PhD Students Grants
Winter 2023 Funding Results
| Transportation Networks and Innovation |
| Researcher: Giorgio Ravalli |
| There is an increasing research focus on the gains that transportation networks provide to local innovation. In this paper, I examine the impact of the construction of the train network in 19th century England on patenting. This research focuses on three potential channels through which train access might impact innovation. The first is an agglomeration effect whereby rail access impacts several macro variables, one of which is innovation. The second is a spillover effect in which knowledge flows are facilitated through cheaper communication costs. The third channel is that the train network connects individuals with locations better suited to their skills than the locations in which they are born; in other words, the train network corrects a misallocation of labour. In "The Use of Knowledge in Society" Hayek discusses the specific knowledge that individuals in different locations possess and how this naturally leads to a decentralised market as each individual can specialize and command a price for their knowledge. The core of my research paper deals with a decrease in communication and transportation costs due to the railway. This represents a shock to Hayek's knowledge market as individuals can move to new locations more easily and provide greater competition to existing industries (represented by Hayek as groups of individuals with specialized knowledge). In particular, one of the main questions my research seeks to answer is whether lower transportation and communication costs lead to industrial concentration or diffusion. Patent data reveals that many inventors had non-scientific occupations (such as carpenters) and either worked with others who may have shared the same occupation, but who presumably had a different "piece" of knowledge or worked with individuals of a different occupation and therefore in possession of a clearly distinct type of knowledge. In Hayek's terms, it is this combination of individuals' specific knowledge stores that creates innovation. Thus, the core idea that greater communication fosters innovation can be traced to this notion by Hayek. More broadly, Hayek's framing of knowledge diffusion as evidence of an efficient market can be tested with the introduction of the rail network – workers should reallocate themselves according to their specializations as local hubs emerge. |
| Women in the Middle East: Educated, Skilled, and Unemployed |
| Researcher: Ola Aboukhsaiwan |
| The integration of women into the formal labour market was described as "the most significant change in labor markets" over the last century (Goldin, 2006). However, this integration has been unequal and has not matched the integration of women into education. In the Middle East and North Africa (MENA) region, women's education levels have been rising but employment levels have been low and stagnant. This research project addresses this labour market puzzle and a broader puzzle: How can we effectively reduce long-term unemployment? In partnership with a government in the MENA region, I will be evaluating the impacts of a re-skilling program, identifying the associated general equilibrium effects, and exploring the role of information treatments in correcting behavioural biases, especially among long-term unemployed (but highly educated) women. This research project is at the heart of Hayek's words on education and the role of government: "There is little reason why the government should not also play some role, or even take the initiative, in such areas as social insurance and education, or temporarily subsidize certain experimental developments" (The Constitution of Liberty, 1960; 2020). In this research project, I explore the role of the state in directing policy changes that are more aligned with the private sector's growing labour demands. In this setting, behavioural biases and incorrect beliefs around the market system have prevented individuals from making fully informed labour market decisions. I hope to explore the role of diffusing information to correct biases and allow the private sector to absorb more of the high-skilled working-age populations that are currently relying on government unemployment benefits. The government is implementing the re-skilling using a method that allows for quasi-experimental analysis. I compare people who receive the re-skilling treatment in a staggered manner over time and also people just below and above the threshold of entry to identify the direct effects of the program. I connect this data with administrative data on the long-term unemployed who were offered treatment to analyze spillovers, as well as heterogeneity in the treatment effects. I hope to generate insights into how information treatments could be cost-effective tools in limiting government dependence, generating productivity gains, and improving market function. Analogously, by addressing labour misallocations and behavioural biases that could be impairing market function, I hope to contribute evidence to a nuanced behavioural framing of the Hayekian idea that the freemarket economy provides the best conditions for workers to find employment and for unemployment to be reduced. This emphasizes the importance of correct and salient information related to market characteristics for allowing the most effective individual production of knowledge which becomes embedded in prices. Allowing both firms and workers to find each other through the "spontaneous order" of the free market economy, innovation, and entrepreneurship is essential for growth and progress. I am grateful for the Hayek grant which has allowed me to conduct research that investigates methods to jointly improve government policy and the structure of the market economy. |
