Ülo Ennuste Economics

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Survey speech: On optimal socio-economic public knowledge mechanism design

 Survey speech: On optimal socio-economic public knowledge mechanism design

2.XI 09

“Depending on which shared knowledge prevails, change may be favoured or deterred.”  

 

Paolo Ramazzotti. 2005(?). “ Knowledge and macro-coordination” preliminary version – do not quote, Google.

There are at least two excuses for me to talk to you here: first to make an apology to Prof Ramazzotti that I could not resist, and had publicly quoted one of his 2005(?) papers several times, although I have found it in Google with the warning “do not quote”.

But I just thought that this caveat could have been valid before the crises, and certainly not any more. Indeed, before one could argue snobbishly that given motto is perhaps not broad enough etc. But just now, in the midst of crises, it sounds extremely actual, like: 1) significant sources of the crises may have been in the low quality regulation/coordination  mechanisms of the building of the national public socio-economic knowledge structures and information acquisitions 2) perhaps there are available some implemental modern knowledge based institutional-theoretic instruments to enhance the quality of these mechanism and so the quality of the prevailing “shared knowledge” 3) the expression “which shared knowledge prevails” seems especially challenging for the mathematical modeller; which indeed: scholarly knowledge or mythological beliefs? hard or soft knowledge? truthful or manipulated? or bubble-beliefs and bubble-ideas and bubble-valuations/ideas prevail. And how this prevailing works etc. These problems widely discussed e.g.

Martin Wolf: “As Mr Smithers remarks sardonically: “Invalid approaches to value typically belong to the world of stockbrokers and investment bankers whose aim is the pursuit of commission rather than the pursuit of truth.”” FT 27 Oct, How mistaken ideas helped to bring the economy down.  

And secondly:

“In their pursuit of tractable models, economists have made over-simplified and misguided assumptions concerning of human agents, markets and other institutions, rather than engaging adequately with the complexities of the real world.”

 

Geoffrey M. Hodgson (Press Release, Oct 09)

With all my deep respect to Geoffrey, in my report here I am trying to give a little counter-argument to this his statement. Indeed, from the point of socio-economic design theories, which are based heavily on mathematical game theories (no much neatness in these coordinated and Bayesian extended games), with the main theme as agents strategic behaviour (deceptiveness, manipulations, bubble-making etc), with the main task to correct markets mechanisms and other institutions imperfectness and optimally adapt these to contemporary environmental conditions (especially to modern information technology and turbulent socio-economic developments) and that by meta-synthetic, heuristic etc workhorse implementation methods to combine evolutionary theories and abstract formalized results etc – the Geoff’s statement seems to me a bit overstrained, and I am sorry to say, it has, to my mind, already a bit contaminated e.g. even Estonian public economics knowledge structure.

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As a matter of fact, one lesson from the crisis certainly is the need for more effective and complex high quality institutionalized socio-economic regulation systems ( it seems that the lessons of the crises have already in general suggested that we have to move  to more regulative varieties of democratic liberal market capitalism, see e.g. BOX 1), and it seems this lesson should be extended on the enhancement the quality of  building public socio-economic knowledge/belief structures: to adapt respective data basis to the modern IT possibilities and turbulent socio-economic developments, especially as the decision making base to come more effectively out of the crises (as in the crisis erroneous over-optimistic statements may dominate (B2C), especially from manipulations of incumbent coalition and government and so to defer recovery etc).

And it seems that especially in this crises, first serious in the IT age, of  serious socio-economic crises and turbulences, the shared knowledge that prevails in societies is, in general, loosing much quality and adequacy, as being at least too much lagging behind events, and frequently also politically and managerially most excessively distorted/biased,  manipulated (B2), not sufficiently in proper detail any more, and most importantly, contaminated with ignorant messages by masses acting in the information networks, not in sufficient truthfulness and excessive neg-entrophy, not transparent etc. And most importantly, in the crisis situation, it seems the theme of information games with active deception come specially on the fore  The theme of active deception is to manipulate the decisions of a decision-maker by changing its base information in favour of a deceiver. Generally speaking, the purpose of deception is to conceal reality by inserting “noise”, or to mislead the decision-maker with biased information. Although deception has received a lot of attention, to date, the literature on deception is still relatively sparse.

