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video congratulation message from Professor Eric Maskin

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I would like to offer my very warm congratulations to Yingyi Qian and Chenggang Xu for winning this important research prize. I’m particularly happy about this event because Yingyi and Chenggang were students of mine here at Harvard. In fact, they were a couple of my very first Chinese students. And I’m extremely proud of them. They have gone on to do great things and this prize is just one manifestation of their accomplishments. I’d like to say a little bit about their work and some of their contributions to economics.

 

Yingyi, in his PHD thesis, wrote on hierarchies. That is tree structures in organizations. And he is particularly interested in the question of which structures would optimize the net payoff for the hierarchy, that is output minus the wages that have to be paid the workers on the hierarchy. And he came up with some sharp answers to those questions and his work is important for understanding corporate structure and also structure of hierarchy in governments.

 

He also had an early paper on shortages, which was very important. So a long-standing question about centrally planned economies, is why they were plagued by shortages of consumer goods. And Yingyi was able to show that the answer to this question is tied to an important phenomenon called the soft budget constraint. The soft budget constraint was developed by Janos Kornai, a very distinguished scholar of centrally planned economies. And actually Janos was here at Harvard at the time that Yingyi was, and had a profound influence on Yingyi’s thinking and also had a profound influence on my thinking. Anyway, Yingyi took this idea of the soft budget constraint to explain shortages and the idea is that in a centrally planned economy, there would be enterprises which are inefficient, but they are kept going anyway because once they started, it’s not always optimal to shut them down. These inefficient enterprises absorb a lot of goods in the process of production, and that diverts these goods away from consumers. The government, to make sure the consumers can compete effectively against these inefficient firms, deliberately keeps prices low. But those low prices create shortages, and Yingyi made a compelling argument that this helps explain, say, shortages in the former Soviet Union and also shortages in China, at the time that economy was still heavily under government control.

 

Another paper that Yingyi contributed, which I regard as important, is his work with Bai, Li and Huang on government predation. The idea here is that in a country without an independent judiciary, it’s very difficult for the government to commit itself not to expropriate private wealth. And that inability to commit leads to the deliberate creation of institutions for masking wealth. Of course these institutions are inefficient, but they are the only reasonable responds to a government that would take the wealth away, if it could. And I think this work sheds a great deal of aid on the Chinese experience.

 

Now, Yingyi and Chenggang have had a long and fruitful collaboration. And one of their important papers is on innovation, and the contrast between innovation in centrally planned and market economies, or put it another way, in economies with budget constraints soft versus when they are hard. What they started with this observation, that the centrally planned economies, such as the Soviet Union, have not historically been as good at innovation as market economies. And the question is why they should be. And once again, they make an important connection with the soft budget constraint. The problem with innovation in centrally planned economies is that once you start an enterprise, an innovated enterprise, it’s very hard to shut it down later on. And so there are too many false starts, there are too many false directions that are pursued in the centrally planned economy.

 

Another important collaboration between Chenggang and Yingyi, together with Gérard Roland, is their work on M-forms versus U-forms in comparative economics. So there’s a famous distinction going back to the industrial organization literature between firms that have U-forms, which means that they are centrally organized, and they’ll have their sales division, they’ll have their body division and they’ll have their marketing division, but there’s a central executive overseeing all this. And a classic example of a U-form organization was the Ford Motor Company in the United States. And by contrasts, there’s the M-form, where instead of having one sales department and one marketing department and one manufacturing department, there are divisions as in General Motors. So General Motors had the Chevrolet Division, had the Pontiac Division and they had the Oldsmobile Division, and each of those was a little company within a bigger company. This was an important distinction that the economic historian Chandler made. But Yingyi and Chengang and Gérard understood that this contrast between the U-form and the M-form was also useful for understanding economies. And they were particularly interested in the contrast between the Soviet Union which they thought of as a U-form and the Chinese economy which they thought of as an M-form. The Chinese economy is an M-form form because within the Chinese economy there are all of the provincial economies, which are, in a sense, freestanding or autonomous within the larger Chinese structure. And these provinces could operate more or less independently in the same way as Chevrolet and Oldsmobile could operate independently. And they argue that one reason why the Chinese economy proved to be so much more robust than the Soviet Union was because of this M-form structure. And in particular, you could try out a new idea, you could experiment with a new idea in one of the provinces to see whether it worked before introducing it in the country as a whole, so that if it didn’t work, you weren’t committing the whole economy to a big mistake. That was an important insight.

 

I have to say that I had the pleasure of collaborating with Chenggang and Yingyi on an M-form versus U-form project myself and we were interested in how in M-forms, it turns out to be easier to evaluate economic performance than in U-form, because you can compare one province’s economic output, the GDP, if you like, with another, and in that way you can gauge how well each province is doing. You couldn’t do that in the Soviet Union, because how do you compare the coal ministry with the steel ministry, not so easy to do. So I enjoy that collaboration a lot with Yingyi and Chenggang, although I have to give them most of the credits for that project. Chenggang has also done a great deal of important work, not in collaboration with Yingyi. For example, there’s his collaboration with Huang, which helps us understand how in investment projects there’s often advantages to have investors with conflicting interests making capital infusions into the projects. That sounds paradoxical but it’s not paradoxical, again if you remember the soft budget constraint, because the conflicting interests mean if the project turns out not to work, they won’t have the incentive to keep the project going on beyond its useful life. So conflicting interest is a commitment device to shut down a project which is not turning out well.

 

Well, this is just a small sample of the wonderful work that Yingyi and Chenggang have been doing. As I say, I am extremely proud of them and extremely proud of their careers, and I offer my warm congratulations.

 

I would like to offer my warm congratulations to Yingyi Qian and Chenggang Xu for winning the first China Economic Prize. I think it’s a very well deserved prize for them. Their work has been fundamental within economics and also for understanding the Chinese reforms over the last 35 years. I also have to say that I’m very proud of them as their old teacher. Chenggang and Yingyi were among the first students that I had the privilege to supervise here at Harvard many years ago. Yingyi arrived in the late 80s and Chenggang a little bit after that. Working with them and then later collaborating with them was a lot of fun and a great opportunity for me to learn some economics dos. So many many congratulations to them both.

 

I wanted to mention that I have a connection with the National Economics Foundation myself. I have been a councilor for the Foundation for some time now, and I had the opportunity in the spring of 2016 to visit China and give a couple of lectures, one at Nankai university and the other at Zhejiang University on behalf of the Foundation. There were intended to be educational events and I enjoyed them very much.

 

One of the notable features of Yingyi and Chenggang’s work is how they take important concepts from theory and use them to illuminate and to help us understand the Chinese economy. And they started doting this very early in their career when they were still PHD students. So they took a fundamental idea called the soft budget constraint formulated by Janos Kornai, one of my Harvard colleagues and someone they worked with while here at Harvard, and they used this to very great effects to understand how the Chinese economy works and sometimes doesn't work.

 

 

 

◆please indicate the source if authorized: National Economics Foundation

◆photo:National Economics Foundation