President Koichi Tadenuma talked with Dr. Jean Tirole,Honorary Chairman, Toulouse School of Economics , Toulouse 1 Capitole University
Honorary Chairman, Toulouse School of Economics (TSE), Toulouse 1 Capitole University, France
Dr. Jean Tirole
President, Hitotsubashi University Dr. Koichi Tadenuma
Published on January 31,2019
Dr. Jean Tirole
Honorary Chairman, Toulouse School of Economics (TSE), Toulouse 1 Capitole University, France
Dr. Tirole was awarded the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel in 2014. He serves as Chairman of the Board of Directors, TSE and Chairman of the Executive Committee, Institute for Advanced Study in Toulouse (IAST). He is also Scientific Director of the Institute d’Économie Industrielle (IDEI), Toulouse 1 Capitole University, and a Visiting Professor at Massachusetts Institute of Technology (MIT). Dr. Tirole holds a Docteur de 3ème Cycle, Decision Mathematics from Paris IX – Dauphine, and a Ph.D. in economics from MIT. He was also awarded an honorary doctorate by Hitotsubashi University. He conducts ground-breaking research in a range of fields including game theory, information economics, industrial organization, regulation policy, finance, macroeconomics, and economics and psychology.
Dr. Koichi Tadenuma
President, Hitotsubashi University
Dr. Tadenuma graduated from Hitotsubashi University with a B.A. in Economics in 1982. He was awarded a Ph.D. in Economics in 1989 upon completion of the doctoral program in economics at the University of Rochester. Since then, he has been serving for Hitotsubashi University, where he was appointed Assistant Professor of Economics in 1990, Associate Professor of Economics in 1992, and Professor of Economics in 2000. After serving as Dean of the Graduate School of Economics from 2011-2013, he was appointed President of Hitotsubashi University in December 2014. His fields of research are social choice theory, welfare economics, and game theory. His recent publications include Shiawase no tame no keizaigaku—koritsu to kohei no kangaekata (Economics for happiness—thinking about efficiency and equity), Iwanami Shoten, Publishers, 2011.
Dr. Jean Tirole serves as Honorary Chairman and Professor at the Toulouse School of Economics (TSE), Toulouse 1 Capitole University in France. He is a global authority on game theory and industrial organization, and his selection for the 2014 Nobel Prize in Economic Sciences is still fresh in the memory. He also holds an honorary doctorate from Hitotsubashi University, and recently visited the University to deliver a special lecture. During his visit, he discussed his research and university management with President of Hitotsubashi University, Dr. Koichi Tadenuma, a fellow economist and university head.
Game Theory and Information Economics:
A Unifying Research Theme
Tadenuma：Welcome to Hitotsubashi University
Tirole：Thank you.
Tadenuma：As an economist and president of this university, I am delighted to have a recipient of the Nobel Prize in Economics visit us and deliver a lecture to our students. I am very grateful to you.
Tirole：Thank you. I’ve been associated with Hitotsubashi for a long time. I visited in 2000, and then of course I got an honorary degree from Hitotsubashi in 2013.
Tadenuma：Just before you received the Nobel Prize.
Tirole：Exactly. That was a leading indicator (laughs).
Tadenuma：rst, I would like to ask you about your career. Could you please tell us about your career background and major fields?
Tirole：I have been working in different fields, but there is a unifying theme in my research which is game theory and information economics, and I have applied this theme to many different subfields of economics. First, I did industrial organization, which deals with competition policy and regulation. But the game theory and information economics used for that analysis can be used as cross-cutting tools in many academic fields. These include psychology, for example, because we play games with ourselves in our society and we have incomplete information about ourselves. So game theory and information economics are applicable in various fields, such as macroeconomics, international finance, and corporate finance. They are extremely useful as a tool for economists.
Tadenuma：I believe game theory and information economics form a fundamental theory that has radically changed the social sciences, not only economics, but also politics, psychology, sociology, and international relations.
Tirole：I think that’s correct, because game theory and information economics allow you to study frictions and cooperation in all kinds of decision-making environments such as international bargaining, markets, and politics. They have become standard tools.
