Monday, February 16, 2009

Podcast of the week 

A week late because I finally listened to it this morning, but this is one of the few I will not delete from the iPod. Daron Acemoglu provides a good interview for Russ Roberts. Here's the essay on which the podcast was based. I just finished reading it about ten minutes ago. I'm pretty sure it will be added to the development class' reading list tomorrow. Largely, I want them to discuss this paragraph:
Our trust in the self-monitoring capabilities of organizations ignored two critical difficulties. The fi?rst is that even within fi?rms, monitoring must be done by individuals the chief executives, the managers, the accountants. And in the same way that we should not have blindly trusted the incentives of stockbrokers willing to take astronomical risks for which they were not the residual claimants, we should not have put our faith in individuals monitoring others simply because they were part of larger organizations. The second is even more troubling for our way of thinking about the world: reputational monitoring requires that failure should be punished severely. But the scarcity of speci?fic capital and know-how means that such punishments are often non-credible. The intellectual argument for the fi?nancial bailout of Fall 2008 has been that the organizations that are clearly responsible for the problems we are in today should nonetheless be saved and propped up because they are the only ones that have the "specifi?c capital" to get us out of our current predicament. This is not an invalid argument. Neither is it unique to the current situation. Whenever the incentives to compromise integrity, to sacrifi?ce the quality, and to take unnecessary risks are there, most companies will do so in tandem. And because the ex post vacuum of speci?fic skills, capital and knowledge that their punishment will create make such a course of action too costly for the society, all kinds of punishments lose their effectiveness and credibility.