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As the junior job market rears it ugly head, there are many deep questions: How good are the candidates’ papers? If the papers are so-so, do the candidates show signs of promise and potential for good work in the future? Is there a forgiving, omniscient God? I digress but you get the picture – I have no easy answers for the deep questions. But I do have trite answers for shallow questions.
So, let us turn to “job market meal,” the mating dance that usually ends the visit.
Let us first consider dinner planning. If I am in charge of organizing the visit, I find it is imperative to have my ducks lined up before hand, i.e. get the dinner party and restaurant fixed ahead of the visit. Otherwise, there can be a nightmare scenario where the candidate visit is a disaster, no-one else wants to go to dinner and you are stuck as a silent, unromantic twosome at a pizza joint close to work.
The now planned-ahead restaurant choice is a delicate matter. Like a date, you are sending a signal about how much you care via the restaurant choice. You might like the pizza joint and the very fact you are going to dinner with a spouse and kids at home is a costly signal of your interest. But the people you are interviewing are young and have no knowledge of spouses and kids. Your signal has to be more obvious so you have to go to an (obviously) good restaurant.
There is another dangerous mistake you can make at this step: choosing a restaurant that is too good. This carries a double risk. First, you are sending a confused signal: Is this dinner really signaling your interest in the candidate or in an expensive meal subsidized by your university? Second, and in my experience more pertinently, you are subject to the wonderful but confusing impact of the melting pot that is the American job market for economists. Students from all over the world get into PhD programs at American universities and if their papers are good, they can get a job anywhere. As one of the melty bits in the pot, I can’t help but celebrate this but it does lead to some confusion at the dinner table. Is some hardworking nerd from a land-locked country really going to appreciate the raw seafood at the Temple to Sushi you decide to go to? Chances are that they have been stuck in front of a computer eating toast and processed cheese for the last five years and, before that, they’d never heard of high or low grade tuna.
Play it safe: a good Italian or French restaurant is the best choice.
Made it to Brooklyn alive. I don’t see what the big deal is, some nice chap shoveled me a spot and even gave me a free chair!
From @TheWordAt.
Speaking of which, have you noticed the similarity between shovel-earned parking dibs and intellectual property law? In both cases the incentive to create value is in-kind: you get monopoly power over your creation. The theory is that you should be rewarded in proportion to the value of the thing you create. It’s impossible to objectively measure that and compensate you with cash so an elegant second-best solution is to just give it to you.
At least in theory. But in both IP and parking dibs there is no way to net out the private benefit you would have earned anyway even in the absence of protection. (Aren’t most people shoveling spaces because otherwise they wouldn’t have any place to put their car in the first instance? Isn’t that already enough incentive?) And all of the social benefits are squandered anyway due to fighting ex post over property rights.
I wonder how many people who save parking spaces with chairs are also software/music pirates?
Finally, here is a free, open-source Industrial Organization textbook (dcd: marciano.) This guy did a lot of digging and we all get to recline in his chair.
Amazon has patented a way to let you return gifts before you even receive them.
Amazon’s innovation, not ready for this Christmas season, includes an option to “Convert all gifts from Aunt Mildred,” the patent says. “For example, the user may specify such a rule because the user believes that this potential sender has different tastes than the user.” In other words, the consumer could keep an online list of lousy gift-givers whose choices would be vetted before anything ships.
The benefit to the receiver is clear. The benefit to Amazon is even bigger:
The proposal has also brought into focus a very costly part of the e-retailing business model: Up to 30 percent of purchases are returned, and the cost of getting rejected gifts back across the country and onto shelves has online retailers scrambling for ways to reduce these expenses.
To the giver? Think of it as weakly dominating a gift card. It’s a gift card with a default. If gifts are better that gift cards because they allow you to show the recipient something they never would have found/considered on their own, then this system achieves that without the risk of it going badly. Perhaps that allows you to take even more risks with your gifts. Not everyone is happy though.
“This idea totally misses the spirit of gift giving,” Post said. “The point of gift giving is to allow someone else to go through that action of buying something for us. Otherwise, giving a gift just becomes another one of the world’s transactions.”
Amazon’s system gives users a “Gift Conversion Wizard” through which they can program various rules like “no gifts made of wool” or ”Convert any gift from Aunt Mildred to a gift certificate, but only after checking with me.” But what will the giver be told?
Most cleverly – or deviously, depending on your attitude toward this sort of manipulation – the gift giver will be none the wiser: “The user may also be provided with the option of sending a thank you note for the original gift,” according to the patent, “even though the original gift is converted.” (Alternatively, a recipient could choose to let the giver know he has exchanged the item for something else.)
Casquette cast: Courtney Conklin Knapp.
Liberal commentators bemoan the demise of the old John McCain they thought they knew and loved. Joe Klein wonders what happened to the guy who originally sponsored the Dream Act to allow children of illegal immigrants to become citizens. Think Progress points out that he is now supporting the tax cuts to the rich he vilified in 2000-2004. What has happened to John McCain? Have his preferences changed?
There is one obvious theory that seems to make his positions consistent: McCain had to run to the right to beat off a primary challenger in Arizona. But, as Joe Klein points out, “he recently won reelection and doesn’t have to pretend to be a troglodyte anymore.” So this theory is flawed.