Tadenuma：Game theory and information economics are applied not only to fields of positive economics, which seek to explain real phenomena in economy, but also to normative theory. For example, in John Rawls’ A Theory of Justice, he used game theory and information economics to analyse people’s behaviour and decision-making.
Tirole：That’s right.
2014 Nobel Prize in Economic Sciences for Analysis
of Market Power and Regulation
Tadenuma：Would you please elaborate on the academic accomplishments that won you the Nobel Prize in Economics?
Tirole：The Nobel Prize is awarded for a specific contribution rather than the entire career of a researcher. My Nobel Prize in Economics recognized my contribution on industrial organization and market power in general. The bodies of work I performed with my co-authors in this area can be broadly divided in two. The first, which I did with Jean-Jacques Laffont, relates to regulation. This looked at how you could regulate firms with market power, like those in telecommunications, railroads, or electricity, and what kind of incentive schemes to give to those firms. You have to take into account the fact that you have asymmetric information, since the firms generally know much more than the regulator about the demand and especially the cost structure, so regulators don’t have this information. Therefore, there is some kind of trade-off between regulation and trying to give a lot of incentives to the firm. That’s basically what we showed. Other work, carried out with Jean-Jacques Laffont and Patrick Rey, showed how to create competition in regulative industries by giving access to what are called essential facilities. Essential facilities are bottlenecks, basically those elements that are very hard to duplicate, like the local loop for telecommunications, the transmission grid for electricity, or the tracks and stations for railroads. This summarizes the first part of the research.
Tadenuma：And what was the second part?
Tirole：It dealt with competition policy, which is different from regulation. Antitrust policy looks at abuses of dominant market position or monopolization, and tries to prevent abusive exercises of market power. That’s what competition authorities like the Japanese Fair Trade Commission do. Actually, I was at the Fair Trade Commission yesterday to talk about the new market power of companies like Google, Facebook, Apple, and Amazon.
We have carried out a wide body of work on vertical constraints associated with the kind of contract signed between suppliers and clients, on predation, on intellectual property, and on the issue of patent pools, which has made a comeback in the last 20 years. We also worked on two-sided markets, which was one of the things cited in the Nobel report. Two-sided markets are markets in which a platform is trying to bring together at least two sides of the market, typically merchants and consumers. For example, Google is trying to bring you and me together with advertisers, because we are using Gmail, the search engine, and YouTube, which connect us with advertisers. Uber is bringing drivers and consumers together, and creative car companies, merchants, account holders, and so on and so forth. Such two-sided markets are very important nowadays. Actually, the seven largest firms in the world are two-sided platforms: Google, Apple, Amazon, Facebook, Microsoft, Alibaba, and Tencent. That’s why this research was very timely, because there are a lot of open issues, both in terms of business models which those platforms are using and policy intervention that competition authorities can use.
※ A patent pool is a mechanism whereby companies and research institutes pool multiple patents and cross-license them in the aim of promoting the widespread use of new technologies. (Sources: ASCII.jp dejitaru yogo jiten [ASCII.jp dictionary of digital terms] and Merriam-Webster dictionary.)
“Contestability” is the Key to
Competition for the Market
Tadenuma：One of your most outstanding academic achievements leading to the Nobel Prize was establishing the basic concept of incentives that could be applied in multiple ways in different disciplines and fields to explain human behavior.
In terms of competition, in the past monopoly was often equated with scale, and arose in industries requiring large-scale facilities. But now we are seeing a dramatic socioeconomic transformation, and the more that networks expand, the greater the potential for market monopoly. In this situation, I think we have to revisit regulation from the perspective of people’s well-being. In the past, monopoly was regarded as undesirable because it was inefficient. Now we need to reconsider whether regulating network monopolies in the same way is conducive to human well-being.