| Estimating the Effect of Online Food Delivery Apps on Consumers and Businesses |
| Researcher: Javad Shamsi |
| Food delivery apps have become increasingly popular worldwide, impacting both consumers and restaurants. They provide convenient food delivery services, but may inadvertently promote unhealthy choices and sub-optimal decisions due to the presence of internalities and externalities. For restaurants, the rise of these apps could either foster a winner-take-all economy, with top restaurants dominating the market, or lower entry barriers, boosting competition and diversity in the food scene. This research explores the multifaceted effects of food delivery apps on the industry, offering valuable insights for policymakers and stakeholders. This project resonates with Friedrich Hayek's emphasis on competition as a cornerstone of free markets and individual liberty. In his book "The Road to Serfdom", Hayek posits that competition prevents the consolidation of economic power and promotes coordination without authoritative interference. Food delivery apps' impact on competition is uncertain: while they may lower entry costs, support niche players, and diversify food offerings, they could also create a winner-takesall economy favoring high-performing restaurants. Additionally, the research addresses potential negative side effects, such as the prevalence of unhealthy options leading consumers to make suboptimal choices. This concern aligns with Hayek's belief that efficient resource allocation relies on complete information for both buyers and sellers |
| Enclosure and Family Dynasties |
| Researchers: Ellen Munroe and Gailius Praninskas |
| Our project investigates the long-run economic effects of the Enclosures Acts in the United Kingdom using historical data from the 18th and 19th Centuries. The Parliamentary Enclosures were a series of acts of parliament which formally "enclosed" parishes, rescinding the common field system and formalising property rights within the enclosed parish. We intend to assess how revoking rights to common pasture while formalizing property rights had impacts on the distribution of both wealth and political power through three specific mechanisms: marriage market patterns, inter-generational wealth transfers, and occupational choice. To do this, we will undertake an effort to combine individual-level data on enclosures, tax records, poll books and genealogical ancestry data tracing the descendants of enclosure beneficiaries. We will digitize and provide this historical data for public use. To our knowledge, we are the first to empirically investigate this topic with individual-level panel data.
Our project relates to Hayek's legacy in several ways. The quintessential Hayekian idea is the efficiency and strength of the free market system, which crucially relies on the existence of well-defined individual property rights. Enclosures provide the ideal case study for studying how private property rights affect economic markets, efficiency, and distribution. Through this, we are able to explore multiple themes in Hayek's work, including how private ownership compares to common ownership, and the sociopolitical consequences of increasing wealth inequality. Historians conjecture that the enclosures played a vital role in the industrial revolution, which, in turn, resulted in the establishment of liberal capitalist regimes. Hayek was concerned with the evolution of the political economy in such states, and the threats to them. By focusing on the formalization of private property rights in this unique setting, we will be able to explore both the consequences of private ownership on the overall evolution of economies and how their citizens have adapted to changing historical circumstances. |
| Democratising Welfare Measurement and Policy |
| Researcher: Jakob Dirksen |
|
F.A. Hayek famously remarked in his Nobel Lecture "... I prefer true but imperfect knowledge, even if it leaves much undetermined and unpredictable, to a pretense of exact knowledge that is likely to be false." (Hayek 1978: 29) The argument here was one against scientism in the economics discipline, supposedly elevated to the status of a quasi-exact cousin of the natural sciences.
Our predominant welfare measurement and policy methods and framework are all, one way or another, taken from the economist's toolkit. And our economist-technocrats and their quantitative measurement may well be subject to a certain scientism and a pseudo-exactness. A 'pretense of exact knowledge that is likely to be false' is worrying especially where it concerns value-laden and reasonably pluralist concepts, such as welfare or well-being. With their aim for exactness and uniformity, our well-intentioned but far from omni-scient technocrats may indeed be getting things awfully wrong. My research will answer the question just by how much we might be getting it wrong. It does so by embarking on a unique and novel data collection endeavour that elicits and then compares welfare measures based on individual preferences and over various aspects or dimensions of welfare to those that technocratic elites do frequently impose. |
| The Use of Knowledge in Policy Implementation Tacit Knowledge and Korean Industrial Policy |
| Researcher: Philipp Barteska |
| This project will contribute to the understanding of two themes of Hayek's work - the use of knowledge in society and the role of the state. It will do so by studying bureaucrats' ability and learning-by-doing in the implementation of industrial policy. It aims toprovide evidence that successful industrial policy relies on bureaucrats' experience in particular sectors and with individual firms, reflecting Hayek's observation of the value of "knowledge of people, of local conditions, and special circumstances".
