Legally, the government would probably have to compensate building owners by the fair market value of the building as well.

Another possibility would be to increase the amount by which building owners are liable in the event of a building collapse. This could tip their decisions in favor of retrofitting instead of buying insurance. Again, if the rental market is fairly competitive and if insurance is mandatory, building owners would have to absorb most of the cost themselves and either abandon the building completely or retrofit without raising rents substantially.

Both of these options have costs associated with them and implicit in all of this is one of the most difficult issues in economics and moral philosophy: how much should we be willing to pay to prevent someone's death? Presumably, the number should be less than $10 trillion -- the value of U.S. GDP -- and certainly much greater than pocket change. The other topic implicit here is the notion that people in the real world ignore or belittle low-probability catastrophic scenarios. The fact that many residential, commercial and government buildings would become death-traps in the event of a 7.0+ magnitude earthquake here is public knowledge but the will to do something about it is quite small.

Why reservations might be a good idea, huh!

2006-04-11T14:20:00.001-07:00

There are three steps to stifle a market. One, increase the entry barriers. Two, remove protection for private property. Three, defuse any possible competition. Usually these three factors serve to increase the supply response. In the long run they provide the four attributes of quality; cost; access and diversity that maketh a desirable market. Once you add state regulation one upon another that adversely affect these factors, you set up the market for sure ruin.

The reservations is just another nail in the coffin of higher education in India. The pure economic reasoning in me cringes, but I think these steps are desirable and unavoidable in the short run. Why?

Possibly we need a repeat of the '91 Liberalization in the sector of higher education. For that we need a crisis. A crisis is generated only when the present set-up will bleed itself. Hence I support the reservations. In fact, I wouldn't mind even 85% reservations. The short-run is painful. But I hold more optimism in the long run. Once they succeed in bleeding the higher education market will the citizens and policy-makers realise the importance of developing sound markets and not ruinously doctor them with policy measures like this. Once that happens a lot of other constraints like the no for-profit set-up in education and strictures on private universities may be removed. These factors are present not only in tertiary education but elementary education as well. All these measures only dampen the supply of education. In fact, I hope they don't get any bright ideas of providing vouchers to the students to choose their seats. That would only delay the crisis and possible recovery of education markets.

Any sound higher education market needs the freedom of whom to teach, what to teach and how to teach. There is no need for a central Department of Higher Education (part of MHRD) in the Indian government. There may be a case for a department at the state level to maintain a registration list of universities and colleges. In fact, roads and de-regulation can do far good to targetted groups rather than reservations.

Right now, we are far far removed from a sound market. To get there we need a repeat of the crisis before Liberalization. So don't be surprised by an increase in the "black market" fees for seats in higher education. I am keeping my hands crossed for the "innovative" responses of the private sector and the citizens.

Here is a quick list of a few sources of info that may illuminate the debate on reservations in higher education.

Reforms
Higher education sector in India: Opportunities and Reforms
College Autonomy: Policy, Practice and Prospects
The holy quota: Have reservations really expanded quality education for marginalised groups?
How to build Quality Institutions

Knowing higher education in India better
Indian higher education reform: From Half-Baked Socialism to Half-Baked Capitalism

Understanding reservations better
Earnings and Education among Ethnic Groups in Rural India
Has job reservation been effective? Caste, Religion, and Economic Status in India
Positive discrimination in India: A Political Analysis
In Defence Of Larger Interests
Affirmative Action Around the World: An Empirical Study

My previous posts on education
Why IIPM is significant for Indian education?
Educationalization

Any other valuable sources of information will be appreciated.

Why it is so damn difficult to catch a running hen?

2006-04-10T21:59:00.000-07:00

I have often spent my childhood summers in an obscure village called Munupalle near Guntur in Andhra Pradesh. The game catch-the-hen was a great favourite of the kids there. Not mine, because I would usually take twice the time to catch a hen, twice the time of the youngest girl there! Having often wondered why is it so damn difficult to catch a hen, I atlast found a possible answer in Game Theory. The math and the jargon are obscure so let me simplify it.

If the hen swerved to one side only (either left or right) it would be easily caught. Ideally it should have a strategy such that any presumptive strategy on my part makes it difficult for me to catch it. The strategy followed is randomization. If you have chased a hen, the problem is that you have no idea which side it will turn. It is not as if the hen knows it, but that evolution plays its role in selecting such a strategy.

Interestingly, the same line of reasoning leads us to the answer of the bilateral symmetry of our bodies. Having an extra leg on one side or a super strong leg will make it possible for the predator to guess our moves better. We would have lost out.

How is all this relevant to policy? Well, randomization could be an essential strategy when you want to lower enforcement costs of a policy. Tax-compliance, for example.

Where would you construct a garbage dump in your constituency?

2006-04-10T21:48:00.000-07:00

Sometime back I wondered in A billion-dollar question about the decision-framework of a corporation to locate its production site in a "flat" world. The political context of the question is even more interesting.

Suppose you are the MP of a constituency and you have to construct a garbage dump. Where would you construct it?

Garbage dumps are an example of the Not-In-My-Back-Yard or NIMBY allocation. Is it only a coincidence that most garbage dumps in cities are located near slums or public places?

There is a way to circumvent the above problem. But I must incubate it first.

Shifts in Working Conditions

2006-04-10T21:03:00.000-07:00

Two news incidents caught my eye that had a similar vein of job market conditions running through them. One, read about young American workers conducting part of their work-life in Bangalore in Americans seek opportunity in booming Bangalore. Two, labor shortage in China enables an increase in working conditions and benefits as portrayed in Labor Shortage in China May Lead to Trade Shift.

The buzz about the first one is interesting, would it make sense for the average American as well to entrepreneur from Bangalore “remote” location to offset the initial set-up costs? The second means that rural India could well benefit from the cost of production increase in China, in the long run. Policy lesson. Produce roads, especially lots of spoke-and-wheel connectivity. That will precipitate a demand for electricity and enable a decrease in transaction costs for micro-entrepreneurship.

Hat Tip: Development Bank Research Bulletin and Priyatam.

Is the world becoming more unequal?

2006-04-07T17:03:00.000-07:00

The answer, according to the best data so far, is no.

A friend just alerted me to this Macromedia application on Xavier Sala-i-Martin's website illustrating graphically the world's income distribution over time. It is definitely worth a look, as is the rest of Sala-i-Martin's cheeky website.

The problem with a lot of articles or op-eds saying the world is becoming more unequal is that they often just look at GDP per capita across countries. It is true that GDP per capita is becoming more dispersed but the reason for that is largely the failure of sub-Saharan African countries to grow. A tragedy, certainly, but one that unjustly overshadows India's and China's stellar economic growth. Sala-i-Martin, in contrast, tries to estimate income distributions for each country and then group them together, weighted by population, and look at the worldwide distribution. The result is a much more optomistic picture of poverty reduction and inequality than what many people are used to seeing.

Do you know what "finish up a cook" means?

2006-04-06T01:08:00.000-07:00

I'm a native born American and, yes, I know some drug slang but I've never heard this before. 44 Indian convenience store owners in rural Georgia are now facing drug charges because they claim they didn't know either (it means cook up methamphetamine). They sold chemicals that are used to make methamphetamine to undercover agents who, when purchasing the chemicals, said they were going to finish up a cook. I don't have much time to comment on this but a few thoughts come to mind:

1. Drug law enforcement may have reached the point of diminishing returns long ago.
2. This gives an incentive to police to be as obtuse as possible when they are trying to bust people for conspiracy. If they had said "I have to move $1000 worth of speed by tomorrow" that would be one thing but, of course, it is so direct they would risk not being able to complete the sale (and not being able to press charges).
3. The legal system does not have a lot of protection for foreigners not familiar with local culture. Juries often have to base decisions based on what "reasonable" people "should" do in certain situations which, of course, can vary greatly from culture to culture.
4. If these guys are all convicted (the American Civil Liberties Union is filing a claim of racial bias in these cases) it suggests there is an obligation on the part of immigrants to be familiar with local drug slang. The Dutch have started to distribute videos of nude women and of homosexual men kissing (among other things) to potential immigrants to prepare them for life in the Netherlands. Maybe the U.S. should do the same: make a video discussing all the drug slang commonly used interspersed with clips of junkies shooting up and crack-heads taking hits.

Is there a market for supplying private addresses?

2006-04-04T17:12:00.000-07:00

There are a few simple things that if public governance could get it right, it will pay huge dividends for citizens' productivity and convenience. Systematising addresses and providing street directions! They provide information and in the process improve coordination among the members of a society. A benchmark is this. I make a first-time trip to a new city. I rent a car with a GPS that has data of all addresses in the city. I punch in my destination adress and voila, I am all set!