Tirole：I agree that we are in a new world, and we have to revisit our knowledge on antitrust. For one thing, if we think about network societies, monopolies may be efficient in a sense. Networks are not interoperable, so if you want to enjoy the benefits of network societies, you may need to rely on one firm, or maybe two or three. I am on Facebook because you are on Facebook. Since this is the way network societies work, the reality is that we have a small number of providers. Maybe one is actually efficient. But at the same time, monopolies still have many drawbacks. And we know that monopolies charge high prices and also that they don’t innovate very much, because they are afraid of cannibalizing their products. Therefore, we need to think about antitrust policy in a different way. Something that people discuss a lot is contestability. Contestability is competition for the market as opposed to competition in the market. Competition for the market means that the next Google can come in and replace Google. And if the incumbent, like Google, is kept on its toes because of this threat of entry, that will force Google to innovate, and also to charge low prices because it might be replaced. It wants to build network societies as much as possible, at least in theory. We can then discuss whether this also applies in practice.
Was Facebook’s Acquisition of WhatsApp and
Instagram a Plus or a Minus?
Tadenuma：Contestability certainly is a very interesting concept.
Tirole：The difficulty, of course, is to have contestability. There must be at least two conditions for this to work. The first is that an efficient entrant can actually enter the market. And the second, which is slightly difficult, is that the entrant actually enters the market and competes with the incumbent. On the first point, an entrant often enters a market niche accounting for a very small segment. In fact, Google itself entered the search engine business and Amazon entered the book business, both very small segments, and then expanded into empires. In almost every industry today’s big players—Google, Amazon, Facebook, Apple, and so on—started small in some specific segment where they did well, and then expanded. It may be difficult to enter if the incumbent bundles everything together and prevents entry into a market niche, or if it engages in predation, in other words preys on new entrants. So that’s the first thing. Antitrust authorities have to avoid these kinds of bars to entry.
The second thing is that even if the new entrant can enter the market, it may not compete with the incumbent, because it may sell out to the incumbent. Now a lot of entrants seem to be purchased by incumbents, so there is no actual competition. This doesn’t create value for consumers. And we may be worried about mergers and acquisitions like those of WhatsApp and Instagram by Facebook, because those are social networks and they could have competed with Facebook. But we don’t know what would actually happen if they weren’t acquired by Facebook. And that raises an issue with merger policies. It’s very difficult to prove that those were anti-competitive mergers, because the competition hadn’t happened yet. That’s one of the challenges. Technology is moving so fast that it’s very hard to know whether Instagram and WhatsApp were competitors for Facebook.
The Value and Social
Role of Economic
Tadenuma：It was a great honor for me to listen to your very interesting lecture on industrial organization here. I hope that you will continue to contribute to economies and human well-being around the world by guiding competition policy and public regulation.
Tirole：Thank you. I think it’s actually very important to stress, as you noted earlier, that economics is a normative science, not only a positive science. Of course, in economics we stress quantitative methods: theory, econometrics, lab and field experiments, and big data. But it’s not only about quantitative methods. Economics also has a very strong normative element, which makes it very applicable and usable for policy making, and it’s part of our job to actually do that. I’m glad you are emphasizing this. If I may add something, and it’s probably the same for you, one of the reasons I chose economics was this normative aspect that enables us to use it to make the world a better place and engage in policy-making. That’s one of the attractions of economics.
Tadenuma：Recently you published a new book entitled Economics for the Common Good, and I would like to ask you about that. What are your views on the value of economics, and what kind of role should it play in society?