There is another obvious theory. In this one, you have to identify an outcome a person supports or opposes not just by the policy itself but also by the the other person who supports it. So you have outcomes like “tax policy opposed by Obama,” “tax policy supported by Bush,” “tax policy supported by Obama,” “tax policy opposed by Bush” etc. Then, it is quite consistent for McCain to support a 35% tax on the rich when Bush opposes it but to oppose a 35% tax on the rich when Obama proposes it. Essentially, if McCain loses to someone in a Presidential election or primary he opposes their policies whatever they are.
A sophisticated model along these lines is offered by Gul and Pesendorfer. It allows one person’s preferences to depend on the “type” of the other person, e.g. is the opponent selfish or generous? In principle, this model allows us to determine whether a person is spiteful using choice data. McCain certainly has some behavior that is consistent with spitefulness. Is he ever generous? We would need to know his choices when facing someone he beat in a contest or someone he has never played. Or is he just plain mean? Joe Klein leans towards spite based on the available data:
“He’s a bitter man now, who can barely tolerate the fact that he lost to Barack Obama. But he lost for an obvious reason: his campaign proved him to be puerile and feckless, a politician who panicked when the heat was on during the financial collapse, a trigger-happy gambler who chose an incompetent for his vice president. He has made quite a show ever since of demonstrating his petulance and lack of grace.
What a guy.”
If choice with interdependent preferences can be utilized in empirical/experimental analyses, we can investigate the soul of homo economicus using the revealed preference paradigm.
Jonathan Weinstein does a very good Dickens. A fun read.
“There are many other purposes of charity, Uncle, but at the risk of my immortal soul, I shall debate you on your own coldhearted terms. Your logic concerning gifts appears infallible, but you have made what my dear old professor of economic philosophy would call an implicit assumption, and a most unwarranted one.”
You can find it here, thanks to a reader Elisa for hunting it down. The core is paragraphs 43-112 (starting on page 27) which lay out the new rules. I will give some excerpts and my own commentary.
The regulations break down into 4 categories: transparency, no blocking, no unreasonable discrimination, and reasonable network management. Transparency is what it sounds like: providers are required to maintain and make available data on how they are managing their networks. The blocking and discrimination rules are the most important and the ones I will focus on.
No Blocking.
A person engaged in the provision of fixed broadband Internet access service, insofar as such person is so engaged, shall not block lawful content, applications, services, or non- harmful devices, subject to reasonable network management. (paragraph 63)
This is the clearest statement in the entire document. (Many phrases are qualified by the “reasonable network management” toss-off. In the abstract that could be a troubling grey area, but it is pretty well clarified in later sections and appears to be mostly benign, although see one exception I discuss below.) The no-blocking rule is elaborated in various ways: providers cannot restrict users from connecting compatible devices to the network, degrading particular content or devices is equivalent to blocking and not permitted, and especially noteworthy:
Some concerns have been expressed that broadband providers may seek to charge edge providers simply for delivering traffic to or carrying traffic from the broadband provider’s end-user customers. To the extent that a content, application, or service provider could avoid being blocked only by paying a fee, charging such a fee would not be permissible under these rules. (paragraph 67)
No Unreasonable Discrimination
A person engaged in the provision of fixed broadband Internet access service, insofar as such person is so engaged, shall not unreasonably discriminate in transmitting lawful network traffic over a consumer’s broadband Internet access service. Reasonable network management shall not constitute unreasonable discrimination.
This rule is heavily qualified in the paragraphs that follow. Here is my framework for reading these. There are three typical ways a provider would discriminate: differentially pricing various services (i.e. you pay differently whether you are accessing Facebook or YouTube), differentially pricing by quantity (i.e. the first MB costs more or less than the last), or differentially pricing by bandwidth (i.e. holding fixed the quantity you pay more if you want it sent to you faster, for example by watching HD video.)
The rules seem to consider some of these forms of discrimination unreasonable but others reasonable. The clearest prohibition is against the first form of discrimination, by data type.
For a number of reasons, including those discussed above in Part II.B, a commercial arrangement between a broadband provider and a third party to directly or indirectly favor some traffic over other traffic in the broadband Internet access service connection to a subscriber of the broadband provider (i.e., “pay for priority”) would raise significant cause for concern. (paragraph 76)
Such a ban is clearly dictated by economic efficiency. The cost of transmitting a datagram is independent of the content it contains and therefore efficient pricing should treat all content equally on a per-datagram basis. This principle is the hardest to dispute and the FCC has correspondingly taken the clearest stand on it.
As for quantity-based discrimination:
We are, of course, always concerned about anti-consumer or anticompetitive practices, and we remain so here. However, prohibiting tiered or usage-based pricing and requiring all subscribers to pay the same amount for broadband service, regardless of the performance or usage of the service, would force lighter end users of the network to subsidize heavier end users. It would also foreclose practices that may appropriately align incentives to encourage efficient use of networks. The framework we adopt today does not prevent broadband providers from asking subscribers who use the network less to pay less, and subscribers who use the network more to pay more. (paragraph 72)
So tiered service by quantity is permitted. Note that the wording given above is off the mark in terms of what efficiency dictates. It is not quantity per se that should be priced but rather congestion. A toll-road is a useful metaphor. From the point of view of efficiency, the purpose of a toll is to convey to drivers the social cost of their use of the road. When drivers must pay this social cost, they are induced to make the efficient decision whether to use the road by comparing it to their their private benefit.