About one year of my Delhi working life was spent in a place called Jia Sarai. The place is a hell-hole but you can't deny its character. What is relevant for this post is that one, it is a crowded "urban village" (read as place in a city where the usual bye-laws are not followed) and two, the place is an IAS coaching-and-residence haven. I have been surprised to hear statements that Jia Sarai throws up the largest number of IASes in Delhi. And when I came across this IAS aspirant's blog titled Jia Sarai Days, it struck a chord.

Jia Sarai is a ready residential market for students/ bachelor officials and a thriving one for IAS coaching services. However it is an architect's nighmare. First, the regulations are not suited for the residential demand there. And whatever regulations are there, they are flouted with impunity. I fear that if a fire ever struck the place, it will leave it completely gutted. Imagine the Manhattan Skyline. Now compress it in length and breadth in the space of nearly 1 sq.km. Even less than that, I guess. That is approximately Jia Sarai for you. Once impoverished residents have made a killing out of the demand for one-room residences and have become now lakhpatis. There is a whole market of eateries, cafes etc that have sprung up in conjunction.

Enter yours truly looking for a room in Jia Sarai. I go up to the first shop and ask with my city-bred experience, "So where are the brokers for rooms?" There is a silence. "Boss, there are no brokers. Those who want to rent out rooms, they just paste posters on the walls. Go around the colony and look out for posters on the wall." I was a little perplexed but nevertheless I followed his advice. However the biggest difficulty was yet to be faced. Even if you have the particular addresses on the walls, it is near impossible to locate the house. There is no system of addresses in Jia Sarai. The only way to identify is by landmarks which is usually a eatery. Or if the name of a landlord is well-known, it makes things slightly easy, only slightly. Sometimes, residents do post their mobile numbers, and then follows the process of trying to understand the exact wherabouts of the house. Tiresome!

Through the one year of my stay there, I could see residents struggling with the addresses or the lack of it.

I never got around to it but I thought of coming up with an address system or a directory for Jia Sarai. One, it will immensely help the people there and two, I could make money if I had a viable business model. The basic research would involve hiring the local post-man and a couple of students to scout the locality and map the addresses. In fact, assign addresses where they are non-existent. The next step would be to have a index of these addresses and also a map. Ads should be forthcoming from the numerous business enterprises there who are renting rooms; restaurants; coaching services etc. Additional money could be made from selling it to newcomers to the area, and the residents as well. The RoI seemed quite attractive! Someday when I am retired and bored, I will try and do something like this. It is worth doing it.

There lies the real question. Is there a market for providing this kind of service in select areas?

One may ask, why shouldn't the state do it. Let me sound out a good idea that I heard of late. The Indian police should run call-centres to not only answer distress calls but also research the data of the calls to pinpoint potential sources (areas/ nature of crimes) of trouble. What do you think is the problem with this suggestion?

Selection bias alert (porn is bad for you edition)!

2006-04-02T22:08:00.000-07:00

One thing that consistently irritates me about most mainstream journalism is that journalists are seemingly untrained in basic logic or statistics. They will unquestioningly relate any opinion expressed by an "expert," no matter how unsubstantiated or flimsy. The fictitious headline, "New Evidence World is Round: Experts Divided" expresses this tendency well.
And so it is in an AP article entitled Battle Brews As Porn Moves Into Mainstream. The battle, apparently, is between those who think that pornography leads to addiction and inability to maintain a relationship and those who do not. As the author David Crary writes, "The bottom line, perhaps, is that each side in the debate can make points that seem unassailable." This is typical look-at-me-I'm-so-objective journalism but, I believe, does a disservice to readers.
The evidence cited that porn destroys relationships is that for up to 10% of porn consumers, "relationships suffer." Even taking this statistic at face value, it's rather like saying that drinking bathtub gin makes you poorer since consumers of bathtub gin have lower incomes than those who consume Scotch whiskey. The notion that people might become (self-select in stats jargon) porn consumers because they are in failed relationships does not occur to Mr. Crary nor to the "experts" he quotes. I had to laugh out loud when I read the quote, "many husbands spend so much time online that they cease to have sex with their wives." Hmm. Do you suppose there is another explanation for this no doubt interesting phenomenon?

Does history matter?

2006-04-02T19:25:00.000-07:00

As an economic historian-in-training, I am biased toward answering this in the positive. So much of what an economy, society, or country are today are the result of a myriad of social forces operating over a long period of time. America's modern-day political structure can be traced back to its colonial heritage and debates over slavery, for instance. And in India, the legal system and many of the laws come handed down from British colonial overlords.

What is becoming one of my favorite papers in economic history comes from Abhijit Banerjee and Lakshmi Iyer on this subject. They look at the whole of British India (that is, those territories directly administered by the East India Company or, after 1858, the British Crown rather than the "princely states") and divide the districts into different categories according to the land tenure system the British put in place. They then find that those districts in which taxation was done at the individual level (the raiyatwari system), rather than the landlord or village level, have higher rates of agricultural productivity today.

The idea behind this is that institutions and policies persist over time. If policy over one hundred years ago empowers landlords at the expense of individual farmers, landlords will gain more control of the local political system and will not be interested in modernizing traditional village-level institutions. More controversially, it may be that large landowners may take less interest in the productivity of the fields they control and will only half-heartedly support attempts to improve the land.

Whatever precise interpretation one assigns to this result, I think it provides clear evidence at the local, micro level that institutions matter and, more crucially, are resistant to change. While we cannot go back in time and tinker with institutions set up hundreds of years ago, we should be aware that political decisions made today may have serious implications for future generations. It is wrong to pretend that government is made up of social engineers who can manipulate the functioning of society at a whim.

Deja vu!

2006-03-29T16:09:00.000-08:00

You arrive on a rainy night into Mumbai. You ask for a decently-priced (read as little as possible) hotel at the airport enquiry. Soon a nattily-dressed man escorts you to a shady hotel. You are tired and have to rush off early morning. You sign in and resign to your near-empty wallet and beckoning bed. Early morning at 5 am, you rush off for your work to Mumbai Central. And at lunch-time it strikes you! I do not know which hotel I checked into. Gawd! I forget even the area from where I took the auto. This cannot be real!

I thought events like these don't happen till it finally happened to me. And last weekend I was again reminded of this incident.

I was tired after visiting Mark at Berkeley and was on the BART metro-rails back to my brother's place at Fremont. It was already 11-30 pm and I couldn't help dozing off. Suddenly the phone rang. It was my brother asking me why haven't I yet arrived at Fremont. He was waiting to pick me up. I looked out and it was still station Hayward, which is 4-5 stations away from Fremont. I nod off to sleep again. Through the lazy slit of my eyes, I see station Bayfair arriving after Hayward. Something is haywire. Hey! This train is moving from Fremont towards Berkeley. But I took the train from Berkeley to Fremont. Gawd! I slept off so badly that I didn't get up at Fremont, and now the train is on its way back to Berkeley. Kisine mujhe uthaya bhi nahi!

Shit! Shit! Shit! I need to rush out. Thud! What was the sound of that?

Anyways, I rush out of the train and puff onto the platform in the nick of time. Huh! Bach gaya baba! Hey! Wait! Where is my wallet? That thud was the sound of my wallet falling down. Ahhhh! But the train is leaving. Shit! Shittier! Shittiest! How does something like this happen to me?

In the first case, we had only two clues. One, a station that sounded something like vada-pav (in Mumbai places have either Victorian or vada-pavish names). Two, I noticed a lot of Christian residences near the hotel. These two clues took us three hours to locate the hotel. But the adventure with the dear friend was fun. And no, the hotel wasn't listed in the telephone directory nor did it give me a visiting card!

The second time it was a mobile phone and a magnanimous brother. I love you, bro!

The more bizarre incident was however when Sachin and I were travelling from Bangalore to Chennai. At Chennai we were supposed to catch a train for Calcutta. About 1 km away from Chennai, the train stops. Why? Apparently there was another train from the opposite direction on the same track! We had only about 20 minutes left. I guess, dragging describes our motion better than running. (Eight limbs do not suffice for six luggage pieces and a desperate rush, not to forget the mid-way motivation to Sachin ki ham honge kamyaab:-). And when we did arrive huffing and puffing, the Calcutta bound train was 2 hours late.

The look on our faces? Priceless!

--Novino

Driver's Licenses in Delhi

2006-03-29T15:29:00.000-08:00

Official cost of driver's license (in Delhi): Rs. 450
Average actual expenditure for getting a driver's license: Rs. 1127

This is from an excellent paper, available here, by Sendhil Mullainathan, Rema Hanna, Simeon Djankov and Marianne Bertrand. A lot is written in academic papers about corruption but few go into the nuts and bolts of corruption, how much it costs and what are the main consequences of corruption.

The data from the paper was gathered by hiring a bunch of prospective drivers in Delhi to document their experiences in trying to obtain a license. Some were given a reward for trying to obtain a license faster while others were given free driving lessons. The majority of the participants in the study, instead of going through the official route to get a license, instead hired an agent.