 In other words, public announcement mechanisms are not spontaneously and evolutionarily adapting sufficiently quickly and time consistently in the extant regulative frameworks – although there may be in the  mechanism/institution theories’ tool-kits many good instruments and principles to help on designing more effective regulative systems.

And now the most critical question to the institutional economists is what  theoretical recent results of the game theoretic mechanism/institutional design, could/should be implemented to make national public knowledge systems building mechanisms more valuable for complex socio-economic decision making, and also for more effectively recognize in these structures the deterring complex risk phenomenon bubbles growing – that in the midst of crises and thereof in turbulent/volatile global information environment.

The main problem is that general well-designed mechanism building for national socio-economic knowledge structures is extremely large and complex (see Annex A) problem. In the rigorously formalized ways these are tractable only by decomposed/separated parts of it (e.g. B3-4). So, un-happily, we are facing un-convenient problems of synthesis (B5) of these partial mechanism. One suggestion for operational analyzing these synthetic issues is in the t BOX 6.

Instead of conclusion: Guidelines to designer of  public socio-economic knowledge/belief structure building mechanisms

Idiosyncrasies of the design problem:

Information comes form heterogeneous strategic actors (political camps, business, stock market, macro- and microeconomic schools, internal and external etc) at different activities and with different rationalities, learnedness, moralities etc, actors with multidimensional targets.

Quick announcements avalanches especially due to the modern information technology (possibly enabling quick contamination of national knowledge structures (possibly by speculative currency attics, foreign general cyber-attacks etc) especially in crisis situations.

Quality indicators of knowledge basis and announcements:

uncertainty indictors (neg-entrophy, confidents intervals, data dispersions, truthfulness assessments …) fullness of reports (proper fields, aspects, states, aggregates, disclosure in proper details …) transparency (logical rigour, contradictions …).

Synthesise hybrid (evolutionary experience and theoretical constructions) regulation (coordination and monitoring) mechanisms designs (by hierarchical state authorities (coalition and opposition), combined with competitive civil networks and complex coordination (e.g. economic and political sector).

Coordination objects/preferences and periods:

moral behavioural values and motives of the actors (reputation, credibility, rationality, …) permanently

material values of the actors permanently

Coordinative motivating instruments:

incentives (real side-payments and imaginary (e.g. decorations) possibly as complementary side payments and in properly sequentially …)

constraints (laws, directives, norms …)

consultation/mentoring (technological, strategically, statistical, educational …)

Knowledge basis and communications quality enhancements:

media data (quotations of sources, constraints for incompetent professional announcements and hoaxes …)

statistics (adequate speed, adequate dimensionality, in necessary detail, transparency, credibility metric: e.g. GDP statistics by monthly, Gini by quarterly …)

predictions (continuously adaptable, statistical characteristics of predictions: e.g. unemployment, national net and gross external debts …)

research (national teams on all nationally significant fields…).

Institutional:

amendments of constitutions (freedom of speech specifications, clauses of protection of national knowledge base, social and human capital, e.g. prohibition of the denial of the fact of occupation …)

laws (e.g. voluntary codes of data disclosure and transparency enhancements for corporations à la Sir David Walker initiative)

directives, norms, decision norms (formal and informal, mandatory and voluntary  …)

media institutional regulations (e.g. curtailing the meddling of political bosses and tycoons in the editorial work etc)

organizations, networks functioning quality (governmental and non-governmental e.g. permanent inspective and monitoring activity …).

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BOX 1

Regulatory capitalism and the reassertion of the public interest

David Levi-Four. 2009. Policy and Society, 27, 181-191

Abstract

Neoliberalism has not led to the retreat of the state but instead to the restructuring of the state. This has led to new forms of  governance where regulation represents the expanding part of government, and where the various models of governance compete and sometimes are synthesized into global forms of regulation. It will be discussed where such forms have emerged, and where they are yet to emerge. In this new order, best described as regulatory capitalism, the regulatory state meets the regulatory society and actors’ demand for and supply of regulation is ever expanding. Rule- making, monitoring and enforcement are becoming increasingly important for democratic policy making. It is being asserted that varieties of regulatory capitalism are produced by the interaction of varying degrees of civil- and state-regulation and variations in the composition of the networks that serve as the backbone that transform autonomous jurisdictions to interdependent ones. Accordingly the paper distinguishes between Corporatists, Pluralist, Command & Control and Laissez-Faire forms of regulatory capitalism.

