Why workers oppose privatisation? This paper by Harvard Economics Prof Sendhil Mullainathan explores, among other things, the psychology behind such opposition. It stems from a phenomenon called 'loss aversion', he says.
The paper cites an experiment by Kahneman, Knetsch, and Thaler to point out that people who "are given objects very quickly appear to value them more than those who were not given the objects." In the case of privatization, the people who "are given the objects" are the incumbent workers.
This is what Sendhil has to say: "The insight about loss aversion can also help understand why policy change is so difficult in developing countries.
"Consider market reforms that transfer resources from one group to another with an efficiency gain. For example, suppose privatizing a firm will result in gains for customers while resulting in losses for incumbent workers.
"Under this perspective, such reforms are fought so vigorously partly because the losses are felt far more sharply by the workers. One implication of loss aversion is, at the margin, to pursue strategies that preserve the rents of incumbents rather than ones that try to buy out incumbents.
"All other things equal, a strategy that offers a buyout for incumbent workers will be far more costly than one that grandfathers them in. The buyout requires the government to compensate the workers for their loss, and this can be much greater than simple utility calculations
suggest.
"In contrast, a strategy that guarantees incumbent workers a measure of job security would not need to pay this cost. Many situations of institutional change require some form of redistribution. The recognition of loss aversion suggests that successful policies may require protecting the losses of incumbents."
6 comments:
sriram,
a fascinating insight into the problem of privatisation. so basically the 'incumbents' factor could be one of the reasons why privatisation is such a hassle in this country?
i would suggest, from a purely layman's perspective, that efficiency is also a threat for them - in some of these govt institutions, efficiency (from the POV of the customer) is such an alien concept that i wouldnt be surprised if that were half the problem - the thought of having to get off their collective asses and actually do some work.
actually fantastic stuff from sendhil mullainathan, whom i met today!
what you say is true. the threat of job loss and the threat of more work!
in short, the threat of moving out of status quo.
Could you elaborate on the Kahnemann result? I didn't quite understand it. By the way, I would have to say that the reason Abhinav provided seems to me to be the #1 reason why workers oppose privatization in India.
P.S. I think Kahnemann won a Nobel Prize for his work on Cumulative Prospect Theory, which attempts to predict how a human being will take monetary decisions under uncertainty. Fascinating stuff - talk a look at it if you haven't done so already, it's worth reading.
Shravan,
If what I understood was right, the Kahnemann experiment was about giving half a class with mugs and the rest with money (roughly equal to the value of mugs). They were then asked to trade among themselves.
The result was the number of trades was low (the idea was at least half would have wanted to buy the mug). The people who had the mug bid at a rate three times (I hope I am right, pls check!) that of the price the have-nots (!) quoted.
The researchers inferred that that's because people who have the mugs (the incumbents) value them more highly than those who don't. In case of privatisation, the incumbent benefeciaries are the workers whose loss through privatisation is perceived higher than those who aren't workers!
I haven't read Kahnemann that deeply. I believe he has a psychology background! Will surely have a look at it, Shravan.
Also, what Abhinav says is absolutely true. But interestingly, that won't be an explicit reason for them against privatisation (this is, another tool of the behavioural economists).
Behavioural economists have time and again used the implicit association test to find out if there's race bias (for eg, say names of afro-americans is associated with something negative or some such study). I guess Mullainathan's study on this has been elaborated in Freakonomics.
Could be interesting to find out if workers implicitly associate privatisation with more work. Their explicit reason is job loss, which I think strikes an emotional cord with the lobby groups. It's politically correct too. What do you say?
Nice article, Sriram. Now, I'd like to see a few humorous ones. :D
Thanks Sachin,
Quite a serious task, writing humour!
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