Agents are technically illegal but, as is the case with many government services in India, offer an easy way to get a license for those willing to pay extra money. Those who hired an agent spent Rs. 720 more than those who did not. Those who hired an agent also spent two hours less at the Regional Transport Office than those who did not.

The real key statistic in the paper, however, is that only 12% of those who hired an agent actually took an official driving test as compared to 94% of those who did not hire an agent. And when these two groups were both given unofficial driving tests by researchers, those who hired agents were slightly more likely to fail than those who did not (38% failure rate as opposed to 31%).

Aside from the costs of an inefficient bureaucracy, which can be crudely estimated as Rs. 677 per license (the difference between official and unofficial expenditure), the fact that there exists a way for people to bypass the driving test means the main reason for having driver's licenses in the first place (ensuring competent drivers) is not fulfilled in practice. An additional possibility suggested by this paper is that having such an inefficient and frustrating system for getting a driver's license serves to enrich agents by pushing more applicants to use agents' services. The exact relationship between low-level RTO officials or clerks and the agents is not spelled out in the paper, but it should be pretty clear that an economic relationship exists. Therefore, people at RTO may have an incentive to make your life as difficult as possible so that you will go to an agent instead. This system serves as a substitute for outright bribery which, according to the study, was not common among the participants.

(If anyone wants to dispute the notion that bribery is uncommon at RTO offices, feel free to comment.)

Also, here's a post on a comparison between U.S. Department of Motor Vehicle (DMV) offices and the RTO. For those who don't live in the U.S., the DMV is widely regarded as being the embodiment of incompetence and ineffectual bureaucracy. Having to go to the DMV office is like being cast into the lowest circle of hell for many people. My own experiences have been rather uneventful, however. My home state of New Jersey has contracted out DMV management for several years now and all employees are trained on basic people skills so things usually seem to run pretty smoothly there. When I moved to California, I made an appointment to go to the DMV in Oakland online, arrived there at the specified time and left with my temporary license in about an hour-and-a-half (I already had a NJ driver's license so did not need to take a driving test). Experiences vary greatly, no doubt, but there is no rule set in stone that government services need be so lousy.

Singapore's Sex Laws

2006-03-28T13:54:00.000-08:00

From Wikipedia's entry on Singapore:

Male homosexual intercourse is illegal in Singapore. This has been the subject of much debate both inside and outside the country, and there is no legislative proposal to alter this. Under the Societies Act, the government has not allowed any gay rights group to form and openly address the issue. It has considered homosexuality to be taboo, claiming that the population is predominantly conservative. This has resulted in a number of alternative communities forming on the Internet, such as PLU (People Like Us), Sambal, Fridae, Red Queen, and others. Heterosexual oral sex and anal sex are also illegal in Singapore, unless performed as a precursor to vaginal intercourse.

[emphasis not in original]

Hmmm. So if a police officer happens to walk in on a straight couple engaged in a non-legislatively approved sex act, the couple can always respond, "Officer, we were just about to switch to missionary position!"

I had never heard about this "precursor" exception to Singapore's sodomy laws but it is clearly discriminatory. It is obviously next to impossible to prosecute straight couples under the law but gay couples unlucky enough to be busted have no legal defense.

Wikipedia has been wrong before, but assuming this is an accurate description of the law, I find this hilarious and pretty depressing at the same time.

Why Are Politicians So Corrupt?

2006-03-26T20:15:00.000-08:00

Just my (Machiavellian) muse for the day:

No country is a perfect democracy, in the sense that those who are elected win based on the strength of their ideas and popular appeal of their policies. Getting a nomination and winning an election instead requires that you get the support of enough coalitions and interest groups that make up society, such as unions, government bureaucrats, the media, different social classes and their affiliated pressure groups, etc. A person who is likely to succeed in winning such broad support must possess two qualities:

1) Must be a shrewd networker
2) Must have a magnetic and charismatic personality

You do not need to be honest or have good moral values to win in politics. In fact, those who possess these two qualities may be more likely than the average person to want to bend the rules in their favor or otherwise act unethically. Following the rules is boring -- it's for wimps and people who don't have powerful friends. Additionally, those with extensive personal and professional networks have a much larger temptation to use their position of power to award friends and supporters.

The struggle against corruption need not be futile. But the often made claim, "politicians are corrupt because we, the people, vote corrupt people into office" doesn't tell us very much. Strong anti-corruption laws, an independent judiciary and prosecution service, and a law barring anyone convicted of a serious crime from holding public office go a long way toward cleaning up politics.

Welcome Novino!

2006-03-23T15:00:00.000-08:00

This is Naveen's cold-blooded gut!

Naveen is boring. If he is not analysing institutions, he is thinking of designing markets. Bah! Humbug! He needs a fresh lease of intellectual life. I, only I, can and will give it to him. For everything pro-market design, there may actually be stuff out there that is convincingly anti-market. I need to reach there. Before I get there, I need to shake off a little dust that has grown on me. Its been around four months in the blogosphere. I don't comment much around. I do sometimes look at the first few posts of an individual to get an idea of his/her character. My guess is the first few ones are more truthful and dil se. Later on, an oyster starts forming which can be terribly self-limiting. I need to de-reason myself to perceive reason afresh!

Novino will break Naveen's subconscious boundaries!

One of the brightest ways to break a boundary is to have a rule. If it sounds contradictory, trust me, it isn't. The rule is simple. Every time you are in a dilemma make a list of six options. Number them. Remember, the options should obey only one condition. You do not force or cause harm to anybody. One highly recommended criterion for designing options is outlandishness or what is "beyond your normal framework" of actions. That is it. Now roll a fair dice. Whichever number turns up, you do that! Chance is your God. Now you are the Dice Man.

As if my academic pressure was not enough, I wanted to have a hobby! So I listed six options. The chosen one turned out to be Artistic Female Nude Photography (AFNP). Don't ask me about the other ones. I don't even know how to do AFNP.

For that matter, Dice Man is a stupid book with a fantastic idea. Don't go by the reviews. On the same note, I think movie reviews are over-rated. They are a one-way intellectual street. They completely miss out on what the spectator brings with him to the screen. The idea-chemistry of the spectator and the movie is what creates magic. Great movies overwhelm you. Good movies involve you well. But stupid movies are what shake off your blinders. Stupidity is under-rated. We need more brilliant stupidity around us to make us feel human.
Naveen will be on a break. I will make sure he posts less often but regularly (Tuesdays, Thursdays and Sundays). He is not around now.

So which is the most stupid thing I can do right now? Maybe I should travel on a bus with this book, Diet Blood for a Fair and Lovely Complexion! Maybe I can recommend that to my models as well.

--Novino

"He is Reliance certified MM!"

2006-03-22T18:05:00.000-08:00

First cut thought.

People marry. Before marriage they need reliable information about their partner. Is s/he Marriage Material (MM)? Could be anything: character check (for instance, how he treats women); qualifications; property; previous flings or even HIV status. Today in India you do your own bit of asking around. Tomorrow it may not be the same. Especially with increasing urbanization.

If an agency can screen the info with a guarantee of reliability, would people flock to it? Is it already happening? Can insurance information be shared? How would comparision-shopping evolve along with provision of reliable info in the future? Do I smell an opportunity in the making?

Hmmm...suddenly I am in favour of more arranged marriages! :-)

An interesting research question would be an account of the changes in matrimonial ads in the last 30 years. On a related note, I know of one account which tries to capture the politico-economic changes through the lenses of Bollwood. And it is worth perusing it.

Microeconomic policy reforms needed in India

2006-03-21T23:55:00.000-08:00

Much policy reform debate in India is often focused on the BIG issues like macro-stability, privatization and capital markets. These are only the tip of the iceberg of desirable policy reforms. The real action of enabling markets is often at the microeconomic policy level.

The report Industry level analysis: the way to identify the binding constraints to economic growth by Vincent Palmade captures this succintly. Their abstract runs as below.

There are many economic diagnostic tools available which are trying to identify the constraints to economic growth in a given country. Unfortunately these tools tend to provide inconclusive and often conflicting answers as to what the most important constraints are. Even more worrisome, they tend to overlook the many industry specific policy and enforcement issues which, collectively, have been found to be the most important constraints to economic growth. This is the key finding from more than ten years of economic research by the McKinsey Global Institute (MGI). The MGI country studies have been uniquely based on the in-depth analysis of a representative sample of industries where clear causality links could be established between factors in the firms’ external environment and their behavior, in particular through the analysis of competitive dynamics. They showed in details how industry specific policy and enforcement issues were the main constraints to private investment and fair competition – the two drivers of productivity and thus economic growth. This finding implies that governments and international financial institutions should rely much more on in-depth industry level analysis to uncover product market competition issues and set reform priorities. These analyses should include the often overlooked but critically important domestic service sectors such as retail and housing construction.

