The magic of Nizhny Novogorod

Don’t call it just Novgorod, our guide advised me. You can say Nizhny, but just Novgorod is wrong. Nizhny has always been ‘the city’. The meaning is that, founded in 1211, it has always meant to be a city; it was not created just as a settlement. In 1932 Stalin decided to rename the City into Gorky, i.e. it was given the name of the famous Russian writer. Gorky himself, still alive at that time strictly opposed the idea. And believe it or not, soon after the city turned from Nizhny Novgorod into Gorky, Gorky started to fell ill. Bad Karma. Eventually the city was renamed again in 1991. (So Nizhny Novgorod = Gorky = Nizhny Novgorod; I will use both terms interchangeably).















In the Great Patriotic War 1941-1945 Gorky made highly significant contributions to the production of military equipment. One out of 2 submarines, every third tank, including famous T-34, and one out of four airplanes were produced in the cities’ numerous factories. German Wehrmacht never reached the City (Plan Barbarossa to capture Moscow in a Blitzkrieg failed already in 1941 as a result of the battle of Moscow), but military planes did; the city was bombarded 43 times.

Eternal Flame

A large chunk of the magic of Nizhny derives from the fact that the city is located on the mighty Volga River, which is the largest river in Europe, some 3,500 km long. And Volga River meets with the river Oka, some 1,500 km long. The location where they meet is a must see. You can easily do so by visiting the Kremlin.



Due to its military importance the Gorky was a closed city until 1991, i.e. it was invisible to foreign tourist. It was not displayed on foreign maps. And cruisers on the Volga River passed the City at night, when most tourists were sleeping.


Nizhny consists of two parts. The Kremlin, the old city, and the Higher School of Economics are located in the first one on the one side of the River Oka. The second part, industrial part of the City on the other side of the River Oka, was only merged with Nizhny in 1920. Nizhny is the 5th largest city of Russia, with some 1.5 registered inhabitants (Gastarbeiter and sans-papier come on top of that). Though Nizhny has a Metro, the public transportation system strongly relies on public buses, and to some extent tramways. In fact the first Tramway in Russia was established in Nizhny in 1896. They proudly display this fact on the railcars of a particular line. Nizhny will host some of the matches of the Soccer World Championships in 2018. This is expected to lead to a large increase in infrastructure investment in the years to come.

Until 1917 Nizhny was famous for its international fair. Back then Moscow was usually said to be the heart of Russia, St. Petersburg was the Brain (until today, a lot of senior federal decision makers graduated from St. Petersburg, just take the President, and the Prime minister as examples) and Nizhny was the pocket or the valet (because Nizhny provide so much goods, and merchants made a lot of money there). The fair was closed in 1917, reopened again 1922-1930 during a period of economic policy experiments, and then again closed.

So Nizhny is worth a trip. You can reach the City by bullet speed train within 3 h 48 minutes from Moscow Kurskaya. Fast, clean, safe, still reasonable price. And no boarding time.

Nizhny_Frau_entspannt (c) Tim Jaekel, 2015


What’s new in econometrics? (Part 2)

Day two of the 2nd International conference on Modern Econometric Tools and Application at the Higher School of Economics in Nizhny Novgorod.

Mikhail Zitlukhin from Steklov Mathematical Institute in Moscow addresses a question which is relevant for any actor in the financial market: How to invest money optimally? The common approach is to compare scores assigned to different investment strategies. From that you choose an optimal portfolio. Now, investment decisions face a tradeoff between profit and uncertainty. The objective of financial market research has been to provide a good answer to the question how to measure the trade-off. The Sharpe Ratio is a well-known measure. The expected return, EX, is divided by standard deviation of returns (square-root of Var(X)): S(X) = EX / Var(X)^0.5. A basic assumption is that future returns are known. The Sharpe Ratio is famous because it is easy to understand, and good for practice. But it has disadvantages: not monotone, symmetric, and not flexible. And it is just one measure. Mikhail pointed out that we want to have a family of performance measures, not just one. Mikhail contributes to the literature by defining a simple monotonic profit-to-uncertainty ratio. This approach builds on Theory of coherent risk Measures, the concept of a worst scenario expectation (what is the profit in the worst case), and the logic of Average Value at Risk, among others.