The social cost is zero when traffic is flowing freely (no congestion) because they don’t slow anybody else down. So tolls should be zero during these periods. Tolls are positive only when the road is utilized at capacity and additional drivers reduce the value of the road to others.
So “lighter users subsidizing heavier users” sounds unfair but its really orthogonal to the principles of efficient network management. In an efficiently priced network the off-peak users are subsidized by the peak-users regardless of their total amount of usage. And this is how it should be not because of anything having to do with fairness but because of incentives for efficient usage.
There is one big problem with this toll-road metaphor when it comes to the Internet however. The whole point of peak-pricing is to signal to drivers that its costly now to drive. But when you are downloading content from the Internet things are happening too fast for you to respond to up-to-the-second changes in congestion. It is just not practical to have prices adjust in real time to changing network conditions as dictated by peak-load pricing. And without users being able to respond to congestion pricing their purpose would not be served by calculating prices ex post and sending users the bill at the end of the month.
Given this, it could be argued that a reasonable proxy is to charge users by their total usage. It’s a reasonable approximation that those with greater total usage are also most likely to be imposing greater congestion on others. And the FCC rules permit this. (Note that in particular, what is implied by tiered pricing as a proxy for congestion pricing is not a quantity discount but in fact a quantity surcharge. The per-datagram price is larger for heavier users.)
Discrimination by bandwidth is not directly addressed. It is therefore implicitly allowed because paragraph 73 reads “Differential treatment of traffic that does not discriminate among specific uses of the network or classes of uses is likely reasonable. For example, during periods of congestion a broadband provider could provide more bandwidth to subscribers that have used the network less over some preceding period of time than to heavier users.”
But the following paragraph comes from the section on Network Management.
Network Congestion. Numerous commenters support permitting the use of reasonable network management practices to address the effects of congestion, and we agree that congestion management may be a legitimate network management purpose. For example, broadband providers may need to take reasonable steps to ensure that heavy users do not crowd out others. What constitutes congestion and what measures are reasonable to address it may vary depending on the technology platform for a particular broadband Internet access service. For example, if cable modem subscribers in a particular neighborhood are experiencing congestion, it may be reasonable for a broadband provider to temporarily limit the bandwidth available to individual end users in that neighborhood who are using a substantially disproportionate amount of bandwidth. (paragraph 91)
At face value it gives well-intentioned providers the ability to manage congestion. But there doesn’t seem to be a clear statement about how this ability can be integrated with pricing. Can providers sell “managed” service at a discount relative to “premium” service? One re-assuring passage emphasizes that network management practices must be consistent with the no-discrimination-by-data-type mandate. So for example, congestion caused by high-bandwidth video must be managed equally whether it was from YouTube or Comcast’s own provided video services.
Finally, the rules permit what’s called “end-user controlled” discrimination, i.e. 2nd degree price-discrimination. This means that broadband providers are permitted to offer an array of pricing plans from which users select.
Maximizing end-user control is a policy goal Congress recognized in Section 230(b) of the Communications Act, and end-user choice and control are touchstones in evaluating the reasonableness of discrimination.215 As one commenter observes, “letting users choose how they want to use the network enables them to use the Internet in a way that creates more value for them (and for society) than if network providers made this choice,”and “is an important part of the mechanism that produces innovation under uncertainty.”216 Thus, enabling end users to choose among different broadband offerings based on such factors as assured data rates and reliability, or to select quality-of-service enhancements on their own connections for traffic of their choosing, would be unlikely to violate the no unreasonable discrimination rule, provided the broadband provider’s offerings were fully disclosed and were not harmful to competition or end users.
While this paints a too-rosy picture of the consumer-welfare effects of 2nd degree price-discrimination (it typically makes some consumers worse off and can easily make all consumers worse off) it seems hard to imagine how you can allow the kind of tiered pricing already discussed and not allow consumers to choose among plans.
So the FCC is allowing broadband providers to rollout metered service, possibly with quantity premiums, and there is a grey area when it comes to bandwidth restrictions. These are consistent with, but not implied by efficient pricing, and of course we are putting them in the hands of monopolists, not social planners. They certainly fall short of what net-neutrality hawks were asking for but it was wishful thinking to imagine that these changes were not coming.
I think that the no-blocking and no unreasonable discrimination rules are the core of net-neutrality as an economic principle and getting these is more than sufficient compensation for tiered pricing.
Final disclaimer: everything above applies to “fixed broadband providers” like cable or satellite. The FCC’s approach to mobile broadband can be summarized as “wait-and-see.”
This year, Germany finally paid off its old bonds for World War 1 reparations, as Margaret MacMillan has noted in the New York Times. MacMillan asserts that “John Maynard Keynes, a member of the British delegation in Paris, rightly argued that the Allies should have forgotten about reparations altogether.” Actually, the truth is more complicated. A fuller understanding of Keynes’s role in the 1919 Paris peace conference after World War 1 may also offer a useful perspective on his contributions to economics.