They point out much-needed reforms in these arenas in order to jumpstart product market competition. Non-tariff trade barriers; Licensing restrictions; Price/ Product restrictions; Inadequate regulations of quasi-natural monopolicies and social sectors; Land market issues and the Unequal enforcement/informality trap. The last one is especially relevant for the distortions it introduces in markets to the disadvantage of both informal and formal enterprises: underdeveloped informal enterprises and absence of fair competitive field.

Once you start talking of microeconomic policy reforms, you cannot ignore legal reforms in the economic arena. There are studies in selected sectors in India which show that 20% of the selling price is incurred as additional transaction costs imposed by legal and infrastructural ones. Of course the true cost is what they deter in the long-term. For a rare study of much-needed legal reforms in India do read Bibek Debroy's Reforming the Legal System. He argues that market-oriented reforms cannot succeed without legal reforms and points out glaring loopholes in a host of laws. His analysis clearly brings out a paradox afflicting India: over-legislation and under-governance. The last 16 pages in fact are a list of laws that show how over-regulated is India. For a more fundamental understanding of legal reforms this post of mine may be helpful.

Both studies are recommended for their high IP (Insight/Pages) ratio!

Cross-posted on the Indian Economy blog.

Why England?

2006-03-20T20:05:00.000-08:00

Naveen forwarded this blog post to me so, while not having read the underlying paper, I will give a few comments about the Industrial Revolution and why it happened in England first.

I think it is fair to say that most people interested in this question agree the Industrial Revolution was the result of a confluence of conditions that all happened to be in place by 1760 in England. One crucial thing that is often left out is geography. England had large coal deposits at the time and it is no coincidence that the first areas to industrialize in England were those near coal fields. A similar pattern holds in Scotland as well as mainland Europe and the United States. Nowadays, natural resources do not matter nearly as much because it is much cheaper to transport coal or oil between countries and regions than it was in the 18th century.

Two other things you need for an Industrial Revolution are access to cheap and reliable transportation to bring goods to market and the ability to feed industrial workers. England certainly had the first, since it is an island country with many rivers running through it. For most of history, transportation by ship has been much cheaper than over-land transport. As for the second, agricultural productivity was relatively high in England before the Industrial Revolution. This meant that not only was the countryside producing enough food to feed textile mill workers but also that farmers were earning income from selling produce which they could then use to buy manufactured goods. The Poor Law would have been ineffective at alleviating poverty if it wasn't for the high level of income and productivity in the English countryside at the time.

It is at this point that we start to ask even deeper questions. Why was agricultural productivity in England higher than mainland Europe or Asia? Or would it have been possible to have an industrial revolution in another country not based on coal power? These are the kinds of questions that still elude explanation.

Here is the abstract, courtesy of New Economist:

Why was England first? And why Europe? We present a probabilistic model that builds on big-push models by Murphy, Shleifer and Vishny (1989), combined with hierarchical preferences. Exogenous demographic factors (in particular the English low-pressure variant of the European marriage pattern) and redistributive institutions – such as the Old Poor Law – combined to make an Industrial Revolution more likely. Industrialization was the result of having a critical mass of consumers that is “rich enough” to afford (potentially) mass-produced goods.

Our model is calibrated to match the main characteristics of the English economy in 1780 and the observed transition until 1850. This allows us to address explicitly one of the key features of the British Industrial Revolution unearthed by economic historians over the last three decades – the slowness of productivity and output change. In our calibration, we find that the probability of Britain industrializing before France and Belgium is above 90 percent. Contrary to recent claims in the literature, 18th century China had only a minimal chance to industrialize at all.

Perspectives

2006-03-20T16:20:00.000-08:00

Focus on it! Fascinating, how hard-wired our perspectives can become and we don't realize!

Sight of Sound

2006-03-18T17:37:00.000-08:00

Ooooh! Awwww Hehehe Whoa! Ughh! Hahaha!

Where do you draw the lines?

2006-03-18T12:32:00.000-08:00

After watching her, you may not want to read about the market for this!

Phish markets

2006-03-17T17:51:00.000-08:00

Growing up in Calcutta among the mach, mashi and the Maidan, you cannot miss the obsession with phish! Whenever my friends started talking about phish, my anthropological voyeurism would take over. I would mentally substitute phish for "sex" and listen to the conversation evolve. "O go, aaro ektu phish dao naa!" It is akin to watching Britney Spears swing to Chamma Chamma!

Anyways, one of the messiest markets that I think out there is the fish market. Nope, not where they sell fish. I am talking about fishery markets.

Think of the coastline of India. Now think of the fishermen out there. That isn't too hard. Now throw in mechanised fishermen; super-mechanised fishermen; state government; defense concerns; the Union government and the dealers, wholesalers etc. As with most things, there just is not enough fish (and power) to go around. As in other markets, even this has its technical and economic factors.

There are seasons and places when fish breed more. So if fish migrate a lot, then it becomes difficult to enforce fishing regulations either by the community or the state. If there is no ownership then you have over-fishing. Too much mechanised trawling can damage the ocean bed especially given the low-lying continental shelves of the Indian coastline. And it is not easy to throw bycatch of fish back into the ocean even if you prefer them tomorrow. Finally, there are the livelihoods of the fisher-folk who cannot match the mechanised trawlers and at the same have to suffer the state government bans on fishing in certain seasons.

How can one think of designing a policy (or a market) that will alleviate these concerns? Shorter coastlines and Tradable Quotas have worked in favor of Iceland. While institutional procedures entrenched in community systems have worked well in Japan. As far as I know. But yes, the tough part is designing a rule of law where there is none or government regulations have failed. And one that works in the favor of incentives of the stake-holders, not an external agent. What could be the rules of the game?

For a much-readable regulatory take on the issue in India, read the Delhi think-tank CCS's Briefing Paper on Fisheries. I also like the Fulton Fish Market paper which describes how the Fulton Fish Market in New York actually works.You would be surprised at the variation in prices and the reason for it.

Sigh! How I miss the phishi-culture back home!

Visual relief!

2006-03-16T17:51:00.000-08:00

If you like optical illusion art, you will enjoy this.

Understanding Gawker and regulations much better

2006-03-15T18:00:00.000-08:00

The legal system of India can be too daunting and leave you gawking but I shall try and unravel it. A legal system exists to decrease transaction costs and provide incentives for appropriate behaviour. The legal system has two parts: the law and judiciary.

Laws are often a mix of government-based legislation (civil law or legislative regulation) and the decisions made by judges over a long period of time (common law). India has a predominance of of civil law compared to common law. In addition to the civil law in India, you have the criminal law.

Salman Khan running over homeless victims is an example of criminal law. If you are a victim of clinical drug trials with mis-information, that is an example of civil law, especially tort law. A tort law is best exemplified by the famous McDonald's coffee case.

Again, laws in addition to a statutory component have an administrative one. Administrative law (or bureaucratic regulation) consists of government orders, regulations and rules. These, though not part of statutory law, are sanctified and allowed under some statutory law or the other. These gave rise to the much criticised inspector-raj and licence-raj. The statutory component is presided over by the judges. Finally, we have the procedural component of law which is concerned with the facilitation of the movement of a lawsuit through the legal system. This is the functional aspect of the judiciary. Accused languishing in prisons without trials are examples of a poor criminal procedural sytem in action. Cases pending in courts are due to the procedural laws.

Now a few first principles.

My car gets damaged because of your carelessnes. You should pay the damage incurred. This is a liability rule. But then you have the compensation only if a damage happens. What if the car runs into you and you die? For that there is the property rule. This rule tries to set the damages sufficiently high so that there is a reason enough to always deter.

Example. For car accidents you hang the perpetrator. Pretty soon nobody would be driving. And for rapes if you impose a fine of Rs 250, I dare not look at such a society. The difference is crucial. In case of liability rule we are trying to provide compensation. But in the property rule we are trying to provide punishment.

Liability rules function best in a situation of common law (even civil law will do); insurance companies and where tort lawyers have incentives to "prey" on negligence causing harm. Entities soon have incentives to cause least damage (externality) to others, or if they do, then they have to pay the compensation.

When I am asking for a reform in administrative law for clinical trials and that let it be subject to tort law, that is asking for a legal reform in civil law. That is subject to the liability rule. In the case of clinical trials, the insurance company would not "allow" a drug company to carry on such drug-trials. Or the company would have every incentive to try and lower the probability of an adverse result in the drug-trial. It is here that information comes into play for the company will try and make a defense that it gave every possible info to the person. That is why you see doctors in US inundated with info from drug companies. Because the doctors suffer in case of a malpractice, the drug company suffers and the insurance companies involved.

When you are trying to set up a system of deterrence for criminals (criminal law) then you are using the property rule. The government arguably has a role here. This is an application of the liability rule to a criminal activity. I agree. It is not enough to make it work! Unless you have a property rule in implementation in tandem.

