Applying Behavioral insights in design of public policy

SAUGATO DATTA and SENDHIL MULLAINATHAN have written a comprehensive review showing how behavioral research findings can be applied to make public policy more effective. The authors asset that applying behavioral economics is not simply about intuition or about trial and error. It is a scientific, systematic approach to defining, diagnosing and designing solutions to problems in many different areas.

Behavioral economics helps program design in three ways.

  • First, it changes how we diagnose problems. For example, we are usually tempted to conclude that parents do not understand the value of vaccination. Behavioral economics suggests that perhaps they don’t get around to doing it.
  • Secondly, it changes how we design solutions to problems. For instance, Simple things like reminders can have desired impact on behavior.
  • Finally, it changes how we define the scope of the problem. We often focus on access like “make sure people get the drugs they need at low cost”. Behavioral economics suggests “Make sure that people actually take the drugs they are given”.  

Behavioral economics is also based on a key economic concept i.e. scarcity and in this case it is of mental resources. They point to four such scarcities of human mind and seven principles to address these scarcities.

FDI (Farmers Direct Investment) in development of Magarpatta City

Indian citizens have wondered the meaning of FDI (Foreign Direct Investment) in recent times because of political furore over liberalization of FDI in retail. PROF. AMIT GUPTA of IIM Bangalore along with three Co-authors point to a very different kind of FDI- Farmers Direct Investment.

The case revolves around a section of farmers based in Pune who built a township named Magarpatta City on their land holdings. Magarpatta City covers 430 acres of land that was owned by about 120 farmer families with 800 individuals. These farmers joined together to form the Magarpatta Township and thereby realizing their dream of converting their land into a value-added finished product that gave them benefits and returns in perpetuity. Magarpatta City was conceived as an integrated planned township with multiple commercial zones, residential neighborhoods, school, hospital, shopping malls, hotels, restaurants, and recreation areas. These were designed to be contemporary with futuristic features and included a state-of-the-art IT Park called Cybercity that provided international facilities to leading global IT giants.

The paper describes the process that the farmers went through to convert the raw material that they possessed (land) to Magarpatta Township. It illustrates the issues related to getting government permissions for a township, designing & constructing the township, marketing and financing the township and developing an organization that can carry forward the process of replicating the success of this model of real estate development.

If the policymakers and farmers could identify more such indigenized FDI schemes, there might be more political support than the usually controversial Foreign aspect of direct investment.

Scheduling and conducting India’s General elections efficiently — some lessons from Operations Research

BODHIBRATA NAG of IIM Calcutta uses Operations Research techniques to make India’s General elections more efficient. Constitution of India mandates Police to be responsibility of the States. However, average police-population ratio is only 133 police per 100,000 in comparison with average international ratio of 342. Therefore, Central Government maintains Central Police Forces (CPF) (Central Reserve Police Force, Border Security Force etc.) to complement the State police forces (SPF).

In Lok Sabha elections, CPF is required to man the elections alongwith SPF. However, CPF numbers are not enough to man all the polling stations of the 543 constituencies at the same time. Therefore, General Elections are spread over different days with each day covering a few states. For example, the 2009 General Election was conducted in five stages from April to May. The movement of CPF from their bases to the polling stations in the  different stages and their subsequent return to the bases is a gigantic exercise, requiring  coordination between different agencies.

Hence, the author proposes a research methodology which minimses the distance travelled by the central police forces and conducts elections in mimimal time. While conducting the elections in phases, the following two principles are observed by the Election Commission to the extent possible: (a) Elections for all constituencies in a State are  held on a single day (b) As far as preferable, elections for contiguous States must be held  simultaneously. The proposed method attempts to incorporate both the principles in the model.

The paper divides the states into three cohorts based on above constraints and arrives at a way in which election scheduling could be made more efficient.

Hyperinflations Are Rare, but a Breakup of the Euro Area Could Prompt One

This is what ANDERS ASLUND argues in a note. There have been 58 episodes of hyperinflation so far. What are the common causes?

  • The most common cause is the collapse of a multinational  currency union with competitive currency issue and large  uncleared payments balances. No less than half (28) of the  hyperinflations pertain to this category, notably to the collapse of the Soviet Union, Yugoslavia, and Austria-Hungary. 
  • ·         The second most common and the most natural cause is war or civil war, resulting in profound state dysfunction.
  • Another economic dysfunction is revolution—a time when any ordinary laws, whether of economics or gravity, are considered irrelevant. Examples are French Revolution, the Russian Revolution etc.
  • Populism as we saw in Latin America in the 1980s. The outstanding example was the indexation to very high rates of inflation as in Brazil in the latter half of the 1980s, when average annual inflation was 516 percent 
  • Finally, there is the odd case of hyperinflation that started due to the sheer madness of an authoritarian ruler as in case of Zimbabwe. North Korea is arguably another case.

He points how European leaders should avoid the collapse of their union. Chances of hyperinflation post collapse are likely to be very high.

Corruption and nexus of real estate and politics…Case of India

The nexus between real estate and India’s politics has been known for a while in India. However, how to verify this empirically? DEVESH KAPUR and MILAN VAISHNAV use a novel approach and track the cement consumption by real estate companies before and during elections to throw some light on the matter.

The logic is that Politicians and builders allegedly engage in a quid pro  quo. The former park their illicit assets with the latter and the latter rely on the former for  favorable dispensation. At election time builders need to re-route funds to politicians as  a form of indirect election finance. Hence demand for cement should contract during elections since builders need to inject funds into campaigns.  The authors show that cement  consumption does exhibit a political business cycle consistent with this hypothesis.

They test other hypotheses as well. First, contraction in cement demand should be larger during scheduled elections compared to unscheduled elections. Second, the contraction in cement consumption  will be more significant in national elections compared to state-level elections.  Third, elections in some states coincide with national elections like in the case of Andhra Pradesh. In such dual election cases, the need for election finance will be greater. Finally, linkages between politicians and builders  are likely to be more intense in urban states.

All the above four mentioned hypothesis also stand true apart from the main result.