Svetlana Makarova from University College London and co-authors proposed a new test for evaluating economic policy effects. The traditional approach to evaluation is to include some variables representing policy action into the equations. Svetlana and co-authors start from two assumptions which contradict the traditional logic: The time lag between policy action and impact on the economic process is not known well enough. And past decisions might not affect the mean value of the process but its stochastic, unpredictable part. An example is targeting inflation. Svetlana use ARMA-GARCH models to inform an alternative testing strategy.

Kirill Furmanov from Higher School of Economics and his co-author presented results from research on a model for mortgage survival. The response variables are timing of default (3 months without payment), pre-termination (both are modeled separately). They exploit a data set with some 280,000 observations, so large sample trap is an issue. Covariates include debtors and mortgage characteristics. The focus of the paper is on the methodology of comparing survival or life time models. However, they find no satisfactory measure of predictive accuracy of survival model.

And a last snapshot, because this is the kind of topic everybody is interested in: Evgenii Gilenko from St. Petersburg State University and Elena Mironova from University of Amsterdam investigated whether items like gender, driving experience, and even car color should be reflected in future tariff formulation of Russian Motor Own Damage insurances (pictured). So far, mostly driver’s age, car brand and car age and prior claim are reflected in tariff calculation. The Russian car insurance market is a very competitive one, due to recent Rouble deprecation prices for foreign car parts have skyrocketed, while profitability of insurance products has sharply decreased accordingly. Exploiting a dataset of some 3,000 contracts they found no significant effects of driver’s gender on damage claim frequency. Nonetheless the insurance company where the data come from introduced a discount for female clients. The reasoning was that women tend to cheat less, and the claim severity is lower compared to male peers. (Footnote: In the European Union unisex nowadays triumphs over such reasonable nuances. It is not allowed anymore to (positively) discriminate insurance customers based on gender characteristics).


What’s new in econometrics?

The 2nd International Conference on Modern Econometric Tools and Applications (EC2015) is currently taking place at the Higher School of Economic Campus in Nizhny Novgorod (pictured), some 500km east of Moscow.

Svetlana Bryzgalova from Stanford University presented a quite impressive and sophisticated approach to estimate the consumption risks both of bonds and stocks. Dean Fantazzini from Moscow State University had a closer look on the reasons for the recent sharp decline in oil prices. 3 Factors are usually held to account: First of all, there was too much oil in the market. Shale oil production in US is at a peak level, although the oil companies are making losses and accumulating a lot of debt (indicating that shale oil production is just not efficient, but anyways). A short break in the civil war in Libya resulted in an unexpected additional inflow of oil on the market. And Saudi Arabia decided not to cut supply. Secondly, demand for oil turned out to be lower than expected. This was mainly due to economic slow-down in Europe and Asia. On top of that there was a strong dollar, which further put pressure on the oil price. But beyond these commonly stated factors, Dean showed that there is some variation left. He proposed a bubble detection strategy; including a decomposition of a variable into its components. He finds evidence on bubble behavior; apart from basic economics this bubble behavior puts additional pressure on the oil market.

In the spatial econometrics sessions Olga Demidova, from Higher School of Economics, and her co-authors investigated unemployment clubs in Russian Regions. This is relevant because the Federal concept of Regional Development until 2020 asks for a balanced socio-economic regional development and a reduction of interregional disparities. In the same session I present a paper on Performance Gaps, Peer Effects and Innovative Behavior in Public Sector Organizations. I develop a model in which managerial actions result from spillover due to pure learning or strategic mimicry and a cost-benefit calculus of instrumental benefits vs. reputational costs of innovation adoption. Propositions are tested against participation data in a Swedish benchmarking exercise.