There are scenarios where insurance companies can fulfill the role of providing security in a completely free market but that is not crucial to our discussion here. The important part is that there are much efficient ways (example What should be the punishment for rape?) of providing deterrence to criminals then the present methods, and there can be market-based mechanisms for having the right incentives for liability rule. Part of this efficiency will arise from legal and judiciary reforms: less administrative law; better-designed statutory law and a better procedural law. A more elaborate version is provided in Reforming the Legal System and Judicial reforms - Law and Contract enforcement. I would recommend the latter considering its high IP (Insight/ Pages) ratio. If you are really interested in criminal justice reforms you should read the Malimath report.

Fundamentally, the question is how does the government get to a scenario where it concentrates on the efficient provision of the most important public goods, namely law and order, and defense. The answer is by shedding activities that it is neither efficient nor equitable. And that is where markets help to shed the inefficient economic engagement of the government. We need less inspectors closing shops, destroying cycle rickshaws and muzzling entrepreneurial activity. We need more police personnel, courts and lawyers out there to be a deterrence to the more sinister crimes of murder and violence.

Note: No malice included. Hopefully this will give rise to a better understanding of regulations or atleast a worthwhile debate! For a conceptual overview one can read Law as a Constraint. For judicial reforms read Delays, Costs and Glorious Uncertainity-How Judicial Procedure Hurts the Poor. For understanding the application of liability rule to the state, (yes, why not?) read Tort Law in India.

Why does Silicon Valley exist?

2006-03-14T19:11:00.000-08:00

In continuing with the theme of Naveen's earlier post "A billion-dollar question!", another related question is why we see companies cluster in certain cities or regions and not others. In the software industry it is particularly striking. With all the hype about the "death of distance," you might imagine that programming could be done anywhere in the world. So why do so many software companies choose to locate along the southern edge of the San Francisco Bay in California? Having access to Berkeley and Stanford computer science graduates is certainly one factor. However, Silicon Valley is famous for hiring many immigrants or Americans not from California originally. Additionally, what is taught in computer science departments around the world probably does not vary too much. With labor so mobile and with programming such a location-independent task, why then is there a Silicon Valley?

According to Bruce Fallick, Charles A. Fleischman and James B. Rebitzer, a significant part of the answer is job-hopping (Here's a link). They show that programmers and others in the computer industry are likely to change jobs more often than computer professionals outside of California. Part of this may be due to the fact that California law does not allow employees to sign contracts agreeing not to work for a competitor. The result is that employees gain industry-specific knowledge while working that they can use in another firm.

So the fact that Silicon Valley exists shows that firms locate there in order to access the local labor market which is made up of people with highly specialized knowledge that even well-educated people elsewhere are unlikely to have.

This is part of the reason I am skeptical of all the hype behind "outsourcing" and how it spells the end for computer professionals in the U.S. Bangalore has done quite well for itself in supporting a growing software industry, but rather than competing directly with Silicon Valley, it is more likely to develop its own niche that complements, rather than competes directly with, Silicon Valley's unique expertise.

A corollary is that if local software firms in Bangalore want to go head-to-head with Silicon Valley firms, they will have to start enticing NRI programmers in California with significant work experience to go back to India. At that point, many of the cost advantages India has start to get a lot smaller with the inflated salaries they would have to pay Indians used to American salaries.

Selling to BOP markets in Rural India

2006-03-14T18:26:00.000-08:00

Read Building Wealth by the Penny for a snapshot of Hindustan Lever’s efforts in rural India. It will be engaging to see which rural parts of India emerge the most viable ones for companies targeting BOP segments. More importantly, the sequence of businesses that develop profitably in these markets will hold lessons for policy-makers in terms of infrastructure focus. Even a basic infrastructure in these areas can hugely bring down transaction costs for consumers, companies and civil society efforts.

Cross-posted on the Indian Economy blog.

A billion-dollar question!

2006-03-13T11:27:00.000-08:00

A question that has fascinated me of late is the following one. Let me provide a stylized example.

Suppose you were a CEO of an electronics company. You want to set up a manufacturing centre driven by X needs. The world is your board of choices. I am talking of precise location and not only of countries. How would you choose a particular location? What is your calculus of decision-making? What ups the stake is the billions of money that are involved.

There are so many factors that influence your decision. Let me point out a few. Infrastructure; the particular industry environment of electronics firms; regulatory and legal issues; macro-economy and finally, the political element. Most decision-making on this count is based on rigorous analysis of a few factors and subjective estimation of others. An example of the former is the industry environment and of the latter is an assessment of the political element. Do companies do a risk analysis of all these factors for their investment? If not, how should they do it?

To give you a flavour of the reasoning behind the question, read an account of Intel's site selection decision in Latin America.

I will keep you posted on the answer to this question as I find out more. If you have any thoughts or ideas, I would be glad to know.

The Equity Premium Puzzle

2006-03-12T15:01:00.000-08:00

Brad Delong has an excellent summary of what economists call "the equity premium puzzle."

For the uninitiated, the equity premium puzzle refers to the fact that, for the United States, investing in bonds and reinvesting the coupons over a span of twenty years yields significantly less returns than investing in a diversified portfolio of stocks. The simplest explanation is that stocks are riskier than bonds but the problem here is that, making standard assumptions about someone's capacity for risk, you would have to assume people are unrealistically risk-averse to accept the lower yield on bonds in exchange for less risk.

The puzzle comes from the fact that over the long-run, investing in the U.S. stock market really is not very risky at all. I see two possibilities for explaining the equity premium:

1. Economists' standard assumptions about risk-taking behavior are lousy. Very few people have the stomach to watch their net-worth plummet by 5% in one day and not do anything about it. This is a required character trait if you want to succeed in the stock market.
2. People who invest in bonds do not invest in them for returns in the far-off future. They invest in bonds because they want a steady and completely predictable source of income over a long period of time. This is something stocks cannot deliver so people pay a premium for bonds, hence the lower yields. My grandmother, for instance, religiously believed that one should only live off only the interest income of one's investments in retirement. How many people out there are like her?

S-externality!

2006-03-11T18:09:00.000-08:00

Blame it on the cardboard walls! My room-mate is suffering from a peculiar externality caused by the boisterous lovemaking of the inmates adjoining his bedroom. His light sleep is ruined every alternate night because of noises that apparently seek mercy from the Almighty. I guess suspiciously his irritation may be because of his lack of the same activity in his life. Anyways, being a good-hearted and shy guy, he is averse complaining to them. I told him to slip the following apology of a limerick under their door.

When you have a peaceful neighbour,
Life is like heaven.
But when you make love to your dear,
My night becomes a burden.

He laughed it off. But the question remains. What is the most courteous and efficient way to dispose of this externality?

Is there a resource curse?

2006-03-11T13:20:00.000-08:00

Plot a simple graph with economic growth on one axis and some measure of natural resource endowment on the other, and you will get a negative relationship. This is a real puzzle since it defies common wisdom. This negative relationship is called the "resource curse," as if somehow resource-rich countries are destined to be poor.

There are two explanations for why we would observe this negative relationship:

1. The "Dutch disease" explanation. Having lots of natural resources means you will have a comparative advantage in natural resource exports which tends to have relatively low productivity growth. The logic of trade theory says then that other countries will have a comparative advantage in other sectors (like industrial goods) that may have higher productivity growth. Furthermore, since productivity and comparative advantage are linked to some extent to learning-by-doing, people in resource-rich countries do not acquire the skills or experience to compete in other sectors. Therefore, the economy stagnates (this is a very simple version of the Dutch disease model).
2. The institutions explanation. If there are natural resources just waiting to be extracted from the ground, this will encourage a legion of rent-seekers to compete for the privilege of acquiring the rights to drill for oil or to mine for minerals. This rent-seeking behavior can ultimately wind up undermining the rule of law and can provoke civil conflict, both lowering economic growth and stability. Also, the lure of easy money through political connections or muscle power might tend to dampen entrepreneurship and productive economic activities.

In fact, to students of history, the "resource curse" story should sound somewhat suspicious. After all, the United States, Australia and Norway are all resource-rich countries that have managed to grow quite rapidly over the past hundred years.

So how do we explain that some resource-rich countries wind up with a high standard of living and good institutions while others wind up with the opposite result? According to Halvor Mehlum, Karl Moene and Ragnar Torvik (all based in Norway, incidentally), a possible answer is that the resource curse affects countries with already poor institutions but not countries that start out with good institutions. In other words, if we look at the sample of countries rated as having good institutions, there is no observable relationship between natural resources and growth. Their data analysis supports this hypothesis but this paper is certainly not the last word on the subject.

My take is that any attempt to explain away the resource curse by invoking institutions ultimately has to face the question of where institutions come from. Some economic historians, like Sokoloff and Engerman, for instance, think that institutions are closely linked with a country's natural resource endowments -- or at least those natural resource endowments that were relevant when the country's institutions were being put in place. I think there is likely a complex, two-way relationship between natural resources and institutions that we are only beginning to understand now.