To estimate the importance of learning-by-doing, the main empirical strategy will exploit the pre-existing variation in industries and firms exporting to the country of each bureaucrat’s 1st assignment to identify effects on subsequent targeting and effectiveness of export promotion measures. This approach exploits plausibly exogenous variation as products that were insignificant for Korean exports at the time of export promotion officers' first appointments, often quickly gained in importance in subsequent years. This gain in importance occurred due to factors unrelated to the individual bureaucrat: the rapid growth and change in composition of Korean manufacturing and national policies such as the Heavy and Chemical Industries drive (1972-1979). This suggests that differential exposure to individual products targeted by this policy drive in the pre-1972 era was likely uncorrelated with other bureaucrat characteristics but significant to their later ability to promote exports in line with national policy. |
| Information Participation: constructs for Web 3.0 |
| Researcher: Georgia Jane Meyer |
|
New versions of the World Wide Web - of internet-enabled information value realisation - are materialising. One is Web 3.0. In this vision, individuals will have access to Personal Data Stores with the aim of granting them more control over their data and the purposes to which it is put. The centralisation that has characterised much of Web 2.0, in both data accumulation and knowledge-creation (via technologies of inference), could be upended. But will this really be the case? And what does individual 'control' over 'personal data' really mean?
One expectation could be that decisions about data sharing are (re)distributed across a decentralised ecosystem of Personal Data Stores that act as gatekeepers to personal data use for governments and enterprises. So how will people make decisions about sharing their data in this new ecosystem? Hayekian ideas about the use of knowledge in society and the nature of decisions being taken at the level of the individual - particularly when there are acute societal and planetary obligations upon us all - offer some inspiration for this work. My research explores these questions about data sharing in the new data ecosystems being built through a range of Web 3.0, and other, technologies. I am interested in understanding the consequences of these emerging technologies, and onto-epistemological questions about the nature of data, on current thinking about individuals, the commons, agency and responsibility in the Information Age. This research is being undertaken with the Inrupt Personal Data Store and the Solid technology developer community launched by Sir Tim Berners-Lee at MIT in 2016. |
| City within a city: local government policy and the spatial concentration of poverty |
| Researcher: Pol Simpson |
|
Cities are often looked to as places of opportunity for those moving away from rural poverty or climate change. However, many urban areas offer a very different standard of living for their poor and rich residents, who live in neighbourhoods which differ in their access to education, healthcare, jobs, commerce and community. Whilst these inequalities are typically understood as the result of market forces, this project explores the contribution of local government policy, such as zoning and the provision of public goods, to the emergence, amplification and persistence of urban inequality.
This project explores three themes in Hayek's work. First, it examines how local governments may be incentivised to exclude certain populations from state benefits, relating to Hayek's argument in The Road to Serfdom that collectivist policies can lead to ill-treatment of 'outsiders'. Second, it considers the informational constraints on policy-making that are central to Hayek's arguments in Economics and Knowledge - exploring what local government may know or anticipate when setting policy. Finally, it explores the emergence of alternative providers of public goods and other 'state' services in informal settlements areas, relating to Hayekian debates about the role of the state. |
| The Macroeconomics of Migration and Remittance Flows |
| Researchers: Aditya Soenarjo and Maria Ambrosino |
In the last twenty years, international migration and remittance flows have increased significantly. In 2019, remittance flows overtook FDI as the largest international capital flows with around $550 billion to developing economies. However, little is known about the drivers of migration and remittance flows and their macroeconomic implications. The goal of this project is to answer the following questions:
This paper aims to analyse a specific mechanism through which remittances work: insurance against asymmetric shocks, as agents work in different countries, and therefore different exposures to the aforementioned shocks. Relative to the literature, our contribution will be twofold. First, we will use modern macro techniques on 'identified moments' to understand the effect of macroeconomic shocks on remittance flows. So far, the literature has not taken this approach. Second, we will build a macroeconomic model in the style of Bewley-Huggett-Aiyagari - a workhorse framework used in macroeconomics - augmented to feature migration and remittance flows. The goal is to quantitatively measure how important remittances are to macroeconomic stabilisation and how it affects the welfare of migrants and their families. |
| Lawyers and development |
| Researcher: Ameek Singh |
|
Rule of law and security of property rights have been identified as the most important institutional pre-requisites for development. However, relationship of private citizens with agencies of the state responsible for security of property rights is everywhere mediated through some form of market for legal representation. Conditional on a system of de jure property rights, market for legal representation plausibly plays a critical role in de facto security of these rights.