Keynes became the most famous economist of his time, not for his 1936 General Theory, but for his Economic Consequences of the Peace (1920) and A Revision of the Treaty (1922). These were brilliant polemics against the 1919 peace conference, exposing the folly of imposing on Germany a reparation debt worth more than 3 times its prewar annual GDP, which was to be repaid over a period of decades.
Germans saw the reparations as unjust extortion, and efforts to accommodate the Allies’ demands undermined the government’s legitimacy, leading to the rise of Nazism and the coming of a second world war. Keynes seemed to foresee the whole disaster. In his 1922 book, he posed the crucial question: “Who believes that the Allies will, over a period of one or two generations, exert adequate force over the German government to extract continuing fruits on a vast scale from forced labor?”
But what Keynes actually recommended in 1922 was that Germany should be asked to pay in reparations about 3% of its prewar GDP annually for 30 years. The 1929 Young Plan offered Germany similar terms and withdrew Allied occupation forces from the German Rhineland, but the Nazis’ rise to national power began after that.
In his 1938 memoirs, Lloyd George tells us that, during World War 1, Germany also had plans to seize valuable assets and property if they won WW1, “but they had not hit on the idea of levying a tribute for 30 to 40 years on the profits and earnings of the Allied peoples. Mr. Keynes is the sole patentee and promoter of that method of extraction.”
How did Keynes get it so wrong on reparations? In 1871, after the Franco-Prussian War, Germany demanded payments from France, on a less vast scale (only a fraction of France’s annual GDP), while occupying northern France. To hasten the withdrawal of German troops, France made the payments well ahead of the required 3-year schedule, mainly by selling bonds to its own citizens. But the large capital inflow destabilized Germany’s financial system, which then led to a recession in Germany. Before 1914, some argued that such adverse consequences of indemnity payments for a victor’s economy would eliminate incentives for war and assure world peace. In response to such naive arguments, Keynes suggested in 1916 that postwar reparation payments could be extended over decades to avoid macroeconomic shock from large short-term capital flows and imports from Germany.
Nobody had ever tried to extract payments over decades from a defeated nation without occupying it, but that is what the Allies attempted after World War 1, following Keynes’s suggestion. Keynes argued about the payments’ size but not their duration.
Today economists regularly analyze the limits on a sovereign nation’s incentive to pay external debts. In our modern analytical framework, we can argue that the scenario of long-term reparation payments was not a sequential equilibrium. But such analysis uses game-theoretic models that were unknown to Keynes. As a brilliant observer, he certainly recognized the political problems of motivating long-term reparation payments over 30 years or more, but these incentive problems did not fit into the analytical framework that guided him in formulating his policy recommendations. So while condemning the Allies’ demands for Germany to make long-term reparation payments of over 7% of its GDP, Keynes considered long-term payments of 3% of GDP to be economically feasible for Germany, regardless of how politically poisonous such payments might be for its government. Considerations of macroeconomic stability could crowd out strategic incentive analysis for Keynes, given the limits of economic analysis in his time.
Reviewing this history today, we should be impressed both by Keynes’s skill as a critical observer of great policy decisions but also by the severe limits of Keynes’s analytical framework for suggesting better policies. Advances in economic theory have greatly expanded the scope of economic analysis since Keynes’s day and have given us a better framework for policy analysis than what Keynes ever had.
Bad review < Good review < No review at all:
S. Irene Virbila, the L.A. Times’ restaurant critic for the last 16 years, was visiting Red Medicine restaurant in Beverly Hills on Tuesday night when she was approached by managing partner Noah Ellis, who took Virbila’s picture without her permission and then ordered Virbila and her three companions to leave, refusing them service.
Ellis posted her picture on the restaurant’s Tumblr site, explaining that she was not welcome there.
The LA Times food blog has the story. Other blogs have the picture. The Times is undeterred.
The Times will continue with its plans to review Red Medicine. The restaurant was chosen for review, Parsons said, because of its pedigree –- Ellis has worked in the past with noted chef and restaurateur Michael Mina. And, Parsons added, “We had hopes that they would be doing interesting things with Southeast Asian food. We will still review them.”
Gävle Sweden is the hometown of my teacher and longtime co-author Tomas Sjöström. The second most famous Swede after Tomas, Elin Nordegren, ex-wife of Tiger Woods, spends time in Gävle because her mother lives there.
At Xmas, Gävle is famous for another reason: it sturdy citizens build a huge goat and it appears to have become a tradition to burn it down, steal it or otherwise damage it. A brief recent history:
2001 Goat set on fire on 23 December by Lawrence Jones, a 51-year-old visitor from Cleveland, Ohio, who spent 18 days in jail and was subsequently convicted and ordered to pay 100,000 Swedish kronor in damages.
2002 The goat received only minor damage.
2003 Burnt down on 12 December.
2004 Burnt on December 21.
2005 Burnt by unknown vandals reportedly dressed as Santa and a gingerbread man by shooting a flaming arrow at the goat at 21:00 on 3 December.