Citation: H Mehlum, K Moene and R Torvik. "Institutions and the Resource Curse." The Economic Journal, January 2006.

NOTE: I don't think there is a free version of the paper around. However, this paper by the same authors is along similar lines.

Government Wages and Market Rates

2006-03-09T11:27:00.000-08:00

Ajay Shah analyses the government wages and compares them with the prevalent market rates in Revising the wages of civil servants. The bottomline is captured below.

The main story is simultaneously that while GOI employees at the top are incredibly underpaid - by market standards - the bulk of GOI employees (roughly 98% of them) are incredibly overpaid by market standards. Example: the full cost of a driver at the Ministry of Finance was estimated by me to be four times bigger than the cost of an unorganised sector driver. Not 4% higher, not 40% higher, but four times higher.

Cross-posted on the Indian Economy blog.

Which is the hardest terrain for incentives?

2006-03-08T18:09:00.000-08:00

One of my first jobs during my high school was teaching a Class 6 kid in Kolkata. A tuition for geography and maths. Seemed pretty easy. What I am not sure is how he made a kid of me to the point that we had pillow fights and I broke the precious vase in his house. What followed is too embarassing to be narrated here. But the lesson stuck.

When you are dealing with children, designing incentives to make them follow your decision is very tough. If you have followed the posts What are the wrong types of incentives? and How to make your daughter arrive home early from a party?, you will know what I am talking about.

Donald Cox, an economist has a short piece on the lessons of economics in dealing with children in Parent-onomics 101: Can Economics Help You Be a Better Parent?

His lessons can be summarised in three points.

Sometimes, let them have a taste of what lies ahead in order to arrive at a decision.
Often, a no-bargaining position is better than one open to discussion.
"...explicit payments could actually dilute intrinsic motivation by turning every family activity into a nickel-dime bargaining game."

And I agree with his theme "Families are fundamentally different from markets, after all, and the subtle tug of altruism and reciprocity can be more effective — not to mention more civil — than explicit prices."

Experimental economics needs to learn a few lessons from kids as well.

Hat-tip from Babysh!

Naveen's Addendum

2006-03-07T19:50:00.000-08:00

I had the same problem as Mark with the concept of probability. I couldn't have expressed the limitation of probability better than he has done.

That said, it seems the real world is getting around that limitation of probability, which is characterising and dealing with real-world uncertainty. As I understand the limitation that he has expressed manifests in the concept of Net Present Value (NPV) which is extremely static in its usage of probability values. Real Options on the other hand is gaining ground as a more powerful way of tackling uncertainty in future investments and is already on the radar of law. For a succint primer of real options read The Real Power of Real Options. More in-depth usage of real options analysis is reserved once we tackle the basic idea of distributions and their relevance to us. I am still looking for a powerful and simple way that the idea of distributions can make sense to a Philosophy undergrad or my mommy. Do you know of any?

There is a 15% chance you will read this to the end

2006-03-07T19:18:00.000-08:00

Naveen hasn't posted anything on probability or statistics for a while, so I figured I would give it a shot...

What does it mean to say there is a 10% chance of rain tomorrow? Or that there is a 7% chance Iraq will be a peaceful democracy in two years? These numbers appear silly: these are things that either will happen or won't.

In reality, all probability is like this. For instance, if you flip a coin and while it is in mid-air, I say there is a 50% it will land heads up, no one questions that this is a perfectly reasonable statement. Yet, as far as physics is concerned, what side the coin lands on is already predetermined by many variables, such as the coin's radial velocity, time to landing, etc. The traditional definition of probability (from the so-called frequentist school of thought) is that probability measures observed outcomes with a large enough number of observations. So if I flip the same coin 100 times, it should come up 50 times heads and 50 times tails. But this is only a statement of expectation about the likely outcome. It is perfectly possible the coin lands heads up 49 times or 48 times or even 0 times. Each of these outcomes itself has a probability associated with it.

That's the main problem with the traditional definition of probability. It is ultimately a circular definition since probability is supposed to measure outcomes, but outcomes of repeated experiments are themselves subject to probability. In pure theory, the resolution to this paradox is to say that with an infinite number of coin tosses, exactly half the time the coin will end up heads and the other half it will end up tails [more formally, as N goes to infinite, the coin will land heads up N/2 times and tails N/2 times]. But of course, talking about infinite does us little good in analyzing the real world.

To me, the traditional definition simply does not make sense. Instead, I think of probability just as a way of being systematic about our ignorance of the world. Except maybe in quantam mechanics, probability doesn't really exist. Theoretically, I could know whether the coin will land heads or tails but without that information, I say there is a 50% chance of each as a way of stating my beliefs about the possible outcomes. To put it another way, probabilities give the betting odds I would be willing to accept (if I am a gambler) for a given outcome.

In the end, I think probability is not something that can be concretely defined. It is a useful concept simply because it allows us to make sense of and systematize a complex world.

Drunken regulations?

2006-03-07T11:06:00.000-08:00

I hate whisky. The last time I drank it, I remember gobbling bottles of Sprite from my college canteen to tide the hangover.

Anyways, you cannot ignore its market in India reported in Battle for the world's largest whisky market -- India. Notice the theme of the story may have the same vein if you substitute second-hand cars for whisky.

Policy questions to ponder. How much do consumers of both countries lose because of government executive regulation succumbing to producers' lobbies? How much do producers gain? Is this an example of regulatory capture?

When law tries to catch up with technology!

2006-03-06T17:44:00.000-08:00

If you put A4 sheets one after another over a 1 mile length of road, you have the equivalent of 25 GB. Some companies handle thousands of GB, and in the US, about 95% of their information is in an electronic format. Imagine the amount of data out there.

Consider this. Earlier, when you are entangled in a dispute with a company, most of the data was in paper and could be searched through for potential evidence with only limited costs. Now when the amount of data has multiplied how does the law deal with it? E-discovery litigation!

In US, right now the onus of data-retention is on the company, even when you don't have a lawsuit. For not doing so may invite charges of spoliation of evidence which would seriously damage your defense. You can know more about the issue at e-discovery. For a more succint understanding read E-Discovery Firms Search Data for Evidence.

I heard anecdotes of the ballooning costs of companies wrt e-discovery. Companies need an expert to retrieve all their previous data (technical search costs) and process that data through attorneys (legal search costs). Legal search costs may be 10 times the technical search costs. There may well be outsourcing on this front! Excessive preparation for litigation by companies will generate costs that will finally be passed onto consumers.

Anyways, the news is that it has generated a growing market at the edges of technology and law. The lesson to ponder for public policy is what "rules of the game" are efficient? The costs of data storage and technical search costs will be cheaper in the future. However the costs of enforcement of data retention are high. Imagine making sure that every employee in a company follows the rules of storing their relevant information in a standard manner including emails. (And I didn't know till now that emails are not deleted when you press delete, they can still be retrieved!)

What are the new "rules of the game"? How is the Indian law preparing to handle this issue?

Finally, a book on Market Design!

2006-03-04T18:56:00.000-08:00

I have often harped on "market design" being the next frontier (immodestly speaking :-) for policy thinking especially in this post Micro-economic engineering. Finally here is a book on it. Check out Creating Competitive Markets. Buy it if you are enthusiastic about the operational details of markets. Or wait for a thorough review from me!

Here is the blurb for the book.

Promoting competition has been a leading theme of public policy over the past 30 years. In the United States, the movement began in the 1970s with efforts to rewrite the rules for aviation, trucking, and telecommunications. Since then, many other industries have come in for similar treatment, with banking, securities, agriculture, and energy heading the list. This trend is often described as “deregulation,” but “market design” is a better term. Promoting competition is not just about removing legal controls and then getting out of the way. It also requires that policymakers consciously design new markets, often with significant rules and regulations to promote efficiency. In Creating Competitive Markets: The Politics and Economics of Regulatory Reform, leading experts from academia, government, and the private sector evaluate more than a dozen efforts at market design.

The contributors to this volume analyze a broad range of sectors, including airlines, electricity, education, and pensions. They examine developments in Canada, the United Kingdom, and Japan, as well as the United States. In each case, the authors ask three critical questions: Can markets be designed? How significant are the impediments to competition found in different sectors? And how do the politics of market design shape the policies that result?

Taken together, these chapters help explain why few recent cases of market design have proven to be as unambiguously successful or as relatively uncontroversial as the deregulation of trucking, airlines, and telecommunications. They also provide valuable lessons for future participants in the never-ending process of market construction and redesign. Rich in analysis and detail, Creating Competitive Markets is essential reading for anyone interested in regulatory politics and policy.