Understanding the role of lawyers in the economy is closely related to fundamental themes in Hayek's work. Throughout his writing, Hayek emphasized how market economies gain their efficiency edge by allowing individuals to develop and leverage their specialised skills and knowledge. However, legal professionals are important intermediaries for managing certain important, yet unavoidable, sources of risk for the entrepreneur. Especially in developing countries, both regulatory and counter-party contracting risk distorts the level and shape of entrepreneurial investments. However, even in more developed countries, with fast changing technology of production and trade, lawyers plausibly play an important role of interfacing between the entrepreneur and the state, which lags behind in terms of formal laws regulating new economic frontiers. This project attempts to uncover this critical gap in our understanding of the role that lawyers play in the economy by providing valuable empirical evidence from a cross-country dataset. We aim to generate first-ever evidence about how employment and role of lawyers in the economy evolves along the development path. The process of development is characterised by increasing contribution of manufacturing and services, increasing formalism, and more complex production supply chains. Economic theory (and anecdotal accounts) both point to an increasing role of lawyers in production as economies grow. We also plan to combine this wide-ranging evidence with other datasets to understand drivers of this change, and hence locate sources of value generated by lawyers in the economy, and prescriptions for policy interventions. |
Summer 2022 Funding Results
| Ideology and Innovation |
| Researcher: Marta Morando |
| Innovation is the only way for developed economies to sustain long-run economic growth. In recent years, increasing attention has been devoted to investigating not only the drivers of the overall volume of innovation but also the determinants of its direction. In other words, what determines what gets researched, discovered, and patented?
The aim of this project is to understand how an unexplored channel, political ideology, affects the volume and direction of innovation. First, we plan to study whether the political affiliation of an inventor correlates with the content of their patented innovations. Second, we plan to test the impact of political ideology at the firm-level, analyzing whether political polarization is detrimental to innovation, and whether it can influence its direction. In addition, we aim to study the role of political affinity between inventors and managers.
To perform the inventor-level analysis, we will merge the universe of patents granted by the United States Patent and Trademark Office (USPTO) since 1980 with the universe of registered voters for all U.S. states for which this information is recorded, and publicly available. To perform the firm-level analysis, we will merge the voter registration data with Compustat data linked with patent. In both cases, we will measure political ideology through the party membership of the individual. To match the various dataset at the individual level we will employ a fuzzy merge algorithm on name, surname, middle name and location. Finally, we will construct new metrics of "polarized innovation". We will identify topics that are of interest to individuals of a given party through existing nation-wide survey data, and we will use the patent title and abstract to classify the content of the patent as "polarized" or "neutral". Political ideology is more pervasive now than in the past and this could have enormous consequences, creating fractures among citizens, as well as disrupting economic growth and individual freedom. This last idea was often recurrent in Hayek's works. In his The Road to Serfdom, Hayek warned the reader about the threats of totalitarian regimes, which can affect not only the functioning of markets but also lead to a loss of freedom. This core idea behind The Road to Serfdom reflected the historical background Hayek was living in: despotic regimes were on the rise in many countries, like Germany and Italy, and attempts to limit freedom were common in other countries as well. This scenario is, unfortunately, not so far away from what we are witnessing today. Populism and anti-democratic ideas have recently been on the rise in the majority of Western countries. Political views and attitudes towards integration, trade, education, and civil rights are becoming more and more polarized. But how far can political ideology go? In Hayek's perspective, whenever there is a surge in illiberal political views, the oppression of individual freedoms follows and this, in turn, hinders growth and economic well-being. Our project is closely related to Hayek's view as it aims to investigate whether political ideology can interfere with the individual freedom to innovate. |
| Public or private provision of water supply? The choices faced by water users in nineteenth century provincial England |
| Researcher: Sheila Pugh |
| Water companies in Britain today are blamed for paying dividends to shareholders instead of investing to stop leaks, preventing pollution from sewage and ensuring adequate supplies in times of drought. Similar criticisms were made against the public water corporations on the eve of their privatisation in 1989. The perennial question of whether public ownership of water supply is better than private ownership was also debated during nineteenth century Britain. The dominant historical narrative is that the privately owned joint stock companies providing water in many towns by the 1850's performed badly by supplying water only intermittently, neglecting to supply poor households, and refusing to expand supply to meet growing demand. Municipalisation (public ownership) of joint stock water companies later in the century is thought to have improved social welfare. The research project seeks to challenge this view using a case study of nineteenth century water supply in Midlands' towns. It connects to Hayek's great theme of state versus market provision with Hayek contending that state provision would deprive consumers of choice and eliminate 'competitive experimentation'.