Also interesting from a policy-perspective was that – using time series analysis – Rajarshi Mitra and co-authors find that foreign aid has a significantly negative effect on personal income in Bangladesh in the 1971-2001 period. Seemingly overseas development assistants (ODA) was not very effective has rather harmed than benefited Bangladesh. A “bad policy-environment” is considered to be an explanation for this finding.


Metro 2020

Today I took note of the plan for Moscow Metro in 2020 (external link: m24.ru/infographics/3428; M24 is for москва24, a broadcaster). In Russian words my response was: вот ето да, maybe something like OMG, or so. 64 new metro stations will be constructed in the 2015-2020 period; and 14 additional new ones have been finished between 2011 and 2015. Most interesting to me was that they intend to build an additional circle line which parallels the Moscow Automobile Ring Road (МКАД). MKAD once used to coincide with the administrative boundaries of the capital, but Moscow grew beyond in recent years (mainly due to an acquisition of municipalities in the South West in 2012). Anyways, it will take you about 100 kilometers to circle Moscow on the ten-lane MKAD. And the new circle line will probably have a similar radius of some 16km.

The existing circle line (each line has its color; the circle line is the brown one) is rather important within the capital’s transportation infrastructure, because all other lines together are organized like a spider web. Everything is concentrated towards the center. It is easy to get from the outer parts to the inner city. But travelling from one tail, e.g. in the South-West, to another in the South is not. The existing circle line fills this gap below the ground. Above the surface, the spider-web is complemented by public buses and trams. The existing circle line has another major advantage compared to most other lines: Air-conditioned railcars. And this is something you will adore both in summer and winter times.

Most of the newly planned metro stations will be located outside of MKAD. Note that the first metro station beyond MKAD was opened only in 2002. Beside the new circle line the already existing yellow line will be heavily extended towards the west and south-west of Moscow. The light green line will also see nine new stations in the north.

Two major questions arise, the first being how to manage the underlying procurement process, and the second being what spatial economic spillover effects will result from this investment in public transportation infrastructure.

Thirdly I am looking forward to new inspiring public architecture. One of my pet stations is still Vorobyovy Gory (pictured, while the train halts, you can enjoy a beautiful view over Moscow river), but this means almost nothing in a city where each metro station is a marvelous location.


When and why public administration innovates (pt. 3)

This is part 3/3 of my talk that I delivered a HSE Open Day 2015 in Gorky Park in Moscow.

Obstacles to innovative behavior

You might think: Fair enough. There are so many examples of best practices out there, but why not in my home town? Why do I have to wait hours and hours to file a form? Why are bureaucrats still impolite?

A lack of innovative behavior in some administrations is due to the lack of competition in the public sector as a whole. Performance is not linked to the survival of units; public organizations have the property of “semi-immortality” (Choi and Chandler 2015 Lead & Gov, p. 144). Max Weber, a famous researcher from Germany, and researchers from the progressive era in the US, wrote about how public administration should look like (normative approach). Others including Barnard (1938), Simon’s classic ‚Administrative Behavior‘ from 1947, and March and Simon’s ‚Organizations’ from 1958, asked “what motivates bureaucrats to behave as they do?”. This was the „behavioral revolution in the study of organizations“ (Kenneth J. Meier and George A. Krause. 2005. The Scientific Study of Bureaucracy: An Overview. George A. Krause and Kenneth J. Meier (eds). Politics, Policy, and Organizations: Frontiers in the Scientific Study of Bureaucracy. University of Michigan Press, 1-19. P. 3). If we think of public administrations as utility maximizers, which I think makes sense, it is rational for them to maximize budgets, reputation, and hopefully also the public interest. In any case, maximizing the public interest will not be their only goal. Reason one.