2008 The goat finally succumbed to the flames ignited by an unknown assailant.
2009 An unsuccessful attempt was made to throw the goat into the river the weekend of December 11. On the night of December 23 before 04:00 the goat was set on fire and was burned to the frame, even though it had a thick layer of snow on its back.The goat had two online webcams which were put out of service by a DoS attack, instigated by computer hackers just before the attack.
One hour or so before midnight in Sweden, the goat still appears to be standing according to this webcam.
Subjects were given a sugar pill. They were told it was a sugar pill. They were told that sugar pills are not medicine. And yet they had better outcomes than the control group who were not treated at all.
Edzard Ernst, a professor of complementary medicine at the University of Exeter, says, “This is an elegant study which suggests that the ritual of giving a patient a remedy is clinically effective, even if that patient has been told that the remedy is a placebo.” Kaptchuk himself says, “I suspect that just performing “the ritual of medicine” could have activated or primed self-healing mechanisms.” And Amir Raz, a neuroscientist who studies placebos at McGill University, adds, “Scientific reports make it clear, even if strange and counterintuitive, that receiving – rather than the actual content of – medical treatment can trigger and propel a healing process.”
Notably, the patients (apparently even the control group) were told about the psychology of the placebo effect.
They told the patients that “placebo pills, something like sugar pills, have been shown in rigorous clinical testing to produce significant mind-body self-healing processes.” And they explained: that “the placebo effect is powerful; the body can automatically respond to taking placebo pills like Pavlov’s dogs who salivated when they heard a bell; a positive attitude helps but is not necessary; and taking the pills faithfully is critical.”
There are many caveats and open questions, the full article is worth a read.
It sounds so simple: you’re nice you make the list, you’re naughty you get a stocking full of coal. But just how much of the year do you have to be nice?
It would indeed be simple if Santa could observe perfectly your naughty/nice intentions. Then he could use the grim ledger: you make the list if and only if you are nice all 365 days of the year. But it’s an imperfect world. Even the best intentions go awry. Try as you may to be nice there’s always the chance that you come off looking naughty due to misunderstandings or circumstances beyond your control. Just ask Rod Blagojevich.
And with 365 chances for misunderstanding, the grim ledger makes for a mighty slim list come Christmas Eve. No, in a world of imperfect monitoring, Santa needs a more forgiving test than that. But while it should be forgiving enough to grant entry to the nice, it can’t be so forgiving that it also allows the naughty to pass. And then there’s that dreaded third category of youngster: the game theorist who will try to find just the right mix of naughty and nice to wreak havoc but still make the list. Fortunately for St. Nick, the theory of dynamic moral hazard has it all worked out.
There exists a number T between 0 and 365 (the latter being a “sufficiently large number of periods”) with three key properties
- The probability that a truly nice boy or girl comes out looking nice on at least T days is close to 100%,
- The probability that the unwaveringly naughty gets lucky and comes out looking nice for T days is close to 0%,
- If you are being strategic and you are going to be naughty at least once, then you should go all the way and be unwaveringly naughty.
The formal statement of #3 (which is clearly the crucial property) is the following. You may consider being naughty for Z days and nice for the remaining 365-Z days and if you do your payoff has two parts. First, you get to be naughty for Z days. Second, you have a certain probability of making the list. Property #3 says that the total expected payoff is convex in Z. And with a convex payoff you want to go to extremes, either nice all year long or naughty all year long.
And given #1 and #2, you are better off being nice than naughty. One very important caveat though. It is essential that Santa never let you know how you are doing as the year progresses. Because once you know you’ve achieved your T you are in the clear and you can safely be naughty for the remainder. No wonder he’s so secretive with that list.
(The classic reference is Radner. More recently these ideas are being used in repeated games.)
The freshly tenured Chris Berry has switched briefly from padding out his CV by publishing like crazy to padding out his belly. Chris and his colleagues at the Harris School of Public Policy have an encyclopedic knowledge of fried products in the Chicago area, especially if they are fried in duck or pork fat. But they keep an open mind and are accepting of all kinds of fat so I had the luck to enjoy a donut which Chris picked up at the Rise’ N Roll Amish Bakery. Loaded with butter and dusted in cinnamon sugar, these donuts are treat not to be indulged in too often. But with New Year’s resolutions of exercise just over a week away, what better time than this to enjoy the cholesterol?
Moving us one step closer to a centralized interview process (a good thing as I have argued), the Duke department of economics is posting video clips of job talks given by their new PhD candidates. Here is the Duke Economics YouTube Channel, and here is the talk of Eliot Annenberg (former NU undergrad and student of mine btw.) I expect more and more departments to be doing this in the future. (Bearskin bend: Econjeff)
While we are on the subject here is a recent paper that studies the Economics academic labor market (beyond the rookie market.) The abstract:
In this paper we study empirically the labor market of economists. We look at the mobility and promotion patterns of a sample of 1,000 top economists over thirty years and link it to their productivity and other personal characteristics. We find that the probability of promotion and of upward mobility is positively related to past production. However, the sensitivity of promotion and mobility to production diminishes with experience, indicating the presence of a learning process. We also find evidence that economists respond to incentives. They tend to exert more effort at the beginning of their career when dynamic incentives are important. This finding is robust to the introduction of tenure, which has an additional negative ex post impact on production. Our results indicate therefore that both promotions and tenure have an effect on the provision of incentives. Finally, we detect evidence of a sorting process, as the more productive individuals are allocated to the best ranked universities. We provide a very simple theoretical explanation of these results based on Holmström (1982) with heterogeneous firms.
via eric barker.