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BOX 2

A) The value of a stochastic information structure

Yaron Azrieli, Ehud Lehrer. 2008. Games and Economic Behavior 63 679–693.

Abstract

Upon observing a signal, a Bayesian decision maker updates her probability distribution over the state space, chooses an action, and receives a payoff that depends on the state and the action taken. An information structure determines the set of possible signals and the probability of each signal given a state. For a fixed decision problem, the value of an information structure is the maximal expected utility that the decision maker can get when the observed signals are governed by this structure. Thus, every decision problem induces a preference order over information structures according to their value. We characterize preference

orders that can be obtained in this way. We also characterize the functions defined over information structures that measure their value.

B) Information structures with unawareness

Jing Li. 2009. Journal of Economic Theory, 144,  977–993

Abstract

I construct a state space model with unawareness following [R.J. Aumann, Agreeing to disagree, Ann.

Stat. 76 (1976) 1236–1239]. Dekel et al. [E. Dekel, B.L. Lipman, A. Rustichini, Standard state-space models preclude unawareness, Econometrica 66 (1998) 159–173] show that standard state space models are

incapable of representing unawareness. The model circumvents the impossibility result by endowing the agent with a subjective state space that differs from the full state space when he has the unawareness problem.

Information is modelled as a pair, consisting of both factual information and awareness information. The model preserves the central properties of the standard information partition model.

“There are things we know that we know. There are known unknowns – that is to say, there are things that we now know we don’t know. But there are also unknown unknowns. There are things we do not know we don’t know.”

Donald Rumsfeld, former U.S. Secretary of Defence

C) Information, decision-making and deception in games

Dengue Li , Jose B. Cruz Jr. 2009. Decision Support Systems (in press).

Modelling deception in a real-world conflict situation is usually difficult. For a better understanding, we study deception through a fundamental relationship between information and decision-making. Under a

probabilistic framework, we consider a zero-sum game with an asymmetrical structure, where player 1 receives additional information and player 2 has the potential to inject deception. We derive accuracy

conditions on the information obtained by player 1, which can lead to a better decision. The feasibility of deception is further explored, which is conditioned on the quality of deceptive signals generated by player 2.

We classify deception into passive and active deception.

D) Evolutionary example: Pope Benedict XVI’s “Caritas in Veritate”: It is Man’s Selfish Use of Markets, Globalization That Is The Problem

The Pope on “Love in Truth” by Father Robert Sirico from the Wall Street Journal is a penetrating analysis of Pope Benedict XVI’s latest encyclical on the economic crisis, “Caritas in Veritate”.

Sirico points out that Pope Benedict doesn’t condemn markets, globalization – but rather man’s selfish uses of these instruments.

Caritas in Veritate by Pope Benedict XVI

Democrats Link Pope’s ‘Economic Justice’ Plea With Obama Agenda

Caritas in Veritate is an eloquent restatement of old truths casually dismissed in modern times. The pope is pointing to a path neglected in all the talk of economic stimulus, namely a global embrace of truth-filled charity.

Benedict rightly attributes the crisis itself to “badly managed and largely speculative financial dealing.” But he resists the current fashion of blaming all existing world problems on the market economy. “The Church,” he writes, “has always held that economic action is not to be regarded as something opposed to society.” Further: “Society does not have to protect itself from the market, as if the development of the latter were ipso facto to entail the death of authentically human relations.”

The market is rather shaped by culture. “Economy and finance . . . can be used badly when those at the helm are motivated by purely selfish ends.

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BOX 3

Correlated Types and Bayesian Incentive Compatible

Mechanisms with Budget Balance

Masaki Aoyagi. 1998. Journal of Economic Theory 79, 142-151.

Abstract

This note presents a condition which guarantees the existence of a Bayesian incentive compatible mechanism with budget balance when agents have quasi-linear utility functions. This condition requires correlation among agents’ private signals (“types”), and is (1) simple and easy to verify, (2) good for any decision rule whether efficient or not, (3) valid even if agents’ types are mutually payoff-relevant, and (4) true for almost every

probability distribution of agents’ types.