Some elected officials do not adopt a new practice because they intend to protect their managerial autonomy. Two strategies are available for public organizations, the first one being to innovate and to identify new opportunities; and the second one being to use existing knowledge. There is a strategy of exploration of new knowledge and a strategy of exploitation of existing knowledge. Innovative organizations may witness a failure trap and a success trap. Failure trap means that reform and change occurs to frequently in public bureaucracies. Decision makers do not wait until a prior reform has been implemented and works. They start something new because they don’t see any benefits from recent reforms; they have lost sight of the fact that the potential benefits are long term. Reason two.

Two questions arise from what I said so far: How to spread innovation in Public Administration? And what does that mean for Moscow, the City we are living in?

First, how to spread innovation beyond frontrunners and change agents? One idea might be a patent system for the public sector. There is a gap between taking the risk to innovate and realizing the benefits from them, because new ideas, programs or processes, i.e. innovations, are considered as public value (Choi and Chandler 2015 Lead & Gov, p. 142). In contrast to the private sector there is no patent system that secures the claims of an innovative individual. How can we make that a best-practice becomes the industry-standard in the sector? Which is similar to the question: How to facilitate knowledge-transfer and information spillover? I consider two basic approaches: The first one is the Chinese approach. China has a long tradition of policy-experiments in its provinces, the equivalent to the Russian Regions. A pilot is tested in a number of municipalities or provinces. If it works it is spread all over the country and implemented in other administrations. This is a centralized approach to knowledge transfer. (Charlotte Lee and Xiaobin He. Development and Change 42(2) 329-352. Heilmann 2008. The China Journal 59.). This might work. Accidents on the job are common in China. Not because there is a lack of regulation, but because of corruption. But recently central government has adjusted the performance indicators that are used to assess whether a bureaucrat will be promoted. Now, the number of accidents at work in a given jurisdictions contributes to performance assessment. Guess what happened: The number of industrial accidents sharply decreased.

On the other hand there is a fiscal federalism approach. The approach is based on the notion that voters are (i) mobile and (ii) sensitive to performance differentials. Both approaches claim to contribute to improvement of public service delivery. But they reflect two views of the world. This can be seen from the following quotation from a former Chief Executive of a large English Local authority from an interview that I conducted in 2013: (This and much more quotations from a set of some 50 interviews can be found in a forthcoming book, Tim Jäkel: Benchmarking in der öffentlichen Verwaltung: Ein europäischer Ländervergleich, Speyrer Forschungsberichte. Speyer 2015).

„One thing … local government is really good [at is that] we learn by a whole variety of ways which is best [idea] and this becomes industry standard. … [This is] an approach that a top-down centrally led approach by central government would never be able to do.“

So, one question is how ideas develop and spillover to others. But even more interesting is the question how learning and knowledge transfer impact organizational performance. These are some of the questions I am currently doing research on at the HSE School of Public Administration. And these are the things you will probably hear about in one of my classes.

Application to Moscow

What does all that mean for Moscow, the City we are living in? Moscow is large, and (ii-iii) for sure has a large body of skilled professionals. And a lot of them have been hired from outside. Sobjanin is the most prominent example. (iv) There are internal performance management structures, though they have to been further developed (see Barabashev 2014). I suggest to give more managerial and fiscal autonomy to the cities boroughs and its districts. This will allow launching policy experiments within defined ranges. The big asset is that City Government is willing to listen to demands from citizens, and to fix reported problems.

This is why I am confident that there will be – maybe small – but steady improvement. A last picture shows a recent change that fueled my confidence. There is an old-school but still common timetable for public buses.


It is odd, because it indicates intervals between single buses. But when the bus will eventually arrive is unpredictable. Now, this looks much better.

FahrplanneunahThe bus line 119 is expected to arrive at 8.09. Good. People can now monitor whether public transportation is on due time. At the end of the day they can hold bureaucrats to account. On Gorod.Mos.ru.