Today the commissioners of the FCC will meet to vote on a new proposed policy concerning Net Neutrality. It is expected to pass. Pundits, policymakers and media of all predispositions are hyperventilating over the proposal but none link to it and I can’t find the actual document anywhere. Does anybody have a link to it?
In a perfectly competitive market, the price of a product is given by its minimum average total cost of production. The lower this is, the lower the price. Technological advances have reduced the costs of operating a fridge, air conditioner, washing machine etc… etc…. Consumers will buy more of them and consume more electricity and produce more greenhouse gases. How much more depends on the elasticity of demand. If elasticity is high, energy consumption may go up so fast that it results in greater resource depletion with greater energy efficiency. This is basic economics and was known in the nineteenth century. It is known as the Jevons paradox and is the topic on an article in the New Yorker (subscription required):
In 1865, a twenty-nine-year-old Englishman named William Stanley Jevons published a book, “The Coal Question,” in which he argued that the bonanza couldn’t last. Britain’s affluence and global hegemony, he wrote, depended on its endowment of coal, which the country was rapidly depleting. He added that such an outcome could not be delayed through increased “economy” in the use of coal—what we refer to today as energy efficiency. He concluded, in italics, “It is wholly a confusion of ideas to suppose that the economical use of fuel is equivalent to a diminished consumption. The very contrary is the truth.”
Jevons is now known more as a utilitarian and one of the founders of mathematical economics. Who knew he combined the practical with the theoretical?
Commenting on Jonah Lehrer’s article on “The Truth Wears Off,” and how once rock-solid science eventually becomes impossible to replicate, Chris Blattman blames publication bias in all of its various forms.
The culprit? Not biology. Not adaptation to drugs. Not even prescription to less afflicted patients. Rather, it’s scientists themselves.
Journals reward statistical significance, and too many academics massage or select results until the magical two asterisks are reached.
But more worrisome is that much of the problem might be more unconscious: a profession-wide tendency to pay attention to, pursue, write up, publish, and cite unusually large and statistically significant findings.
This is all true, and it’s why you should reject out of hand studies like the one documenting “precognition” that made the rounds a few months ago. (Who’s gonna even mention, let alone publish a study reporting that “we tried but just couldn’t find evidence that people can see the future”?)
But do be careful: if there is a publication bias in favor of the unexpected, then you have just as much reason to doubt that the “truth wears off.” If a fact was first proven then disproven, was publication bias to blame for the proof or the disproof?
- A winner is declared in the contest to smuggle the phrase “I smoke crack rocks” into a published article.
- Surprisingly accurate account coupled with stunningly confused extrapolation of the Ellsberg ambiguity experiment.
- Julian Assange’s OKCupid profile.
- Salvia market boom after circulation of Miley Cyrus bong video.
- Where are you in the income distribution?
- FBI informant infiltrates Irvine, CA mosque. Muslims are so alarmed at his violent provocations they get a restraining order against him.
There is a new blog, Spousonomics, written by two MILRs, Paula Szuchman and Jenny Anderson. The topics are near and dear to the Cheap Talk heart: “Using economics to master love, marriage, and dirty dishes.” You can read about The Definition of A Good Marriage, Wiki-Marriage-Leaks, and Signaling for Sex.
They are doing a series on “Economists in Love” and based on my post on Hormone Neutraility, they assumed I was a sensitive guy and so they asked me a few questions like “Why are you an economist?” and “Is marriage a repeated game?” Of course the reality is that I am emotionally stuck in the 7th grade and so you can see my smart-ass answers here.
Also, there is a picture of me and my wife (she looking hot, me looking like I need a nap.)
Via MR, a wonderful profile and interview with the economist Avinash Dixit. Avinash has made fundamental contributions to international trade, political economy and the theory of real options. Avinash has a Schelling-esque style and has a great sense of humor. It turns out that for many years he has kept hidden in his drawer an analysis of Elaine’s decision problem in an episode of Seinfeld:
Elaine Benes uses a contraceptive sponge that gets taken off the market. She scours pharmacies in the neighborhood to stock a large supply, but it is finite. So she must “re-evaluate her whole screening process.” Every time she dates a new man, which happens very frequently, she has to consider a new issue: Is he “spongeworthy”?
Avinash studies Elaine’s problem formally. And his model displays all the great qualities one might expect. First, simplifying assumptions: To get intuition for the key issue – how does the finite supply of sponges affect Elaine’s decision problem – it is good to make the rest of the model stationary. Hence:
Suppose Elaine believes herself to be infinitely lived; this is a good approximation in relation to the number of sponges she has and her time-discount factor or impatience. She meets a new man every day.
