Friday 28 January

This week, Mohammad Presents

Bankers’ Bonuses: How should bankers be paid? How much should they be paid?

It is now three years in a row that the bankers’ remuneration packages have received a lot of attention in the public and political sphere. For the past two years the heads of Britain’s five big firms have tried to be seen to exercise pay restraint, for instance waiving their bonuses or donating them to charity. That ceasefire will end this year1. This season promises to be as gory as ever. An expected £7 billion ($11 billion) bonus round in the City of London will be paid just as a wave of public-spending cuts are about to bite2.

I usually tend to think performance pay is essential for incentivizing workers in order to exert unobservable effort. In the case of financiers the unobservable effort may not be single dimensional meaning that they are choosing both the returns on investment and levels of risk3. Looking at bonuses this way raises some specific questions:

1. Who is responsible for the decision of how much to be paid to bankers?

Some would say the government since bonuses are paid from profits buoyed by public subsidies (direct bailouts, bailout guarantee and implicit zero interest subsidy)4.

Others would argue it is in our interest to let the banks decide this because good managers must be paid to clean up the mess and maximize the value of public share and also tightening rules domestically leads to outflow of capital5.

2. How should the optimal compensation package look like?

Some argue that bonuses are essential but they should be paid as shares of the company or should be based on long term performance measures. Thinking in favor of this argument we should bear in mind that managers at Lehman Brothers and Bear Stearns owned lots of shares yet ran their firms aground6.

Other might argue that maybe we don’t need this much of innovation in the banking sector and caps and taxes on the bankers are in the public interest even if they lead to a shrinking of the talents in the sector.

References:

1. http://www.economist.com/node/17909825?story_id=17909825

2. http://www.economist.com/node/17902729?story_id=17902729

3. This idea is originally from Tim and Maitreesh recent working paper on the optimal structure of bonuses.

4. http://www.economist.com/node/17417754?story_id=17417754

5. http://www.economist.com/node/17902729?story_id=17902729

6. Ibid.

Other sources:

http://www.johnkay.com/2011/01/26/the-war-on-moral-hazards-begins-at-home

http://news.bbc.co.uk/1/hi/business/8540020.stm

http://www.youtube.com/watch?v=5lIbWtOvRo8&feature=mcv

Friday 21 January

This week, Francisco presents

“Get rich or die tryin’“: Are we addicted to risk?

“Get rich or die tryin’“ is the title of debut album of rapper 50 Cent and it seems to be the motto of more and more people. Using a revealed preference argument, this make us believe that a significant number of people have preferences where the only satisfactory outcome is the maximum.

And it may be that this kind of behavior/preference is not restricted to a few individuals. We can think that the society as a whole have the same kind of behavior in several different situations:

· We take high risks to find new energy sources (e.g., risky oil drills and nuclear plants);

· We create new financial instruments, sometimes without careful thinking;

· Firms use high-risky/predatory strategies in litigations;

· War.

Are we addicted to risk?

Based on:

http://www.ncbi.nlm.nih.gov/pmc/articles/PMC2528783/?tool=pubmed

http://www.ted.com/talks/naomi_klein_addicted_to_risk.html

http://www.informaworld.com/smpp/section?content=a713937548&fulltext=713240928

http://en.wikipedia.org/wiki/Get_Rich_or_Die_Tryin'_(album)

Friday 13th of January

This week, Jason will introduce our discussion on “How should you have been educated?“

What children should be doing with their time is a topic on which many people, including children themselves, hold strong views, and the same has doubtless been the case for many centuries. Most adults believe that much or all of this time should involve 'education', which many (though surely not everyone!) would define as 'preparation for adult life'. But what is actually seen by the majority of people to constitute an appropriate education seems to vary widely across space and time.

One current trend in many places is towards more regimented activities and more time on academic subjects (and examinations on these) for young children, and away from unstructured play, as discussed for the US in this New York Times article. (link: http://www.nytimes.com/2011/01/06/garden/06play.html) In the UK, the new Education Secretary apparently believes (link: http://www.timesonline.co.uk/tol/news/politics/article7052010.ece) that one should look to the past for the appropriate way to educate children: "Most parents would rather their children had a traditional education, with children sitting in rows, learning the kings and queens of England, the great works of literature, proper mental arithmetic, algebra by the age of 11, modern foreign languages. That’s the best training of the mind and that’s how children will be able to compete."

