(How) can democracy, as we know it, survive in times of strongly increasing market power of a few online media aggregators?

Let us take this fundamental question in pieces. First, why should “democracy, as we know it,” be at stake? A few months ago, an article by Robert Epstein and Ronald Robertson, two behavioral researchers, attracted a lot of media attention (google “search engine manipulation effect,” and get lost for hours). In short, Epstein and Roberts conducted a series of experiments, where voters could collect information about political candidates using a search engine. Some of the accessible (real) websites favored one candidate, others favored the other candidate. The only treatment of the researchers was that they manipulated the ranking of the search results differently across different treatment groups. They found astonishingly large effects of their manipulations on the voting behavior of the subjects in the different groups. Here is a nice summary of the article.

Recently, the question was taken up again: Could a large social media provider (say, Facebook) influence political elections by rigging the political news its users see? The crucial common features of both cases are that any “manipulation” would occur at the level of the algorithm of the media aggregator that is in charge of selecting news for a given user (and can be made contingent on that user’s known characteristics) – and that the media aggregator is more effective the more users it has …

… which brings us to the second claim made in the initial statement above: “strongly increasing market power of a few media aggregators.” Admittedly, thorough empirical studies proving the increasing market power of online media aggregators (such as Google and Facebook) are rare. But the available statistics all point into the same direction. Argenton and Prüfer documented how market shares in the search engine market started to tip after Google had taken over market leadership in 2003. A similar pattern is documented for social networking sites, dominated by Facebook and for other “data-driven markets,” such as geographical maps. The intuition of the theory is that, if an online platform manages to attract more users than its competitors, these users generate more data about their preferences, e.g. by clicking certain links on a website or preferring certain media articles over others, than the competitors have access to. Data about user preferences today improves the services of a platform tomorrow. As the user-generated data are private property of the platform collecting it, more users today allows a platform to improve its services by more than its competitors with lower market shares, hence giving rise to an ever greater divergence of perceived quality levels and market shares, or “market tipping.”

Thanks to the upcoming U.S. Presidential elections, the topic is especially relevant. From the institutional perspective, a session on “How to deal with big data?” will discuss these and related questions at the upcoming SIOE conference in Paris.

Post scriptum

In Epstein and Robertson’s article, one of the findings is that “[a]mong the most vulnerable groups [to search engine rigging] we identified were Moderate Republicans.” A highly respected co-author of mine explained this finding as follows:

“Apparently the authors of that search engine paper don’t recognize that they are a meta-illustration of their thesis. The first clue is their characterization of Fox News as “biased,” implying that other news sources are unbiased. But if all information sources are biased, then adding new but differently biased sources may serve to offset existing biases. Similarly, “vulnerable to manipulation” could be more neutrally characterized as “willing to update in response to new information” (moderate Republicans are just Bayesians), the opposite of which would be “closed minded.”

Given this characterization, researchers might be more vulnerable to such manipulation of their opinions than others. A fact we might want to remember.

[This post was first published at sioe.org]

The economic consequences of Christian doctrines have gained great attention since at least Max Weber’s “work ethic” hypothesis, that the Protestant Reformation was instrumental in facilitating industrial capitalism – and economic prosperity with it – in Western Europe (Becker and Woessmann, 2009). Recent literature has studied the channels through which differences between the Protestant and Catholic doctrines led to the observed economic differences between regions with this or that dominant denomination. Glaeser and Glendon (1998) model the costs and benefits of the Calvinist belief in predestination and find that under many conditions predestination is a more socially efficient belief system. Van Hoorn and Maseland (2013) report that, in their sample of almost 150,000 individuals from 82 societies, they find strong and robust support for the hypothesis that both individual Protestants and, throughout history, Protestant societies appear to value work much more than Catholics and Catholic societies.

However, Arrunada (2009) confronts the work ethic hypothesis with an alternative “social ethic” hypothesis, according to which Protestant values shape individuals to be more active in mutual social control, more supportive of institutions, less bound to close circles of family and friends, and to hold more homogeneous values. He finds no support for the hypothesis that Catholics work less or less effectively than Protestants but identifies that education has a differential impact in both denominations: “[F]or Protestants education complements religion whereas for Catholics education substitutes for religion” (891). This result is related to Glaeser and Sacerdote (2008), who provide evidence and an explanatory model for the empirical finding that education in the United States is positively correlated with church attendance at the individual level but negatively across denominations. This means that the less educated Christian denominations attract more believers to church but that, within each denomination, the more educated believers are more often at church than the less educated ones. The differential interaction of education and Christian denominations is underlined by Glaeser and Glendon (1998:442), who find in their study of U.S. General Social Survey data “that there is a greater connection between education, which we use as a proxy for worldly success, and church attendance among Protestants, especially Presbyterians, than among Catholics.”

