The Hindu Business Line : Repugnance can be a real constraint on markets

Speculation, short-selling, margin-trading, multiple demat accounts, convertibility, hostile takeovers, de-listing... the list of themes for tighter control is never ending, even as the common man may wonder why `some kinds of transactions are repugnant in some times and places, and not in others'.

Mr Alvin E. Roth, of the Harvard University's Department of Economics explores the question in `Repugnance as a constraint on markets', a recent working paper from National Bureau of Economic Research (www.nber.org) .

Mr Roth gives many examples of repugnant transactions, from varied fields. Such as, `short selling, currency speculation, and interest on loans' in finance; `obscenity and profanity, and blasphemy', in words and ideas; `price gouging after disasters' (e.g. tsunami) and ticket scalping; vote selling; and bribery.

"Hiring mercenaries was once an accepted way of dealing with military affairs," recounts Mr Roth. But the method `has largely fallen out of favour since the rise of states with standing armies'. Similarly, there used to be a time when `insolvent debtors could be imprisoned, or sentenced to indentured servitude'. But involuntary servitude became more repugnant, and debts less repugnant; as if to match, "bankruptcy laws were rewritten to provide protection to the debtor as well as to the creditor", explains the author.

A constraint

"Repugnance can be a real constraint on markets," he concludes. "Which transactions are repugnant can change over time, but repugnance can also be persistent." Fine, but why is a study of repugnance important? Because "the very real repugnance that some people feel (and the fact that very many people seem to find at least some transactions repugnant or otherwise inappropriate) means that economists interested in proposing and designing markets must sometimes take account of repugnance." An insight, this may be, applicable to taboos brought in by the market regulator closer home.

Mr Roth cites, as example, the debate over `sale of kidneys', in the US, where there are `long wait times for deceased donor kidneys by tens of thousands of patients without a live donor'. For many, the alternative is `difficult and costly palliative treatment by dialysis'; and, there are `thousands of deaths while waiting'. Sale is repugnant to opponents, while `proponents of markets are correspondingly frustrated at the failure to adopt what they see as a feasible solution that could be implemented quickly.'

Economists may look at `inefficiencies and tradeoffs and their costs' but they shouldn't expect their arguments to immediately win every debate, advises Mr Roth.

"Being aware of the sources of repugnance can only help make such discussions more productive."

He wraps up, by saying, "The manner in which attitudes about the repugnance or other kinds of inappropriateness of transactions shape whole markets, and therefore shape what choices people face, may be one of the important ways that `behavioural' considerations affect the economy."

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