— End


When and why public administration innovates (pt. 2)

(Featured photo: Alexandra Selivanova //  Селиванова Александра Владимировна)

This is part II of a talk that I delivered at HSE Open Day 2015 at Moscow’s Gorky Park on Sept 9:

In my last post I gave some anectoal evidence on public sector innovation from the OECD-world. But what is the empirical evidence – what drives innovation in Public Administration? Research has identified some patterns: An innovative local public sector organization has the following internal properties:

(i) it is large, in terms of organizational, staff or population size.

(ii) It features a significant share of highly-educated professionals that can focus on adopting and implementing new ideas without adversely affecting daily working routines.

(iii) An innovative organization’s staff includes externally hired professionals. Managers that have been hired from outside the organization positively affect the supply side of innovation; job mobility is a relevant source of policy entrepreneurs.

(iv) Innovative agencies posses an internal Performance Management system that allows for internal risk sharing techniques and establish a risk-taking culture.

(v) An innovative organization ensures a high level of employee empowerment by offering knowledge and skill training. This empowerment practice increases encouragement on innovative behavior, i.e. “recovering quickly from errors, learning from those discoveries, generating innovative proposal for redesigning processes and products.” (Fernandez and Moldogaziev 2013 JPart).

(vi) Apparently decision makers tend to innovate in “good times”, though we would expect new ideas after things went wrong. Pallesen (2004 Governance) found that relative fiscal leeway and wealth enables communities to take the risk to privatize community assets. The implication is that innovation adoption is “the politics of good times”.

While these items are uncontroversial, the impact of performance gaps and peer effects is not. Therefore is will discuss the role performance and peer effects on innovative behavior a little bit more.

(vii) Innovative organizations do experience performance gaps, i.e. gaps between aspiration levels for salient goal variables and current performance On the one hand poor relative performance has been found to result in problemistic search processes, organizational learning efforts and innovative activity among members both of private and public sector organizations. On the other hand Public Choice theory tells us that organizations with performance shortfalls tend to avoid innovative behavior. They have an incentive to provide a baseline level of performance. But they will not go for the extra-mile. In my own research I found that large cities in Germany that have a high level of public debt tend to avoid performance comparisons, an innovative practice in public management.  Researchers from Sweden found that highly indebted Swedish municipalities in Sweden are more likely to stick to performance evaluation. Almost the same variable, but opposite effect.

(Viii) Innovation organizations learn from, strategically interact with and mimic innovative peers.  There are good arguments that decision makers have a look at their neighbor before they choose themselves. Has my neighbor adopted the innovation? The mechanism for improvement is competitive learning, that is, policy-transfer because public authorities compete for investments, voters, and taxpayers by performing well on performance scores (yardstick competition approach, Besley and Case 1995 AER). Voters are sensitive to the performance of the incumbent relative to those observed in neighboring jurisdictions; performance indicators act as a yardstick, i.e. a benchmark to inform their voting-decision.

However, the role of peer effects in innovation diffusion has been doubted. Diffusion of innovation might not result from competitive or pure learning but from a search of legitimacy. Some agencies just adopt a policy to gain a reputation premium. But they do not implement it. Public organizations may also adopt an innovation to comply with external regulation or in search of legitimacy but without fully implementing the new routine. There might be mimicry and copycatting, but no improvement of organizational performance.


When and why public administration innovates (pt. 1)

Today I delivered a talk at HSE Open Day 2015 in Moscow Gorky Park (pictured). Here is Part I of what is said:

Moscow is an innovation-driven city, according to the Innovation Cities Index 2014 (which ranked Moscow 63 out of 445). Or as The Economist recently put it – partly jealously, partly admiring – “Russia’s great strength throughout the centuries has been that its people can seemingly adapt to any conditions”.

No doubt, innovation is a top priority in Moscow. There are seven technology parks, young researchers are awarded and the city intends to further develop its innovation and research structure.

