17 December 2018

L. Alan Winters CB, Professor of Economics and Director of the UK Trade Policy Observatory.

The UKTPO exists to provide independent and objective advice on the economics and law of Brexit and trade policy. The question of whether to hold a ‘second’ referendum is essentially a political one. However, how to organise such a referendum is a technical question on which economists have something to offer.

Given the divisions in the country it seems plausible to argue that any referendum should offer three alternatives:

• leave with no deal,
• leave with Mrs May’s deal, or
• remain (as, thanks to the Court of Justice of the European Union, we now understand we can decide to do unilaterally).

But organising a three-way contest seems quite challenging.

For example, Professor Vernon Bogdanor suggests a two-stage referendum in which we ask first whether people want to leave and then, a week or so later, what form leave should take. Professor Meg Russell, in an excellent contribution to the Today Programme today (17^th December 2018; at 2.39:50) characterised this as ‘difficult’, because how you vote in the first round is influenced by your hopes or expectations of the outcome of the second.

Professor Russell is quite correct – Professor Bogdanor’s ordering replicates the fundamental problem with the first referendum: no-one would know what ‘leave’ entailed. However, if we simply reversed the order of the questions, this problem would be avoided. Hence, on the assumption that the details of each option had been properly explained, I recommend a two-round referendum with:

• Round 1: ”IF we leave the EU, would you prefer ‘no deal’ or ‘Mrs May’s deal’?”

Then, when the answer to this is known (say a week later),

• Round 2 asks “Now you know how we would leave, would you prefer leaving or staying?”

The decision that would face the UK public in a referendum is sequential – the step of leaving inevitably precedes the step of implementing post-leave arrangements. Economists have long understood that the way to make optimal decisions in such circumstances is through a process known as ‘backward induction’. You start with what will be the last step of the actual process (which of the forms of ‘leave’ you prefer) and work backwards to determine whether the best of the leave options is better than remaining. So, in the first step, the UK electorate determines whether it would prefer no deal to Mrs May’s deal, and then knowing what it will get from leave, whether it wants to go down that path at all.

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The opinions expressed in this blog are those of the author alone and do not necessarily represent the opinions of the University of Sussex or UK Trade Policy Observatory.

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