French economist Jean Tirole received the 2014 Nobel Prize in Economics.
The news this week that French economist Jean Tirole won the Nobel Prize for economics was of particular interest to a group of Duke faculty studying regulatory governance – one aspect of Tirole's general research on industrial organization.
Tirole's research, more influential in Europe than in America, has helped shaped nuanced government regulation of important markets, particularly those such as the financial industry, where corporate giants carry a disproportionate influence. At Duke, this field is being carried forward by faculty in the Rethinking Regulation project of the Kenan Institute for Ethics.
Below, Tim Büthe, an expert on regulatory politics and antitrust law and policy, speaks with Geoffrey Mock about Tirole's research. Büthe is associate professor of political science and public policy, a senior fellow at the Kenan Institute and a member of the faculty advisory group of the Rethinking Regulation project.
Question: One way I've seen his work described is that he explores how to regulate markets that are dominated by a few large firms, so that traditional free market theory won't work. How has he advanced this line of study?
Tim Büthe: Jean Tirole's work stands out here for focusing on the exact sources of those "dominant" firms' market power and what exactly it is that keeps new competitors from entering markets where extraordinary profits can be had (as traditional neoclassical economics would tell us they should). His work points out that barriers to entry and more generally sources of market power may differ substantially across industries.
Question: The Nobel committee noted how his research has influenced government policies, at least in Europe. In fact, one description of his work was he is the reason why Europe has better cable service than in America. Can you tell me how his research has made the jump into real-life policy?
Tim Büthe: Neoclassical economics tends to seek very high levels of generalization, often by abstracting away contextual information that is specific to particular firms or industries, such as the structure of those industries, aspects of technology and innovation that are specific to the industry.
To some extent, this is inevitable: Theoretical work requires a high level of abstraction. But taken too far, it yields highly unrealistic models of an idealized world that policymakers mistake for the real world at their peril. By systematically developing models of the differential structure of industries and then incorporating this more nuanced understanding of what is known as "industrial organization," Jean Tirole's work provides differentiated insights into the conditions under which particular regulatory interventions produce socially desirable outcomes and the conditions under which they are more harmful than beneficial.
These kinds of conditional insights, while rarely headline-grabbing, are a far better match for the challenges faced by policymakers than sweeping claims whose applicability in a particular context has not been carefully thought through. Importantly, his work on industrial organization also provides a baseline against which to consider policy interventions, which is far more realistic than, for instance, the ideal of perfectly competitive markets.
Question: How does his work connect to understanding the 2008 recession?
Tim Büthe: He has written several pieces on the topic since 2008, but more importantly, his work, some of which had examined the financial sector specifically, emphasizes perverse strategic incentives in oligopolistic industries. That work had more or less explicitly provided warnings of what prompted the recession and financial crisis that started in 2008. It certainly was read that way afterwards.
Question: Has his work been important in popularizing the study of regulation and regulation governance among economists and other scholars?
Tim Büthe: Part of what so impressed the Nobel committee about Tirole's work is that he has on several occasions either launched research on a topic well before it became generally recognized as very important, or shifted the focus of research on that topic in a more nuanced, productive direction. So rather than join categorical (and often quite ideological) debates over whether government regulation is inherently good or bad, he has worked out--and pushed others to work out--both the positive and the negative effects of specific regulatory measures, so as to provide a better understanding of the conditions under which particular regulatory interventions produce net economic benefits.
This has also been a key motivation for the Rethinking Regulation group at Duke. To give another example, Tirole was among the first economists to develop sophisticated theoretical models of technical standard and standard-setting organizations, which play a central role in the modern economy (e.g., for technological development and the distribution of gains from those developments) as well as in global value chains.