The picture of water supply in nineteenth century Midlands towns that I have already constructed using data from Local Acts shows a rich diversity of provision and dynamic change. Birmingham and some other towns conformed to the prevailing narrative of a joint stock waterworks later municipalised. Other water companies such as the South Staffordshire were never publicly owned, water company takeovers were common and companies continued to be established in smaller towns in the late nineteenth century. On the other hand, water was always publicly supplied in towns such as Coventry. The research project will examine whether competition 'for the field' in water supply improved performance or simply reinforced monopolies. The question links to Hayek's argument that the ease with which firms can enter a market is the most important factor reducing monopoly power. The research will collect evidence on the related question of whether the ability of local government to take over a water company was perceived as a threat and stimulus to improve, or as a profitable opportunity to exit the market. Process tracing methodology will be used to research whether and how municipal takeover changed the nature of water provision. Did local government act to improve social welfare by, for example, extending supply to the poorest houses, often unprofitable for a privately owned company? Or was the behaviour of the town's water committee similar to that of a water company's directors and aimed at generating a surplus on the water revenue account? By collecting evidence on the varied incentives and performance of the different forms of water provision in nineteenth century Midlands' towns, the research aims to contribute to the Hayekian debate on the role of the state and the nature of markets. |
| A Neo-Hayekian Solution to Social Loafing on Collective Climate Action |
| Researcher: Anandita Sabherwal |
| Rising global temperatures, our consistent failure to meet emission reduction targets, as well as analyses of consumer and citizen behaviours show that we have failed to address the collective, global, problem of climate change (Brick et al., 2021; Nielsen et al., 2022). In this research, I propose that the collective nature of climate action could be an impediment to pro-environmental effort. Research in the fields of psychology and economics attributes reduced contributions in collective tasks to their tendency to social loaf-expend lower effort when working on a task with others (Simms & Nichols, 2014).
The present research proposes a neo-Hayekian approach to deter individuals from social loafing on collective pro-environmental behaviour. Hayek underscores the dispersed, decentralised, and complex nature of knowledge and advocates for individual choice instead of central planning (Hayek, 1945). However, advances in behavioural science show that individuals often err due to attentional deficits and behavioural biases (Sunstein, 2021). How can errors in individual decision-making be addressed without infringing liberty? A neo-Hayekian perspective seeks to understand the decision making of well-informed, behaviourally unbiased individuals (Sunstein, 2021). According to this perspective, if providing epistemically favourable conditions can address errors in decision-making, then choice-architects should focus on information provision rather than enforcing coercive measures and mandates on individuals (Sunstein, 2021). The present research responds to the call for more empirical research in this domain. I will experimentally test if informing people about the efficacy of their actions– that they will act as role models and that their actions will inspire other group members to follow suit, can deter them from loafing on pro-environmental behaviour. Hayek claims that in a market economy, prices are signals that aggregate various pieces of information to guide individual decision making (Hayek, 1945). I extend Hayek's understanding of signals to information sources beyond prices. I propose that in the context of collective effort performed in groups, information about prices (and costs) may be insufficient or unavailable. Instead, people consider the efficacy of their actions when making decisions. I reason that the social influence exerted by individual contribution aggregates complex information about a) status in the group b) values and preferences of the group and c) Usefulness of individual contribution. As such, I theorise that information about the social efficacy (or social influence) of individual contribution guides decisions about engaging in collective effort. |
| The Financial Channel of Carbon Policy |
| Researcher: Adrien Couturier-Roquet |
| Resorting to a classical Hayekian idea, the European Union designed in 2005 a new market for carbon permits: the European Pricing Scheme (ETS). The ETS has imposed a significant cost on the regulated firms, and as revealed by their financial statements they expect these costs to rise: I refer to this as the "forward guidance carbon pricing policy". Because of this policy, polluting firms will need to switch into green technologies to keep operating profitably. However, switching away from brown technology requires substantial upfront investment, which in most cases will require external financing. As a result, one can expect financially unconstrained firms to become green faster than those experiencing tight financial conditions. Financially constrained firms that don't adopt green technologies will then keep facing an increasing price of carbon which will further deteriorate their balance sheet and in turn make it more difficult for them to secure the funding required to switch to the green technology, thus trapping them in a "brown trap".