Altruistic Punishment and Citizenship

2006-03-04T13:23:00.000-08:00

One of the most interesting things to come out of behavioral and experimental economics in my opinion is the idea of "altruistic punishment." The idea is simple: strangers are perfectly willing to punish each other for inappropriate or nefarious behavior, even if such punishment is costly to the person meting it out and even if the people involved are guaranteed to have no future interaction. This result is not surprising if you think about real life social interactions but it deals a serious blow to orthodox economics where every individual is seen as a purely selfish utility maximizer.

By itself, altruistic punishment poses a real puzzle to those of us who think about the world strictly in terms of incentives. For people like sociologists, on the other hand, it is perfectly natural that people would want to punish each other for failing to follow social norms. Fortunately, economics is slowly absorbing insights from sociology to explain things like altruistic punishment.

Here's the basic idea (coming from a non-sociologist): every one of us has a "social identity" or a set of rules and behaviors that establish us as members of a certain social group (middle-class white suburban American or upper-class, upper-caste urban Indian, for instance). Having this set of rules or social norms implies two things. First, I will feel badly if I fail to live by the rules of my group. So as an American who has been told from day one that littering is a terrible and disgusting thing to do, my conscience will bother me if I litter and I will feel embarrassed about doing it. Second, I will feel a need to enforce this social norm upon others. I will at the very least feel a little annoyed seeing someone else litter and, if I am in a gutsy mood, might accost him in public. Even if I personally don't accost the litterer, I will feel good when I see him punished and have the knowledge that justice has been served.

This second implication of social identity is at the heart, in my view, of altruistic punishment. We want to punish people for violating social norms because we feel that they are cheating and taking advantage of honest people in society. It outrages us that such people exist and can get away with what they are doing and so we might feel moved to punish them even at cost to ourselves. So here's the big question: why do social norms prohibit littering in America but not in India (you can replace littering with bribery or bad driving with similar results)? It is surely no less of a disgusting habit in India as anyone who has walked down any major street in Delhi can attest to. Is it because Indians are less likely to identify with one another as members of the same "group" than Americans? Perhaps too much social fragmentation leads people to not care about violating social norms with the result being the ultimate breakdown of those social norms and the inability to establish new social norms.

A public policy implication of this is that in the absense of strong law enforcement, cosmopolitan places like New York City or Singapore have no informal, social mechanism for enforcing basic behavioral norms in public. This is reflected in the way these cities operate: police routinely arrest or fine people for petty, nuisance crimes that are seen as lowering the quality of life (begging, graffiti, jaywalking, unlicensed street-vending, etc.). Over time, it may be that people develop a common notion of citizenship and social identity that replaces the need for such vigorous policing. However, in some places where common bonds of citizenship do not exist or are very weak, strong policing may be the only way to establish social order initially.

Understanding regulation in markets better

2006-03-04T11:06:00.000-08:00

I alluded to costs in the previous post because there is a dramatic way it relates to the understanding of markets and well, libertarianism. I have my operational reservations against libertarianism but there is need for a better understanding of this animal.

A simple rule often works dramatically well when you apply it consistently. Let who does a damage pay for the damage. There are complexities which go beyond the scope of this post but that should suffice a starting point to think more. The idea is based on the cost incurred in a market setting. So if a market does not involve the payment or consideration of externalities than it is a poorly designed market. All that talk about freedom and choice of libertarianism is first-level knowledge. When you understand who is incurring the cost and who should pay for it, you are one level deeper into the complexity of it. The next part is in designing the incentives to make sure that the party who does the damage pays for it or takes into account the costs of his activity that may cause damage.

For the context of what follows read A Nation of Guinea Pigs, but it is not necessary.

The difference between bureaucratic regulation and legislative regulations should be pointed out. Having a government board to clear a clinical trial is bureaucratic regulation. Having a regulation that allows a legal argument between two parties for deciding the costs incurred, in case of a faulty trial, is a legislative regulation.

India has an oversupply of the former and an undersupply of the latter, in quality and quantity.

In fact, there is a crying need for regulation. Free-markets need more regulations and litigation. But to equate demand of regulation with government supply of regulation is an usual jump in logic and can be faulted as this argument When regulations are necessary. Today the government does bureaucratic regulation which we know doesn't work and well, won't work. If something goes wrong, you cannot point to the government and ask them for compensation. If the legislative regulation had allowed for litigation and mechanisms like civil tort, you would have a host of lawyers scavenging the grounds of Sevagram. Ultimately the true costs and benefits of guinea-pig treatment would be taken into account by both parties.

In finality, you need more legislative supply of regulations that allow litigation between the parties directly, not bureaucratic ones that distort the market of costs.

Addendum: You find the same search for this understanding echoed at AICTE: Waking up from 61 years of slumber.

Seeing the world through costs!

2006-03-03T16:15:00.000-08:00

I think it could be a law. If you see a high cost (time, money, etc) somewhere, it means there is a business opportunity awaiting to make a profit and serve at a lower cost.

Waiters and restaurant hygiene

2006-03-02T11:11:00.000-08:00

During my work-period, I had only three places to go for lunch: Subway, Shefali or the Street-hawker. Shefali was the middle-range and hence I frequented it the most. And I could sense the hatred in the waiter for me (or us) when we entered during peak lunch time, garnered 10 chairs and ordered 2 chow-meins and one Coke. Both of us had little choice. He couldn't throw me out and I couldn't abandon Shefali. You can do a market analysis of insufficient restaurant competiton but I will reserve that for later.

Pissing off waiters has its costs as they may piss into your dish as shown in Fightclub. You should see the movie for its take on consumerism among other issues. Sample a one-liner. The things you own end up owning you! But if you really want to know what it means to be on the other side of the table you should peruse Waiting: The True Confessions of a Waitress and Hey, Waitress! The USA from the Other Side of the Tray.

Anyways, one question for policy making is how to impact restaurant/ hotel hygiene. One of my previous research studies did involve health inspections in Delhi for shops and restaurants. You can view a sample photograph and rule here. It took us umpteen efforts to dig out the rule book from the Municipal Corporation of Delhi. You are guaranteed to see the hygiene world (or lack of it) in Delhi in a new light once you read those rules. The obvious question that strikes is, these are probably good rules! We should only make sure that they get implemented. I am disinclined to believe in that approach for reasons of experience and theory. There are vast problems of incentives with depending only on a "bull-dozer" inspection approach to hygiene.

Unless the information of hygiene reaches the consumer, there is little good incentive for the producer to supply better hygiene or the consumer to sift or demand better hygiene. Hence a better approach would be to use the power of information to have efforts for better hygiene. Again, not all improvements in hygiene are cost-beneficial to the producer or the consumer. You set too high a standard for hygiene and pretty soon all street-food will disappear. Ask yourself who will suffer the most?

Display of inspection scores would be a good way out of the dilemma. It forces competition among restaurants for better hygiene or let their prices reflect the lower hygiene. On the other hand, it forces inspectors to have objective criteria for the scores. It still is a surprise for me as in why there isn't a rating market for hygiene criteria (among other things) of restaurants. You cna extend that to performance of schools in metro cities as well. Market failure or the government crowding out private initiative? There are guidebooks for rating food taste and variety but not quality as of yet. But the government could kickstart the process of having inspections scores or grades displayed prominently in the windows of restaurants. Even if not honest at the outset, transparency of scores can force better delivery of hygiene in the long run. Read The Effect Of Information On Product Quality: Evidence From Restaurant Hygiene Grade Cards by Ginger Zhe Jin and Phillip Leslie for the above proposed reform in the context of Los Angeles County, USA.

The abstract is stated below.

This study examines the effect of an increase in product quality information to consumers on firms’ choices of product quality. In 1998, Los Angeles County introduced hygiene quality grade cards to be displayed in restaurant windows. We show that the grade cards cause (i) restaurant health inspection scores to increase, (ii) consumer demand to become sensitive to changes in restaurants’ hygiene quality, and (iii) the number of food borne illness hospitalizations to decrease. We also provide evidence that this improvement in health outcomes is not fully explained by consumers substituting from poor hygiene restaurants to good hygiene restaurants. These results imply the grade cards cause restaurants to make hygiene quality improvements.

The classic quote that I heard from an inspector on the quality of restaurant food when they are not inspecting was, "Bhai, hamara tho 9-5 job hai!" Ours is a 9 -to-5 job!

Fave books!

2006-03-02T01:15:00.000-08:00

Sometime there are books like "Thoughts" by Giacomo Leopardi (surprisingly, not available on Amazon). Reading them is like sleepwalking into a cold shower bang in the middle of a wintry Arctic night. And now I cannot wait to get my hands on A Pattern Language : Towns, Buildings, Construction suggested by Srikanth. The reviews had me all excited till I looked at the price! Which reminds me...what is the "best" book that you have read outside your domain of work that influenced your thought? Put differently, which book unrelated to your discipline of work mattered a lot to you? I am looking for cross-disciplinary ideation rather than inspirational or self-management books!