Going further, in their test of Weber’s work ethic hypothesis Becker and Woessman (2009:581) show that Weber was right in his observation that Protestant regions were economically more affluent than Catholic regions (across countries in 1900 and within Prussia in the second half of the nineteenth century). However, they reject the hypothesis that the higher economic development of Protestant regions was based purely on differential work ethics. Instead, they postulate and test a “human capital theory,” according to which an unintended side effect of Martin Luther’s 16th century call, that everyone should be able to read the Bible, was that Protestants acquired literacy skills that functioned as human capital in the economic sphere. Consequently, “a simple economic model predicts that when optimizing individual utility, in equilibrium Protestants will have more education on average than Catholics because they have lower costs and higher benefits of schooling” (541). Underlining the differential role of education in the Catholic and Protestant denominations, their results provide empirical support for the fact that Protestantism led to a better educated population than Catholicism.

A helpful overview of the field is delivered by McCleary (2011). Moreover, more and more researchers are now delving deeper than the religious vs. secular paradigm, e.g. studying the role of religion for risk taking and financial investment (Kumar et al., 2011; Noussair et al., 2013) or for managerial decision making (Hillary and Hui, 2009; Filistrucchi and Prüfer, 2013), while distinguishing between several religions or even between subgroups of one faith.

[NB: This post originally appeared at SIOE.org.]

References

Arrunada, B. 2009. “Protestants and Catholics: Similar Work Ethic, Different Social Ethic,” Economic Journal, 120: 890-918.

Becker, S.O. and L. Woessmann. 2009. “Was Weber Wrong? A Human Capital Theory of Protestant Economic History,” Quarterly Journal of Economics: 531-596.

Filistrucchi, L. and J. Prüfer. 2013. “Faithful Strategies: How Religion Shapes Nonprofit Management,” CentER Discussion Paper, No. 2013-052.

Glaeser, E.L. and S. Glendon. 1998. “Incentives, Predestination and Free Will,” Economic Inquiry, 36: 429-443.

Glaeser, E.L. and B.I. Sacerdote. 2008. “Education and Religion,” Journal of Human Capital, 2: 188-215.

Hilary, G. and K.W. Hui. 2009. “Does religion matter in corporate decision making in America?” Journal of Financial Economics, 93: 455–473.

Hoorn, A. van and R. Maseland. 2013. “Does a Protestant work ethic exist? Evidence from the well-being effect of unemployment,” Journal of Economic Behavior and Organization, 91: 1–12.

Kumar, A., J.K. Page, and O.G. Spalt. 2011. “Religious Beliefs, Gambling Attitudes, and Financial Market Outcomes,” Journal of Financial Economics, 102: 671–708.

McCleary, R. 2011. The Oxford Handbook of The Economics of Religion. Oxford: Oxford University Press.

Noussair, C.N., S.T. Trautmann, G. van de Kuilen, and N. Vellekoop. 2013. “Risk Aversion and Religion.” Journal of Risk and Uncertainty, 47, 165–183.

Throughout the last years, the rate of technological progress has accelerated. To a large extent this development was driven by the increasing availability of data, owing to the fact that more and more economic and social transactions take place aided by information and communication technologies (ICT), which easily and inexpensively store the information such transactions produce or transmit. Complementing the increased availability of data, progress has also depended on the increasing ability of firms (and governments) to analyze the novel big data sets (Viktor Mayer-Schönberger and Kenneth Cukier, 2013).

In “The Second Machine Age” (2014:8), MIT-Professors Erik Brynjolfsson and Andrew McAfee motivate their study of the contemporary effects of big data and datafication on our economic, social, legal, political, and cultural spheres as follows:

This is notably an optimistic account of the latest technological developments. But when Brynjolfsson and McAfee comment on its downsides, they mainly mention “spread,” which they describe as “ever-bigger differences among people in economic success – in wealth, income, mobility, and other important measures” (p.12). In this respect, they join a big group of technologists who understand the opportunities of data-driven technologies well but treat the threats for individuals and society rather superficially.

Then, there is the camp of datafication alerters. Comparing the very asymmetric armament of sellers and individual consumers in data-driven markets, Alessandro Acquisti and Jens Grossklags (2007:369) note that “[c]onsumers will often be overwhelmed with the task of identifying possible outcomes related to privacy threats and means of protection. [. . . ] However, even if individuals had access to complete information, they would often be unable to process and act optimally on large amounts of data.”

Extending the big data technology critique to the political sphere, Evgeny Morozov (2011:xiv) sarcastically writes:

Summarizing, there seem to be two opposite approaches to the current technological developments related to data science. The first mainly consists of engineers, statisticians, marketers, and technology-savvy entrepreneurs and politicians. This camp underlines the positive effects of technological progress in general, and the increased opportunities for citizens’ participation and consumers’ customization of products that is becoming possible through the embrace of big data technologies in particular. On the other side, political and consumer activists join forces with a few legal scholars in pointing at the negative economic, political, and social effects of the increasing datafication and ubiquitous connectivity of today’s and tomorrow’s world.