This project will study the potential reallocation effects induced by financial frictions in the presence of a forward guidance carbon pricing policy. Specifically, it will ask "will the ETS reallocate resources from financially constrained firms to financially unconstrained firms"? Merging balance sheet data from WorldScope with 2019 survey data on CO2 emissions from CDP I have shown that, ceteris paribus, firms that are more carbon intensive face higher interests on their debt. In this project I will explore this "brown premium" further by looking at its evolution over time (expecting it to rise as the ETS becomes more stringent) and will provide further empirical evidence on the relationship between financial constraints and carbon intensity. The main contribution will be to embed these data in a quantitative heterogeneous firms model with technological choice featuring a "brown trap" mechanism. The model will be informative about policy counterfactuals such as optimal green bond issuance or targeted subsidies. It was Hayek's ambition to use economic theory to answer some of the big questions of his time. This project will focus on the effectiveness of Hayek's cherished decentralized price system in tackling one of the biggest challenges of time: climate change. My model will be able to speak to some of Hayek's topics of predilection: the interaction of investment, credit, and financial conditions, the effectiveness of state interventions, and the efficiency of decentralized decisions allowed by price systems. In particular, one of the central tenets of Hayek work was the importance of credit markets and financial conditions for the efficient allocation of capital. In fact, he often emphasized how capital misallocation could arise from ill-functioning financial markets. The main focus of this project is exactly to study the mechanism through which financial frictions and carbon price can lead to a reallocation of capital across firms. |
| The Real-Financial Disconnect: Why Haven't MPKs Converged in Europe |
| Researcher: Marco Bellifemine |
| This project begins by documenting a puzzling and largely underexplored fact: unlike financial returns, the real rates of return on capital across different Euro-zone countries have not converged. This disconnect between real and financial returns motivates this project's question: "Why have financial returns converged in Europe, while real capital returns haven't?".
The project will comprise three parts. First, it aims to produce an "Atlas of Capital Returns", to be made publicly available online, by rigorously computing capital returns for different Euro countries. In particular, I plan to work on disaggregated data and compute capital returns at the firm -and possibly plant- level. This would allow to document potential regional heterogeneity in the marginal product of capital. Next, I will move to develop and test potential explanations for the real-financial disconnect, which will involve a mix of theory and data. A promising explanation is given by the presence of heterogeneous idiosyncratic risk in investment across countries. This feature, coupled with the fact that non-financial investment is usually non perfectly diversifiable, would endogenously deliver heterogeneous aggregate rates of return across countries. Finally, I will develop framework to address questions such as the design of union-wide fiscal policies or the heterogeneous transmission of aggregate shocks across different Euro countries, in the presence of heterogeneous rates of return on capital. The role that capital and investment have in driving economic outcomes in general, and business cycles in particular, has been a central tenet of Hayek's ideas. In fact, he deemed the subject so important to devote a full book to it, "The Pure Theory of Capital". This project, by focusing on capital returns, their heterogeneity across countries, and the implications that this heterogeneity has for the transmission of aggregate shocks, relates very closely to this recurrent theme in Hayek's work. Moreover, by looking at the disconnect between real and financial returns, this project tackles one of the central messages in Hayek: that the "widely held idea that capital consists of (or is) a definite collection of instruments combined in fixed proportions [...] would appear to be without any foundation in real facts". Similarly, Hayek noted that competition between investors should lead to some form of convergence in the rate of return on capital, to the extent that investment is mainly driven by "the foresight of the entrepreneur capitalist" whose objective is to "attempt to maintain his capital so that it will yield the greatest possible return". This argument lies at the basis of the puzzling real-financial divide that this project documents |
Michaelmas 2021 Funding Results
| From Fixed Contracts to Free Markets: The Welfare Effects of Liberalizing Pakistan's Electricity Sector |
| Researcher: Tim Dobermann |
| Picture a planner in a developing country deciding on critical investments into electricity generation. Before them lies a suite of options: the capacity of the power plant, the fuel used by the generator, and the variable costs proposed by a contractor. When evaluating each proposal they must not only consider what is efficient and cost-effective today but what will be so in the future. Invest too little and the country will face blackouts; invest too much and the country must shoulder the fiscal consequences. Looming over their decision is the knowledge that their choice will stand for two to three decades, must cover demand over this rapidly changing period, and can only be reversed at great cost. A rigid power purchase price, sealed by a fixed contract, sets in stone the decision. Do we expect the planner to have made the right choice? Unlikely. Can we, however, even ascertain what the right choice in this story is? Again, unlikely. Predicting demand or cost changes year by year can be fickle, let alone over decades.