Key Words: mechanism, transferable utility, budget balance, correlated types, complementarities condition.

***********************************************************

BOX 4

Behavioral aspects of implementation theory

Hitoshi Matsushima. 2008.  Economic Letters.

Abstract

We incorporate behavioral economics into implementation theory, where each agent dislikes telling a white lie. By using a single detail-free

mechanism, any alternative can be uniquely implemented as long as the agents regard this alternative as being socially desirable.

Keywords: Behavioral economics; Implementation theory; White lie aversion; Detail-freeness; Possibility theorem

*************************************************************

BOX 5

Meta-synthesis approach to complex system modeling

Jifa Gu, Xijin Tang. 2005. European Journal of Operational Research. 166 597-614.

Abstract

Meta-synthesis method is proposed to tackle with open complex giant system problems which cannot be solved by traditional reductionism methods by a Chinese system scientist Ian, Queen (Stein Shushed) around the early 1990s. The method emphasizes the synthesis of collected information and knowledge of various kinds of experts, and combining quantitative methods with qualitative knowledge. Since then, continuous endeavors have been taken to put those ideas into practice. In this paper, firstly we review meta-synthesis approach and other research relevant to

complex system modelling briefly. Then we discuss two main issues, model integration and opinion synthesis, which are often confronted when applying meta-synthesis approach, together with an exhibit of the development of an embryonic meta-synthetic support prototype. Such a demonstration shows how to model complex problems, such as macroeconomic problems in Hall for Workshop on Meta-Synthetic Engineering with versatile resources in information collection, model integration and opinion synthesis. Finally, some future work is indicated.

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BOX 6

A) A Linear Planning Analysis of Institutional

Structure in the Economy

Ülo Ennuste. 2003.  http://pdc.ceu.hu/archive/00001564/01/linear.PDF

Abstract

The paper uses the paradigms of the New Institutional Economics to

quantify a linear optimal choice model to design perspective

institutional clusters for a national economy. This model uses binary

integer institutional choice variables and structural parameter values

based on subjective probabilities collected from experts by calibration

questionnaires.

The optimization goal may be e.g. a high expected probability of

stable national economic performance under socio-economic

development-credibility constraints, dependent on the realization of

prospective significant events. The model may be useful as a

complementary tool for the social design of the effective institutional

structure, and especially for evaluation of the socially optimal values

of co-coordinating shadow prices and implementing side-payments in

the political institutional design game.

We use the Estonian case as an example. The model variables

and data calibration table illustrations are provided mainly to

demonstrate the broad spectre of issues that may be involved in this

analysis.

B) INFORMATION IN MECHANISM DESIGN

 

Dirk Bergemann and Juuso Välimäki. 2005. COWLES FOUNDATION DISCUSSION PAPER NO. 1532

COWLES FOUNDATION FOR RESEARCH IN ECONOMICS

Abstract

We survey the recent literature on the role of information for mechanism design. We specifically consider the role of endogeneity of and robustness to private information in mechanism design. We view information acquisition of and robustness to private information as two distinct but related aspects of information management important in many design settings. We review the

existing literature and point out directions for additional future work

Keywords: Mechanism Design, Information Acquisition, Ex Post Equilibrium, Robust Mechanism Design, Interdependent Values, Information Management.

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BOX 7

Mechanisms for sharing knowledge in project-based organizations

Wai Fong Boh. 2007. Information and Organization, 17, 27-58.

Abstract

Organizations need to effectively combine and utilize knowledge resources that are distributed amongst the employees and groups in the firm. This paper examines the use of knowledge-sharing mechanisms to leverage the learning, experience and expertise of employees accumulated across projects. I specify a framework that classifies the knowledge-sharing mechanisms used by project-based organizations. Prior research tends to examine only one dimension of knowledge-sharing mechanisms

– personalization versus codification. Personalization mechanisms are often assumed to be more ad hoc and informal, and codification mechanisms are assumed to be formal and involve the use of electronic databases. In this paper, personalization versus codification and individualization versus institutionalization are highlighted as two distinct dimensions of knowledge-sharing mechanisms. Individualized knowledge-sharing mechanisms are informal and unstructured, while institutionalized knowledge-sharing mechanisms are formal and embedded in organizational routines

and structure. A framework is presented to show how the two dimensions interact. Based on empirical case studies in two project-based organizations, the paper examines if there are suitable configurations of knowledge-sharing mechanisms for organizations with different characteristics.