Tirole：Economics is not about defining social goals. It’s up to society to do that. But economists can help with thinking about that. In my book, I talk about “the veil of ignorance,” which is part of a long tradition dating back at least to England in the 17th century or continental Europe in the 18th century, and tries to help us think about the goals of society. It’s a very simple sort of experiment. It’s very hard to think about goals, because we each have a position in society. We need to abstract from this position. The idea is really like the one put forward by John Rawls, John Harsanyi, and others in the 20th century in the US: Ask yourself, “If I were not born yet and I didn’t know who I was going to be in society, what kind of society would I like to live in?” Imagine you don’t know whether you’ll be a man or a woman or in good health or bad, if you will come from a poor family, a rich family, an educated family, a not-so-educated family, if you will be Japanese or French, and so on, or religious or agnostic. It’s basically these kinds of questions. Ask yourself, “How would I design a society, knowing that I don’t know where I would be in society?” That will give you some insight about what kind of society you would like to have. So, for example, you would like to have gender equality. You would like to have religious tolerance. You would like to have universal health care coverage, because you want to be insured against the risk of illness. You would like to have universal education, so that everybody has at least the possibility of going to good schools, because that’s also an insurance mechanism. You would like to have equal income distribution. You would like to have competition policy. So it’s not up to economists to decide what society needs. It’s up to society to decide. But at least we can help think about it. Our main job is finding solutions. Once we have defined the goals, the question is how do we reach those goals? It’s more a question of resource allocation and incentives for organizations. And we design the toolbox to analyze these issues. But again, the goals are defined by societies themselves.
Tadenuma：I am in complete agreement with your view. The role of economics is not to define social goals, but to serve the people to facilitate agreement on specific social goals. That should be the role of economics and social sciences as a whole. Normative economics and positive economics both serve to facilitate consensus. Normative economics provides a framework for thinking about social goals. The “veil of ignorance” advocated by Dr. John Rawls and the concepts of “functionings” and “capability” developed by Dr. Amartya Sen did provide those frameworks.
On the other hand, positive economics should show the consequences of specific policies and regulations to reduce incomplete information in society. This approach also plays an important role in facilitating social agreement.
Tirole：Of course, it is hard to eliminate asymmetric information. Powerful institutions are actually meant to reduce asymmetric information. For example, we use intermediaries to monitor borrowers, such as investment analysts to monitor Starbucks and banks to monitor small and medium enterprises. We use intermediaries to reduce asymmetry of information. Transparency rules are also about reducing asymmetric information.
In democracies we also use experts to try to reduce asymmetric information. Unfortunately, nowadays experts are being criticized and populists are actually saying they don’t want to listen to the experts anymore. But of course that’s a little bit dangerous for democracy. Even if experts sometimes have their own flaws, we can’t realize true democracy without experts, because without them, people could accept everything blindly.
Many of our institutions are actually tethered to reduce the asymmetry of information, though it’s not enough. There is no way of knowing exactly what the tastes of people are. But it’s true that from the viewpoint of asymmetric information you can understand a number of our institutions.
The same applies to representative democracy. Direct democracy is a rarity. It has been introduced in countries like Switzerland, or in California. These places are democratic to an extent, but not that much. Partly because people are not always well informed. It doesn’t mean they are stupid, but simply that they don’t have the time to get informed about various issues. That’s why we have the principle of representative democracy, which basically delegates decision-making to certain people who in principle—not always, but in principle—have more time to get information about issues.
Young Researchers Should Seek Stimulating Environments
and Train in Multiple Fields
Tadenuma：Precisely. I would like to continue this discussion on economics, but in the interests of time I have to move on to other questions. What is your message for young researchers?
Tirole：I have several messages. The first is, of course, to be trained in multiple topics and maintain a broad knowledge-base, because the field is changing fast. Some of the new ideas are emerging by combining various disciplines, and cross-stratification across ideas and fields can be useful. It is valuable to have a broad grounding in economics and sometimes beyond economics, in other fields of human and social sciences. We are trying to encourage this, but it’s difficult because we also know that economics is becoming increasingly specialized. As the discipline matures, people are specializing more. It’s difficult to have expertise in every field, and at some point you have to be an expert in at least one field. But at least while you are a student it is useful to explore diverse points of view and approaches.
My second piece of advice is to choose stimulating environments. Something I’ve noticed myself is that I’m greatly influenced, as a researcher, by my colleagues and my students and teachers, because they make me think differently, and they make me consider new issues that I haven’t thought about. Sometimes it’s also important to put yourself in touch with the real world. I’ve worked in Toulouse with a lot of partners, in both the private and public sectors. In addition to funding, which is of course important, they have offered new topics for research and new ideas that we could build on. So the environment in general, whether it be your immediate colleagues or external relations, is very useful in thinking about new things.