Meanwhile, Boris Johnson, the mayor of London, bemoans (link: http://www.guardian.co.uk/politics/2010/mar/17/boris-johnson-lobbies-tories-latin-curriculum) the decline of Latin teaching in the UK's state schools. Time for you to introspect – given your current place in society and life, look back on the various elements of your childhood education (from before school through the end of high school, both inside and outside school – so this also includes ‘play’ and ‘extracurricular activities’ of various kinds). Which elements did and didn’t constitute a ‘good’ education for you, given what you know about your adult life now?

Friday 26th of November

This week, Anne will present Does the quest for randomization make us lose sight of interesting research questions?

Does the quest for randomization make us lose sight of interesting research questions?

Randomized control trials are often criticized for low external validity, identifying only point estimates for a heterogeneous population, and not allowing us to understand the mechanisms underlying the effect of an intervention. Another concern, less often discussed, is the fact that the quest for randomization also puts restrictions on the questions that we can answer. Conducting an RCT requires a set of well-defined, measurable outcome indicators. This has made research on health and education particularly popular among development economists. Other interesting topics, such as political accountability or the access to justice, are less suitable for randomization, as outcomes in theses fields are more difficult to measure. As RCTs are conducted in real life time, they also prevent us from answering questions about the long-term change of cultural values, or the inter-generational transmission of ideas. Given that an RCT is a large investment in time and resources, randomistas are also unlikely to experiment with interventions whose effect is uncertain. At the same time, the “new generation RCTs” now use more and more sophisticated outcome indicators and are designed to disentangle different impact channels and understand their interaction (see links below for examples).

Some of the questions we can discuss tonight are “Does the quest for randomization prevent us from answering the most interesting research questions?” “Or does randomization instead guide us to the most interesting questions, as it forces us to think about interventions with strong potential for impact?” “Is randomization in this sense any different from other empirical methods, where the availability of data and the existence of an identification strategy also restrict the questions that can be answered?” “How can we ensure that the methodological concerns do not prevent us from answering the most interesting research questions?”

http://www.annualreviews.org/doi/full/10.1146/annurev.polisci.12.060107.155922

http://aidwatchers.com/2009/07/development-experiments-ethical-feasible-useful/

http://aidwatchers.com/2010/07/is-impact-measurement-a-dead-end/

Friday 19th November

This week, Patrick will present "Should firms be allowed to vote?"

Corporate legal personality seems to have emerged to enable contracting

by firms, and to limit the problems created by personal limited

liability of the owners and of the workers.

But this may have perverse effects.

In January 2010, corporate legal personality has disturbingly led in the

US to invasion of the political sphere by corporations, the free speech

of which is now protected as that of "persons" (under the First

Amendment of the American constitution). (Citizens United vs. Federal

Election Commission) It means corporations are now free to sponsor

advertisements endorsing specific campaign candidates, by ruling of the

Supreme Court. But why stop there? If they are recognized as legal

persons, corporations should also be allowed to vote.

Is this the flip of the coin to excessive limited liability?

To make the case worse, one could argue that limited liability has

largely shifted the risk-bearing of entrepreneurship on owners (vs.

workers) at the corporate level, and it has shifted risk-bearing on

society (vs. owners) at a wider level, resulting in uncontrolled moral

hazard.

So have we gone too far with corporate legal personality, or should we

take it all the way and grant firms the right to vote? Or should limited

liability be relaxed?

Some readings:

* http://www.guardian.co.uk/world/2010/jan/21/citizens-united-supreme-court-ruling

* http://en.wikipedia.org/wiki/Citizens_United_v._Federal_Election_Commission

* Section 4.3 of Laffont-Martimort

Friday 12th November

This week, Kara will present “You’re not the boss of me!”: How do we allocate rights between parents, children, and the state?

The relationship between parent and child is often fraught with conflicts of interest, preference and obligation. For reasons both practical and philosophical, society gives many decision rights to parents regarding their children’s education, health, and social environment, among others. When the interests of the parents and the child conflict, what criteria should we use in allocating decision rights? What is the appropriate role of the state in mediating that conflict of interest? Furthermore, the state is often not an uninterested party in matters concerning children’s upbringing. To use a gratuitous military metaphor, when the battleground for the fight between social welfare and individual liberty is a child, what should be the rules of engagement?

Some interesting issues:

Naming (e.g. the brothers named Winner and Loser)

Education (compulsory attendance, homeschooling)

Health (right to refuse treatment, notification requirements)

Removal (Type I vs. Type II errors)

A few articles just to get you thinking:

Naming: http://news.bbc.co.uk/1/hi/magazine/6939112.stm

Health: http://articles.cnn.com/2009-05-26/us/minnesota.forced.chemo_1_chemotherapy-alternative-medicine-daniel-hauser?_s=PM:US

Removal: http://news.bbc.co.uk/panorama/hi/front_page/newsid_8928000/8928337.stm