Instead of determining these contracts ex-ante, we could draw from classical Hayekian ideas by introducing a market that lets producers rapidly respond to "changes in the particular circumstances of time and place". This project will evaluate the welfare effects of the introduction of a wholesale market for electricity generation in Pakistan. This market will replace an age-old system of rigid contracts negotiated and set by centralized planners, offering a unique opportunity to study the ideas famously set out by Hayek on the role of markets in harnessing decentralized knowledge to improve the welfare of society. Records on existing power purchase contracts will be assembled to examine what happens to the cost of supply after the market is introduced in April 2022. Drawing on a long-standing engagement with the federal government of Pakistan with co-authors, I will use confidential electricity billing and firm tax data to measure the welfare effects of the (hypothesized!) price changes from the market reform. Over time, but beyond the scope of this grant, I will examine changes in investment following the introduction of the market, notably whether there is an entry in other cost-competitive technologies like solar that may have been previously disadvantaged. |
| The Use of Knowledge in Policy Implementation Learning to Implement (Industrial) Policy: Evidence from Three Decades of IP in Korea |
| Researcher: Philipp Barteska |
| This project will contribute to the understanding of two themes of Hayek's work -- the use of knowledge in society and the role of the state. It will do so by studying bureaucrats' ability and learning-by-doing in the implementation of industrial policy. It aims to provide evidence that successful industrial policy relies on bureaucrats' experience in particular sectors and with individual firms, reflecting Hayek's observation of the value of "knowledge of people, of local conditions, and special circumstances".
To estimate the importance of learning-by-doing, the main empirical strategy will exploit the pre-existing variation in industries and firms exporting to the country of each bureaucrat's 1st assignment to identify effects on subsequent targeting and effectiveness of export promotion measures. This approach exploits plausibly exogenous variation as products that were insignificant for Korean exports at the time of export promotion officers' first appointments, often quickly gained in importance in subsequent years. This gain in importance occurred due to factors unrelated to the individual bureaucrat: the rapid growth and change in composition of Korean manufacturing and national policies such as the Heavy and Chemical Industries drive (1972-1979). This suggests that differential exposure to individual products targeted by this policy drive in the pre-1972 era was likely uncorrelated with other bureaucrat characteristics but significant to their later ability to promote exports in line with national policy.Instead of determining these contracts ex-ante, we could draw from classical Hayekian ideas by introducing a market that lets producers rapidly respond to "changes in the particular circumstances of time and place". This project will evaluate the welfare effects of the introduction of a wholesale market for electricity generation in Pakistan. This market will replace an age-old system of rigid contracts negotiated and set by centralized planners, offering a unique opportunity to study the ideas famously set out by Hayek on the role of markets in harnessing decentralized knowledge to improve the welfare of society. Records on existing power purchase contracts will be assembled to examine what happens to the cost of supply after the market is introduced in April 2022. Drawing on a long-standing engagement with the federal government of Pakistan with co-authors, I will use confidential electricity billing and firm tax data to measure the welfare effects of the (hypothesized!) price changes from the market reform. Over time, but beyond the scope of this grant, I will examine changes in investment following the introduction of the market, notably whether there is an entry in other cost-competitive technologies like solar that may have been previously disadvantaged. |
| Hayek Redux: Bankruptcy, Leverage and Productivity Growth |
| Researcher: Johannes Matt |
| Innovation is risky. Its outcomes are highly uncertain. Entrepreneurs spend vast sums of their own money in the hunt for the next big thing. Some succeed, many fail. A well-structured bankruptcy code provides the institutional underpinning for successful innovation. It is the safety net for entrepreneurs to fail and try again.