My third piece of advice is that if you become a researcher, try to ask the right question. Actually, it’s very difficult to ask the right question. There are so many questions that asking the right one is the hardest challenge. That is something you learn over time.
My fourth piece of advice would be not to forget your responsibility as an economist. This is crucial. You are here to make this world a better place. Especially in these times of populism, you have a responsibility to explain how economics can work for the common good and deploy your knowledge to make it work for the common good.
My last piece of advice is just to enjoy yourself and live your passion. Passion is vital. Whether you are in research, teaching, industry, or government, the fact that you enjoy what you are doing is going to change your life, and will actually make you much more efficient and useful for society. But even just enjoying what you do is very important in itself. And to students, I would say have trust in yourself. That’s also very important.
Tadenuma：Thank you for such nice advice to students. I share your views entirely.
Tirole：Especially here at Hitotsubashi University, you have very good students, so it would be a shame if they did not trust themselves. They should be confident in their ability to do well.
TSE’s Establishment
and Sustainability
Tadenuma：I would now like to ask you about the Toulouse School of Economics. TSE is one of the world’s top-ranked universities in the field of economics. Could you please tell us about its history?
Tirole：TSE was founded by Jean-Jacques Laffont. After getting his Ph.D. at Harvard, he returned to his hometown of Toulouse in 1980, and decided to establish a European-level, world-class university there. Everybody told him he was crazy, because there was nothing in Toulouse at the time. But there were a few young researchers who helped Jean-Jacques Laffont build a place to start. He wanted to change things, and he brought in some new people. I joined TSE in 1991.
At first, the way he changed things was to have partnerships with companies and the public sector. This brought research funding and, as I mentioned earlier, suggested new research topics to our researchers. This was applied research conducted through contracts with firms, but the research itself was independent. We discussed things with people in the industry, but then did our own research independently and published what we wanted to publish. That was the model until 2006. Unfortunately, Jean-Jacques Laffont passed away in 2004. He was a great manager and a great researcher. He was a world leader in his field. After his untimely death, we decided to continue what he had started. In 2006 we were fortunate to gain the right to start a foundation called the Jean-Jacques Laffont Toulouse School of Economics Foundation, which I have the honor of chairing. It’s a private foundation but within the public university. Although we are part of the public system, the foundation itself is private, so we have more flexibility in management compared to the more rigid ways of operating in the public sector. The foundation is basically a financial and governance instrument. We obtained the right to create the foundation in 2006, and integrated it with TSE in 2008.
Tadenuma：I see.
Tirole：Once we had the right to create a foundation, the first thing we did was to build an endowment. Basically, this was to source funds from companies and the government in order to be sustainable, because in the past the difficulty was that we had money for only two or three years. We wanted to build an endowment like American universities do, so as to be more stable and sustainable. We used the foundation for that purpose. Then, we established a governance framework for it. We have 15 directors on the foundation’s board, 13 of whom are external, so only two are from within the TSE. We also have a scientific council, and all 16 of its members are outsiders. In this way we have achieved external governance of both the board of directors and the scientific council.
We tried to introduce a number of reforms in the functioning of university systems. One, for example, was to introduce a tenure track system. We couldn’t do that before, but now it is possible. Actually, one of our first recruits was your student, Takuro Yamashita, who you advised when he was an undergraduate at Hitotsubashi. He went on to Stanford, and then we hired him, and he did very well and just got tenure in Toulouse. We mainly hired French people before, just like any French university, but now we have a very international team. We were the first to introduce a tenure track system in France, where such systems weren’t previously used. This allowed us to recruit on the international market.
Amid Fierce Competition for Funding and Talent,
Emphasizing Quality of Research is Crucial
Tadenuma：I have a couple of questions about running the foundation. Compared to science and engineering universities, social science universities sometimes have difficulty in sourcing external funding. How does TSE encourage donations to the endowment you have established? My second question relates to intensifying competition for talented people. Some universities in the US and elsewhere are giving talented people enormous remuneration packages, but I understand that TSE is successfully identifying, qualifying and attracting talented researchers. What are you doing to succeed in that area?