The study contributes to research by providing a more nuanced classification of knowledge-sharing mechanisms, and provides guidance to managers about the types of knowledge-sharing mechanisms that should be adopted based on the size, geographical dispersion and task nature of organizations.

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BOX 8

Sir David Walker’ Guidelines for Disclosure and Transparency in Private Equity

21 Nov 2007. Source: Jeffrey Pellin Consultancy. Sir David Walker

Sir David Walker has published his Guidelines for Disclosure and Transparency in Private Equity, recommending that both private equity firms and their portfolio companies disclose more information. However, the private equity business will remain a private business and Sir David does not see the need to make it wholly transparent.
The guidelines are a measure of self-regulation of the industry and apply to those buy-out firms that own or look to invest in larger UK companies.

Private equity firms are now required to publish an annual review or regularly update their websites to show information on their portfolios and investor base. They should use established guidelines for reporting to LPs and for the valuation of investments, and communicate promptly with their portfolio companies’ employees, particularly in times of strategic change.

Portfolio companies will need to publish an annual report and accounts to include enhanced disclosure on their website within six months of year-end. They should also publish a mid-year update no later than three months after mid-year. Sir David wants to apply section 417 of the UK Companies Act 2006, including sub-section 5 that otherwise applies only to quoted companies, to the private equity industry’s portfolio companies as well, calling for an indication of trends and factors likely to affect a company and to include information on the company’s employees, environmental matters, and social and community issues.

Annex A:  On complex efficiency of  an announcement

Algebraic form of a  complex number z  (i – imaginary unit)

Polar form z=r(cosφ + isinφ) and   ˉz/z=r/r(cos(ˉφ- φ) + isin(ˉφ- φ)).

Interpretations: 

z is the model of complex announcement,  

x and y  –  probabilities (non-commensurables) that announcement is increasing the expected value of the Bayesian information structure (expected values of the optimal decisions) accordingly for sectors Re and Im. Note: negative x and y – absolute values describe probabilities that expected values of optimal decision will decline accordingly for sectors.

Define ideal announcement as  z* where x*=y*=1, and complex efficiency of an announcement z as z/z*= i.

It is easy to see that for the monitor complex non-detrimental (positively effective) announcements belong to the first quadrant x,y>0, and the task of the coordinating mechanism is to coordinate/enforce all announcements into this quadrant, possibly close to the ideal direction.

E.g. let us consider a societal sustainability model, decision based on Bayesian knowledge structure, containing two sectors: Re economic and Im political.

Let the announcement make publicly more prevailing knowledge: 0-profit tax is optimal.

Easy to see that the emitted announcement may increase the probability of political  sustainability (as it may be in the coalitions agenda), and may decrease probability of economic sustainability (as the statement may e.g. economical error  based on “post hoc, ergo propter hoc” error).

For knowledge structure regulating mechanism the main task is to enhance the complex quality of the structure, id est., to stipulate only complexly effective harmonized announcements.

Annex B: Public Information, Private Information, and the

Multiplicity of Equilibria in Coordination Games1

Christian Hellwig

Journal of Economic Theory 107, 191–222 (2002)

I study coordination games with incomplete public and private information and

relate equilibrium convergence to convergence of higher-order beliefs. As the

players’ signals become more and more precise, the equilibrium manifold converges

to the correspondence of common knowledge equilibria, whenever the variance of

the public signal converges to 0 at a rate faster than one half the rate of convergence

of the variance of private signals. The same condition also determines the

convergence of common p-belief to common knowledge, which leads to a simple

intuition for its origin and an immediate generalization of the former results about

equilibrium convergence. Journal of Economic Literature Classification Numbers:

C72, D82. © 2002 Elsevier Science (USA)

Key Words: global games; equilibrium convergence; common knowledge; higher order

beliefs.

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November 2, 2009 - Posted by | Uncategorized

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