Nobel prize-winning economist Eric Maskin was one of the leading academics that spoke at the Green Economy Summit (Cumbre Verde) that took place in Córdoba city yesterday. The Harvard professor discussed how Mechanism design, an engineering approach to game theory that he developed and won his Nobel for, can be used to help the environment. In an interview with the Times, Maskin explained in more detail the benefits of using economic mechanisms as a deterrent to pollution, what are the best types of public-partnerships for investment, and methods countries can use to eliminate corruption.
How might Argentina make use of second-price auctions (a sealed-bid auction where the highest bidder wins but the price paid is the second-highest)?
It can be used as a way to award contracts for procurements. If the government wants to develop a new railroad, for example, it can use a second prize auction to make sure the winner of the railroad construction contract is truly the firm with the lowest cost. So for procurement services this can ensure that the government will obtain the lowest cost.
What do you think about carbon taxes?
I think that carbon taxes are a great idea in general, As a way of getting all of us to pay for the environmental damage that we are causing when we emit carbon dioxide into the atmosphere. So, a tax is a good way to make us think about the damage we are causing and how to reduce.
Tell us how mechanism design theory is currently being applied to the environment?
It’s been used in many applications around the world. One of the great success stories, for example, has been the British carbon dioxide auction for environmental purposes.
But it also has been used in many other areas of the economy. Many countries around the world have used mechanism design for the allocation or radio spectrum licences for telecom companies. These countries want to make sure that the licences go to the right companies and they can use mechanism design as a tool for making sure that the allocation is the right one.
There are many ways of financing incentives. And which way is the best depends on the circumstances. That is what mechanism design is intended to tell us: what is the best incentive structure to accomplish the goals.
What is the best way to use these incentives to reduce pollution?
A few minutes ago we were talking about carbon taxes. They are one way of giving incentives for pollution reduction or for greenhouse gas reduction. I also talked about auctions in my speech and a third way is a cap-and-trade system as under the Kyoto protocol. All three can be used in some combination. Which combination should be imposed depends on the circumstances.
How can you use it to fight private and public corruption?
Corruption is a serious issue and in fact in some parts of the world it is probably the most serious impediment. In Africa, for example, many countries are lagging behind not because they don’t have resources or lack talent but because the system is so terribly corrupt that resources aren’t adequately located with a few people getting rich at the expense of the majority.
Do you think there is a solution to the problem?
Yes, we’ve seen a significant reduction in corruption in countries that make this a high priority. Let me point out Singapore, for example. It use to be an extremely corrupt place, government corruption was seriously interfering with their projects. But they understood the problem and what they did was take a very interesting path. They significantly raised the salaries of civil servants to make government jobs more attractive, so that when one lost their job it was a much greater loss in income. So civil servants had much more of an incentive to avoid taking bribes and lose their high-paying jobs. Also the penalties were higher, because if they were caught they would not only lose the job but perhaps also go to jail. In addition to reducing corruption this also attracted more talented people, so there was a double benefit. It reduced corruption, improving the quality of government.
What is your take on the use of public-private partnerships for investment in Argentina?
Public-private partnerships are often a good way to undertake very large public projects. These are projects that are typically so big that private companies are reluctant to undertake them by themselves.
The public partner may be good at governing, but not running economic enterprise. So bringing in a private partner who really knows what they are doing, bringing in expertise can be valuable.