Researching schooling reality in Hyderabad

2006-03-01T20:39:00.002-08:00

During my coordination of the research internship program Researching Reality for undergraduates, I was often confronted with this question. Given that I lack sophisticated statistical or mathematical tools, how do I analytically piece together all these facts that I observe. What is my framework of reasoning? A benchmark paper would be The Regulation of Private Schools Serving Low-Income Families in Andhra Pradesh, India. This is the kind of paper that a layman with little disciplinary knowledge but rigorous sense of reasoning can pursue with intellectual profit.

Most of the facts may not seem new to you. The article talks about corruption in the private schools in the slums of Hyderabad. But notice the style of reasoning and you will be impressed by the richness of thought that the Austrian economics school of thought can bring to public policy analysis. (And especially designing markets in lieu of bureaucratic regulatory Acts.) Contrast that with the acute lack of such research in India and you will not be surprised at the paper winning the Don Lavoie Memorial Graduate Student Paper Competition. Here is the clincher. If you hate economics or are even economics-illiterate but still want a sound analysis of a policy process, you should read it.

I am not posting the abstract for that may invoke oversight! :-)

Laws of Succession and History

2006-02-28T21:30:00.000-08:00

I'm a big fan of Jared Diamond's Guns, Germs, and Steel but my main criticism is that it only explains why Eurasians had more developed societies than others until about 1100. It does not explain why the first country to industrialize was not, say, Italy or China, but rather England. Moreover, it does not explain why Western Europe surged ahead of the Islamic world or East Asia over the past five hundred years and why Western Europeans at the dawn of World War I controlled or ruled over a majority of the Earth's surface.

I don't know the answer to these questions and don't know if there will ever be an answer that is completely convincing. However, there is one pattern in history that is usually overlooked. In Western Europe, monarchies had simple laws of succession (here is a Wikipedia entry explaining how monarchs are selected in different countries, most of them European) that mandated that the first-born son of the king take over when the king dies. By contrast, the Mongol Empire and kingdoms in the Islamic world had no such rules of succession. The result was that when the King or Emperor died, typically there was a bloody struggle for succession that sometimes degenerated into all-out civil war. Thus, the Mughal Empire disintegrated in 1707 upon the death of Aurangezeb after 181 years in existence and existed afterwards only as a shadow of its former self. In the case of the Mongols, the problem of not having a fixed rule of succession is clearest in 1241 as the Mongols advanced on Western Europe. When the Mongol commanders heard that Ogedei Khan (Ghenghis Khan's third son) died, they abandoned their advance and returned to the Mongol capital to elect a new Khan.

What is the point of all of this? If you don't have a clear rule of succession in place, there is more likely to be chaos when there is a transfer of power to a new person. From an economic standpoint, this should decrease a person's willingness to invest in the future because the future is so uncertain. And from a political perspective, the lack of a law of succession will increase in-fighting within the government as royal officials begin to form rival factions supporting different candidates for king or emporer. It will also, as happened to both the Mughals and Mongols, lead to a militarily weak and fractured state which will become vulnerable to foreign invasion.

This is not to say the transition to a new king was always smooth in Western Europe. However, I believe the transfer of power tended to be less chaotic and uncertain than in Central Asia or the Middle East and this may help explain the very different historical paths these regions have taken over the past 900 years.

Mark my words!

2006-02-28T18:25:00.000-08:00

Mercatus actually started as a workbook of my academic thoughts and a subconscious motive of generating a focus for policy analysis principles, often on India. If you have been following this blog continuously, you must pat yourself on the back for having the stamina to digest my modest analytical thoughts. Believe me, it is not common, especially so on the policy front. Notice that Mercatus has eschewed explicit popularity for I have fears of catering to a "popular" audience. Mercatus is a niche audience blog and prefers to be part of the long tail rather then indulge in the numbers game. In fact, more than content, the intention to connect to people interested in policy analysis has kept me going inspite of a busy academic schedule. I have been surprised at the mail response and I will be more than happy to hear from you if you are interested in policy research/analysis/management and need leads!

As part of an effort to cater to the same standards and have more diversity of ideation, I am glad to have my good friend Mark Miller agree to occasionally blog his thoughts on Mercatus. Mark complements me with his rich knowledge of economic history and development, has worked in India and well, (forgive me, Mark) can flirt in Hindi with any Indian beauty:-). If you are looking for credibility, yes, he is a Ph.D. student in the Department of Economics at University of California - Berkeley.

We have no great pretense to change the world with this blog. The modest intention is to have fun while you equip yourself with the intellectual capital to change the world. Welcome Mark!

Behavioral Economics 101

2006-02-27T14:48:00.000-08:00

You know that watching television is useless and yet when you sit in front of a dumb serial, you feel powerless to switch it off and get onto more important tasks! Why? Read The Market Place of Perceptions for it. If conventional economics made you think that man is an optimising-machine, behavioral economics lays bare all those rudimentary assumptions and makes them more realistic.

Lessons for policy analysis? How would savings accounts function in a world where people need not partake part of their income for the future and option to invest in savings was completely voluntary? I have my doubts and hence the need to tinker the market design with lessons from behavioral economics! You can read Steven Venti's Choice, Behaviour and Retirement Saving for a more elaborate account. Here is the gist.

The lessons of behavioral research for plan design are perhaps most relevant for voluntary employer-based pension arrangements and personal saving decisions. Here the research suggests that certain key features of plan design can have significant effects on saving by addressing self-control problems, the tendency to procrastinate, and the cognitive difficulties associated with planning. In the U.S., employers and other private sector plan providers have, in recent years, greatly increased the information and planning aids available to participants. Whereas in the past most 401(k)-type plans were "take-it-or leave-it" offers to employees, most firms now recognize that leaving the retirement saving decision completely in the hands of the employee has resulted in poor financial choices by some employees, most notably low participation by low-income and less educated employees. Firms have begun to promote their saving plans among employees, and many firms now also use default options for participation, contributionlevels, asset allocation, and cashing out to help their employees make prudent choices.

Pssst. This is one of those things that you should hold me accountable only if it happens and not otherwise :-) I think Sendhil Mullainathan's work is one of the most relevant for policy-making in developing countries and will not be surprised if he wins a Nobel Prize. And for the patriotic, yes he is from India!

HT: Marginal Revolution

A market for business and policy research on South Asia?

2006-02-26T20:49:00.000-08:00

This is a thought from the top of my head based on my experience in India and discussions with a few business managers here in the US.

Firms would like to have a continuous stream of information about public policies and businesses in South Asia from a market perspective. Right now they can only have that based on a one-shot research assignment to a consultancy. There are other companies but they do it in bits and pieces. It seems there is space at the top for more firms because of the demand for more reliable and quality information designed for specific sectors. More importantly, information that helps decision-making in the light of different opportunities available!

On the same note, I must add that I am very disinclined to believe government data. Primarily, because of my own bad experiences with it in the course of my research with government agencies in India. When even companies like “The Firm” base their evaluation on government data, it only means that there is room for a company to offer more intensive and thoroughly researched data! Any thoughts?

Cross-posted on the Indian Economy blog.

What should be the punishment for rape?

2006-02-24T12:10:00.000-08:00

Using back-of-the-envelope calculations, I will try and understand whether the magnitude of punishment for rape really matters? Usually in the aftermath of a rape we hear a range of pronouncements for the punishment of rapists that range from 20 years imprisonment; life imprisonment; death sentence to even castration. Even Vir Sanghvi indulges in this rhetoric like here. Is the magnitude of punishment really effective in conveying to the rapist the consequence of his action?

The numbers I use are taken from the very informative paper Rape victims in Kerala.

In 1999, about 487 women were raped in Kerala. Since about 60-70% of rapes go unreported (ballpark figues obtained from the internet, there are groups who argue it is much higher) the actual number of rapes in Kerala is (let us say with a 60% average) about (487*100/40). In the same year the number of convictions for rape were 36. That gives rise to an approximate conviction rate of 3%. Keep this figure in mind.

Now suppose you raise the sentence from the minimum seven year imprisonment to a twenty years. Let the rapist be earning Rs 1.5 lacs in a year. (If you consider that low, any increase of salary will have a lower conviction rate because of better quality of legal support in favor of the rapist.) His total earning in 20 years is Rs 30 lacs.

Now consider his situation.

He stands a 3% chance of losing the Rs 30 lacs and additional money, in total Rs 50 lac (let us say) IF he is caught and goes to prison. On the other hand, he has a 97% chance of gaining Rs 30 lacs if he goes scot-free. Work out his expected value and you will find it comes down to (29.1 - 1.5) = 27.6 lacs.

This number basically tells us that because of the low probability of conviction he doesn't stand to lose much even if you increase the sentence. You can make a complex model from this but this gives us a rough idea of the economics of crime!

It is the guarantee of punishment that works much better than the increase of severity for the punishment of a crime! Speedy and guaranteed punishment are the best deterrence against crime.