Tirole：As you say, it’s difficult both to raise funds for social sciences and to compete for talent. Moreover, competition comes not only from the US, but also from a number of European countries, China, Singapore, and many other places. In the 21st century, the economy is going to depend on attracting talent with entrepreneurship, both in universities and also outside universities, and so recruitment is very important. That makes it difficult to compete, both for you in Japan and for us in France. It’s not always easy to compete, but we have no choice. We have to compete to get the best people. If you want to convince Japanese donors, you have to emphasize the quality of your research and the fact that general debate about economics is very important for the business environment as well.
I have been arguing that we need smart regulation. Laissez-faire is no good. Neither is stupid regulation. We need smart regulation. And social scientists can contribute by helping to develop better types of economic environments that will promote both business and well-being in the country.
I think that both governments and firms have a duty to invest in higher education, because that’s the future of our countries. If not, everything will happen abroad. If you look at the top 20 tech companies in the world, 11 are American and 9 are Chinese. Those top 20 tech companies in America and China indicate the future of economic activity. In Japan, Europe, and elsewhere, we also have to create our own companies, because they will create wealth and employment for our countries. So in my view there is a very strong duty to invest in a good education in general, and particularly in higher education and research. Sometimes countries neglect to do that, because it’s more of a long-term issue than a short-term one. It’s like climate change in a sense. It’s something that you can delay for a couple of years, but in the end, it catches up in a very bad way. So you need to convince people that it’s vital to invest in higher education and research. It’s a social responsibility.
Promoting Good Governance and Meritocracy to Recruit
and Develop the Best People
Tadenuma：I understand that TSE is known for its talented researchers. How do you recruit such people?
Tirole：We insist a lot on meritocracy. We recruit in the international job market, and around ten of us go to an economic conference and recruitment event in the US every year and interview people there. Among several hundred applications we make a short list of 15 to 20 candidates to meet in Toulouse, and then we make offers. Of course not all of them are accepted, but we may get one or two people per year. We give them tenure track contracts for seven years. After seven years we have an assessment, and send letters to specialists elsewhere in the world to give us an assessment after comparing the quality of the assistant professor’s work to that of their peers. Alongside this external assessment, we make our own judgement, because we also read the papers, and then we decide to grant tenure or not. This is the same process used in the US and elsewhere. We do the same thing when we hire directly at the senior level.
Tadenuma：Hitotsubashi University is a leader in social sciences research and education in Japan. What advice would you give for growing further as you have done at TSE?
Tirole：I don’t have any particular advice to give, because I know you are well aware of what it takes to achieve international standards. It’s true that competition for talent is very tough right now, but as I said, we have no choice. You are facing it just like we are in Toulouse. What we have to do is to promote good governance and meritocracy so as to attract and promote the best people. At Hitotsubashi, you have the benefit of a social science orientation that brings all these disciplines together. It’s great if you can make them work together.
Seven years ago, we established the Institute for Advanced Study in Toulouse, IAST, which we launched to get economists working with psychologists, sociologists, political scientists, historians, philosophers, and legal scholars. IAST is part of TSE, but an independent part where people interact with each other as they do their research. They are of course specialists in a field, but they try to interact with others. This has to be done on a voluntary basis. You cannot force people to do interdisciplinary work, but it can be very useful to create a structure so that they interact and learn from each other. But of course Hitotsubashi is a prestigious research institution, so you know what has to be done and there’s not much more I can tell you.
Something I have found in France is that sometimes the structures can be constraining. That’s why we try to systematically reform while staying within the public university system. We actually need to be able to reform, but it’s not always easy. It requires entrepreneurship, and sometimes it entails conflict as well, but in the long-term it’s a strategy that pays off.
Tadenuma：Four years ago, we established the Hitotsubashi Institute for Advanced Study (HIAS), which is promoting interdisciplinary and international research, so I think we are moving in the same direction as TSE. I hope to further advance collaboration with TSE in both research and education. Just recently we started a student exchange program with TSE.
Tirole：That is tremendous.
Tadenuma：Thank you.