Let Q be the “quality” of a man Elaine meets where Q is drawn from the uniform distribution on [0,1]. Let Vm be Elaine’s expected utility when she has m sponges left. Her per-day discount factor is b – Elaine lives in NYC and meets a lot of men! At her optimum, a man is spongeworthy iff
Q+bVm-1>bVm
Given the assumptions made, Avinash can actually explicitly work out the details of the solution to this problem by cranking out Vm. But here are some qualitative insights.
1. Elaine should have a threshold strategy: There is a threshold Qm where a man is spongeworthy iff his Q is greater than this threshold when Elaine has m sponges left.
2. Qm is decreasing: The more sponges Elaine has left, the lower her standards.
3. Vm is decreasing: As Elaine runs our of sponges, her expected utility declines as there are fewer “interactions” remaining.
There are other insights and extensions. For those, I recommend Avinash’s lovely paper.
Writing naked puts a man at risk of ruin due to financial crash blossoms.
Stare at it a while before clicking through for the disentanglement. (You might want to read the MR post which inspired it.)
In sports, high-powered incentives separate the clutch performers from the chokers. At least that’s the usual narrative but can we really measure clutch performance? There’s always a missing counterfactual. We say that he chokes if he doesn’t come through when the stakes are raised. But how do we know that he wouldnt have failed just as miserably under normal circumstances? As long as performance has a random element, pure luck (good or bad) can appear as if it were caused by circumstances.
You could try a controlled experiment, and probably psychologists have. But there is the usual leap of faith required to extrapolate from experimental subjects in artificial environments to professionals trained and selected for high-stakes performance.
Here is a simple quasi-experiment that could be done with readily available data. In basketball when a team accumulates more than 5 fouls, each additional foul sends the opponent to the free-throw line. This is called the “bonus.” In college basketball the bonus has two levels. After fouls 5-10 (correction: fouls 7-9) the penalty is what’s called a “one and one.” One free-throw is awarded, and then a second free-throw is awarded only if the first one is good. After 10 fouls the team enters the “double bonus” where the shooter is awarded two shots no matter what happens on the first. (In the NBA there is no “single bonus,” after 5 fouls the penalty is two shots.)
The “front end” of the one-and-one is a higher stakes shot because the gain from making it is 1+p points where p is the probability of making the second. By contrast the gain from making the first of two free throws is just 1 point. On all other dimensions these are perfectly equivalent scenarios, and it is the most highly controlled scenario in basketball.
The clutch performance hypothesis would imply that success rates on the front end of a one and one are larger than success rates on the first free-throw out of two. The choke-under-pressure hypothesis would imply the opposite. It would be very interesting to see the data.
And if there was a difference, the next thing to do would be to analyze video to look for differences in how players approach these shots. For example I would bet that there is a measurable difference in the time spent preparing for the shot. If so, then in the case of choking the player is “overthinking” and in the clutch case this would provide support for an effort-performance tradeoff.
One activity can equally be done by Division A or Division B of a firm but, for historical reasons, Division A has control of it right now. This gives the managers of Division A lots of power to hire and they like having a little empire. But the CEO comes up with a plan: Since both divisions are in theory up to the job, have them compete for the activity.
The best way to do this is pretty obvious: If Division A screws up, give the job to Division B. But of Division A does a good job let them keep it. This gives Division A good incentives to work hard to do a good job.
In practice it is hard to measure the quality of output so it is hard to implement this simple scheme. Quality is evaluated by subjective judgements and rhetorical arguments. Perversely, the better the job Division A is doing, the more incentive Division B has to try to steal the job. This is because a job well done generates lots of slots. If Division A is doing a bad job, the activity does not look worth stealing.
So, in practice, having the divisions compete for the activity can lead to destruction of incentives. Better to give one division the property right over the activity and intervene only when outcomes are objectively poor.
It has been suggested that Keynesian economics remains the best framework that we have for making sense of recessions, but that macroeconomic theory also needs to do a better job of incorporating the realities of finance. There may be a fundamental contradiction between these two suggestions.
In their book Microeconomics of Banking, Xavier Freixas and Jean-Charles Rochet noted that there was no microeconomic theory of banking before the 1970s. Banks and other financial intermediaries earn their profits by knowing more than depositors about the quality of borrowers’ investments. So an economic theory of banking requires an ability to analyze transactions among agents who have different information. Economists first developed such agency theories only around 1970, building on previous advances in game theory.
So John Maynard Keynes’s 1936 General Theory and other classic theories of macroeconomics were developed when there was no real economic theory of banking. Inevitably this limited the scope of their analysis. For example, if the 1933 Glass–Steagall Act of banking regulatory reform was essential for halting America’s catastrophic slide into the Great Depression, there would be no way to incorporate that fact into the analysis without an economic theory of banking.
An economic theorist who rereads the General Theory today may be struck by the absence of any serious analysis of how massive bank failures could have been involved in causing the Great Depression. In chapter 11, Keynes briefly discussed moral hazard in lending, but he had no analytical framework to use these insights, and they tended to get lost in the discussion.