Over the last decade international bankruptcy law has undergone sweeping changes. The European Commission has been pushing for a long-overdue harmonisation across member states. Across the pond, the U.S. bankruptcy code has been amended numerous times in recent years. The trend has gone towards making laws more creditor-friendly while trying to maintain protection for creditors. The aim of this project is to analyse how bankruptcy laws affect innovation and economic growth. A well-known trade-off in economic theory is between exploitation of well-known concepts and the exploration of new ideas. Small, incremental innovations and the exploitation of minor improvements can contribute to sustained economic growth. But it is the big ideas that push the technological frontier. The optimal design of the bankruptcy code is about how we can ensure sufficient exploitation of ideas, while encouraging the development of new, cutting-edge innovation. Throughout his work on free banking, Hayek has emphasised the importance of financial intermediation, credit and credit liquidation for economic growth. In an interview with the newspaper The Times in the autumn of 1980, Hayek stressed the importance of tight bankruptcy laws for economic growth pointing out that "all that bankruptcy does is to remove an inefficient management and give someone else the chance to take over. Britain would have been much better, in fact, if it had had bigger and better bankruptcies" (Bradley 1980). Bankruptcy regulation has been at the forefront of Hayek's work on the Great Depression of 1929. In his 1933 essay The present state and immediate prospects of the study of industrial fluctuations, Hayek highlights the importance of firm liquidation to escape the deflationary pressures of financial crises. In fact, Hayek argues that it is exactly aggressive liquidation of unproductive firms that can contribute to long-run economic growth. |
| The Macroeconomic Implications of Bankruptcy Moratoria |
| Researcher: Yannick Schindler |
| This research project explores the large fluctuations in corporate bankruptcy rates and capital re-allocation that occur across the business cycle. In particular, this project provides theoretical evidence that the degree to which capital can freely re-allocate across an economy is an important factor driving bankruptcy rates. This evidence is puzzling as it contrasts sharply with a common narrative classically told about macroeconomic fluctuations: an economy that can more flexibly adjust where capital and labour are allocated can better weather a recession than an economy in which capital and labour are very rigid and fixed. How can an economy that features both the possibility of corporate bankruptcy and capital re-allocation feature deeper and more prolonged recessions than a more rigid economy? Because of the rich interaction between a) changes in corporate bankruptcy rates, b) the cost of capital, and c) capital re-allocation away from firms that are at a high risk of bankruptcy and towards firms that are less at risk of bankruptcy. In effect, capital flows away from firms who are at risk of going bankrupt at exactly the time when keeping capital with those firms is most important for attenuating the impact of a recession. At its current stage, the project relies on micro-founded modelling to shed light on the rich feedback loops between the rate of bankruptcies and the degree of capital re-allocation in the economy. Early theoretical results already suggest that inserting bankruptcies into a structural model in the real business cycle tradition generates significant room for welfare enhancing policies that try to mitigate bankruptcy rates following a negative shock to the economy.
The research themes in this project relate to theories of the business cycle, which were of significant interest to Hayek and the subject of much of his work in the 1920s and 1930s. Furthermore, the findings of this project are informative for policies that amend, at the national level, bankruptcy procedures such as the bankruptcy moratoria enacted in many countries during the COVID-19 crisis. These market interventions would likely have been of interest to Hayek given his belief in laissez-faire market mechanisms and aversion to state intervention. It is through both the study of business cycles and the focus on the welfare implications of state-enacted bankruptcy moratoria that this research project relates to Hayekian ideas. Furthermore, given the widespread, and unprecedented, enactment of national bankruptcy moratoria during the COVID-19 crisis, this research project is both timely and relevant to the current discussion of optimal state interventions following sudden shocks like the COVID-19 pandemic. |