But this is private sector innovation. Infrastructure investments result in innovation in the private sector. An example is yandex.taxi. Using geospatial information from the Open data portal of Moscow the quality and quantity of taxi services has improved significantly throughout the last four years. Good. What about innovation in the Public Sector and Public Administration?

Innovative behavior means “to seek out new and better ways of doing things” (Fernandez and Moldogaziev 2013), and some public authorities try to improve citizen’s well-being by doing so. Aforementioned Yandex.taxi application builds on open Data. Moscow’s Open data portal (data.mos.ru) and its bigger sister, the Our City website (gorod.mos.ru) are public sector innovations; e-government innovations.


Both sites have a potential to improve the public interest. Making administrative data publicly available creates transparency. It is a tool to hold people to account for their actions. Open data portal is not very popular (10,000 visits per day) so far compared to Our City Website (2,000,000). Nonetheless, it is a contribution to hold bureaucrats to account for their actions and the resulting outcomes. Even when the number of clicks is low, it sets incentives to achieve at least a baseline level of performance. Our city is the place where people complain, but also receive public services. It is a source to identify self-reported problems, and to fix them. People complain there, and monitor the implementation of requests. Posted photos show results from actions that were taken to address a reported problem (a broken skid, a pothole, a pile of rubish). A new feature is a reporting tool for excessive pricing in pharmacy. Such innovation is driven by latent demand. I experienced such excessive pricing myself. And seemingly other people did as well. The new innovative reporting tool responds to such latent demand. It makes life better a little bit. I feel better when I have the feeling that somebody takes note of daily-life problems. By doing so Our city increase my personal well-being.

Put generally, an innovation is an idea, a program or a policy, which is new to the organization adopting it, regardless of the number of prior adoptions in surrounding peer units. This is the seminal definition of Walker 1969 which has been replicated since then.

E-Government and e-services are typical examples of innovative behavior in public administration. Several municipalities and government agencies in the US have implemented such e-services. Submitting your tax declaration or booking an appointment online is getting common also in Germany. One-stop agencies (products and service innovation, Bhatti 2004) are another innovative practice. Municipalities in Denmark and England have introduced such citizen’s centers. Tewkesbury Borough Council established a one-stop agency, or customer service center (in Dec 2014). North Somerset has established a similar multi-agency citizens portal. East Riding of Yorkshire and Scarborough Borough Council has a ‚virtual customer service centre‘ since 2012. The London Borough of Croydon has a customer service center reported in Jan 2015 (‚Access Croydon‘). Customer service centers normally work like this: On arrival you will be met and shown where to go. You are able to book appointments in advance, online. All of this will reduce waiting time. The objective is twofold; to tailor public service delivery to citizen’s need; and realize efficiency savings. In England such innovative behavior is clearly driven by the deepest spending cuts in recent history. The Spending Review 2010 asks for severe budget cuts, particular in local council’s budgets. At the same time, central government restricts councils‘ autonomy to raise council taxes. For local councils that means “to seek out new and better ways of doing things”.

Another interesting example of innovative behavior from England is the YouChoose budget tool, a simulator to engage citizens in budget cuts; which was first applied by London Borough of Redbridge. It’s a web based simulation: Regular people, like you and I, adjust spending levels of a basket of functions, see the consequences for service delivery (example from demo: reduced frequency of street cleaning), but budget need to be balanced and council tax cannot be raised by more than 5\%- these are the rules of the simulation. If so you can submit your propositions to the local council.

However, budget cuts in England also drive innovative search activities, which have unintended side effects for local residents. This is called pay-as-you-go government. Public administrations (and elected governments) are charging higher fees for public services to fill budget gaps. By doing so they avoid raising taxes, which is associated with the political risks of losing public support and votes. In principal to charge people for a service avoids overconsumption and prevents free-riding. But in some cases the charge of a service now exceeds its costs; the charge becomes a tax (The Economist, Pay-as-you-go government, August 29th-September4th 2015). Public Administrators became too innovative.