What is missing from the picture is a careful analysis of all involved forces grounded in the understanding that issues are complex and subtle because, while unconstrained big data generates both great opportunities and great threats, a misguided policy response can affect market structures, prices as well as incentives to invest and innovate. Such an analysis of the involved trade-offs is the domain of economics—but economics needs to be accompanied not only by knowledge of the involved technological developments but also by awareness of the institutional forces at play: law, political science, sociology, and anthropology all appear to be relevant when we try to understand the opportunities and threats involved in data-driven technologies and offer an advanced examination of how they operate.

This necessary interdisciplinary approach, rooted in economics, is the domain of SIOE-spirited researchers. There is work to do for us. And opportunities abound.

* With thanks to Agnieszka Janczuk-Gorywoda and Pierre Larouche.

References

Acquisti, Alessandro, and Jens Grossklags. 2007. “What Can Behavioral Economics Teach Us About Privacy?” In Digital Privacy: Theory, Technologies and Practices, edited by Alessandro Acquisti, Stefanos Gritzalis, Costas Lambrinoudakis, and Sabrina De Capitani di Vimercati, 363–77. New York & London: Auerbach Publications.

Brynjolfsson, Erik, and Andrew McAfee. 2014. The Second Machine Age. New York: Norton.

Mayer-Schönberger, Viktor, and Kenneth Cukier. 2013. Big Data: A Revolution That Will Transform How We Live, Work and Think. John Murray.

Morozov, Evgeni. 2011. The Net Delusion. How Not To Liberate The World. London: Allen Lane.

About 25 years ago, Avner Greif and his co-authors set out to study how the rise, mechanics, and decline of certain institutions in the European middle ages can be explained by the help of game theory (Greif 1989, 1993; Greif, Milgrom, and Weingast 1994). Soon it became clear that the theoretical insights gained do not restrict applicability to – notably fascinating – historical institutions and organizational forms. They were applied to other, more modern cases and questions as well.

The key questions studied in this growing literature were, how can opportunistic behavior be avoided in social dilemma situations, where the joint payoffs of the players are maximized under mutual cooperation but it is individually rational to defect and thereby to maximize one’s own payoff at the expense of others? As a consequence, how should institutions be structured such that the incentives of individual players to free-ride on their companions’ efforts are mitigated? […]

The full post can be read here, at sioe.org.

A trade association is a millennium-old organizational form that has existed on all continents. It is a private, formal, nonprofit organization designed to promote the common interests of its members, even if these members are competitors on product (or research) markets. While it is straightforward to assume that an association creates net benefits for its members – why would they join, otherwise? – it is unclear whether, or under which circumstances, the existence of an association has positive net effects for the rest of the economy. In “Trade Associations, Lobbying, and Endogenous Institutions,” Maria Larrain and Jens Prüfer study this question by means of a game-theoretic model. The answer is, of course, “it depends.” But on what does it depend? And why? Check the answer yourself  – to appear soon in the Journal of Legal Analysis!

“Economic Governance and Social Preferences” is the title of a workshop that will be held in Tilburg, The Netherlands, on September 3-4, 2015. The Tilburg Law and Economics Center (TILEC) organizes the event in order to bring together scholars from institutional and organizational economics with those who specialize in behavioral and experimental economics. Despite parallel but mostly unconnected literatures in both fields, the similarity in research interests is striking: how to foster cooperation in social and economic dilemma situations? What institutional, social, and psychological factors are of importance and which of them can be influenced by strategic actors?

Keynote lectures will be delivered by Professors Roland Bénabou (Princeton University), Simon Gächter (University of Nottingham), Avner Greif (Stanford University), and Mark Ramseyer (Harvard University).

In total, 12 presentations (plus several poster presentations) will be given. More information, a preliminary program, and a description of the registration process (closing August 20th, or earlier) is available here.

In “Business Associations and Private Ordering,” I study the capacity of business associations—private, formal, noncommercial organizations designed to promote the common business interests of their members—to support
contract enforcement and collective action. Inspired by recent empirical literature, the theoretical framework connects the organizational and institutional features of formal and informal business organizations with socioeconomic distance. I show how associations provide value to their members even if members are already embedded in social networks, and which players join an association. We propose explanations for empirical puzzles, put forward novel testable hypotheses, and relate business associations to alternative private ordering institutions. The paper is scheduled to be published in the Journal of Law, Economics, and Organization in 2016.

The Society for Institutional & Organizational Economics (formerly known as ISNIE) launches a new website, sioe.org, during their conference at Harvard Law School this weekend. Apart from a a fresher look and the inclusion of some media applications, the new site will feature new content from the world of institutions and organizations, broadly defined, every few days, fed by a team of experienced and dedicated SIOE members. As editor of the website, I had and have the honor of contributing to this venture, trying to establish the platform on institutional and organizational economics on the web.

A great, interdisciplinary conference on “Social Norms and Institutions” will be held in Ascona, Switzerland, in May. Details are available at:

http://www.socio.ethz.ch/en/news-and-events/events/sni2015.html