But Keynes was a brilliant observer, even when he could not fit his observations into his theories. For a contrasting view on the role of banks, look at Keynes’s previous book, his 1930 Treatise on Money. Near the end of that book, in chapter 37, Keynes made the following observation:
“The relaxation or contraction of credit by the Banking System does not operate merely through a change in the rate charged to borrowers; it also functions through a change in the abundance of credit. If the supply of credit were distributed in an absolutely free competitive market, these two conditions, quantity and price, would be uniquely correlated with one another and we should not need to consider them separately. But in practice, the conditions of a free competitive market for bank-loans are imperfectly fulfilled. There is an habitual system of rationing in the attitude of banks to borrowers — the amount lent to any individual being governed not solely by the security and rate of interest offered, but also by reference to the borrower’s purposes and his standing with the bank as a valuable or influential client. Thus, there is normally a fringe of unsatisfied borrowers who are not considered to have the first claims on a bank’s favours, but to whom the bank would be quite ready to lend if it were to find itself in a position to lend more. The existence of this unsatisfied fringe allows the Banking System a means of influencing the rate of investment supplementary to the mere changes in the short-term rate of interest.”
There is an interesting suggestion here that even short-term loans might implicitly depend on long-term relationships between investors and financial intermediaries. Such an idea could be the basis for a theory of macroeconomic fluctuations in which bank failures could affect investment.
In 1936, however, Keynes could not build a theory in which monetary policy could affect aggregate investment other than through its effect on the interest rate. His 1930 observation got lost in his subsequent analysis because it did not fit into his analytical framework. He had no way to answer the obvious question: If so many eager qualified borrowers are unable to get loans at the current interest rate, why don’t banks offer to lend to them at a higher interest rate? Today economists understand how such credit rationing can be derived from considerations of adverse selection or moral hazard in borrowing. The classic introduction to the subject is by Joseph Stiglitz and Andrew Weiss in 1981.
Facebook, Buzz, Reader, and other social networking sites all have one thing in common: if you like something then you get to like it. But you never get to dislike what you dislike. (Sure you can unlike what you previously liked, but just as with that other interest rate you are constrained by the zero lower bound. You can’t go negative.)
This kind of system seems to pander to people such as me who obsessively count likes (and twitter followers, and google reader subscribers and…) because for people like us even a single dislike would be devastating. With only positive feedback possible we are spared the bad news.
But after a while we start to get the nagging suspicion that the lack of a like is tantamount to being disliked. We put ourselves in the mind of each individual reader. If she liked it then she will like it. If she didn’t like it, she would like to dislike it but she can’t. So she’s silent. But then if she was neutral she now knows that by being silent she is going to be pooled with with the dislike haters. She doesn’t want to hurt my feelings so she likes. Kindhearted but cruel: now I know that everyone who didn’t like indeed didn’t like. It’s exactly as if there was a dislike button. Despair.
But wait. One wrinkle saves our fragile ego. Some people are just too busy to like. Or they don’t know about the like button. And who knows exactly how many people read the article anyway. So a non-like could be any one of these. Which means that kindhearted neutrals can safely stay on the sidelines and pool with these non-participants. A pool big enough to drown out the haters. Joyful noise! And as a bonus I get to know for sure that the likers are likers and not just patronizers.
Finally there’s the personal aspect, it’s flattering to see who likes. The serial likers keep me going. Especially this one regular reader who by amazing coincidence has the same name as me and who likes everything I write.
(drawing: emotional baggage from www.f1me.net)
Islam forbids suicide. Of the world’s three Abrahamic faiths, “The Koran has the only scriptural prohibition against it,” said Robert Pape, a professor at the University of Chicago who specializes in the causes of suicide terrorism. The phrase suicide bomber itself is a Western conception, and a pretty foul one at that: an egregious misnomer in the eyes of Muslims, especially from the Middle East. For the Koran distinguishes between suicide and, as the book says, “the type of man who gives his life to earn the pleasure of Allah.” The latter is a courageous Fedayeen — a martyr. Suicide is a problem, but martyrdom is not.
From an article in the Boston Globe on the psychology of suicide bombers.
When you reach a certain age, your friends start getting honors and you are invited to polite soirees. At aforementioned polite soirees, there are cheesy delights and sweet little dessert tarts. The sweet little desert tarts are tastefully arrayed on silver platters and you can easily pick one up and pop it into your mouth without touching any neighboring tarts. You daintily consume a little fruit tart.
The energizing sugar rush behind you, you turn to the cheesy delight. You are pleased that at this soiree, they have put out the delight out of all delights – the baked brie or the “brie en croute” as we call it at polite soirees. You head over and shove your way into the line for the warm cheesy delight. You are rather aggressive and push past a distinguished looking man that you recognize (too late!) as the new President of Northwestern University. You grin sheepishly and say, “Hi. I’m Rakesh Vohra.” You hope this throws him off the scent – even though your colleague Rakesh is balding and white-haired, at least he has the right skin tone. The President seems to make a mental note to dock your (or Rakesh’s) salary and turns away to talk to someone keen to climb up the greasy pole of university administration.
You turn to the cheesy delight and as you pause to pick up bread you forward momentum, barely broken by the President, is brought to a grinding halt by a fundamental problem: To tong or not to tong. That is the question.
In other words, should you use the tongs – always provided at polite soirees – to pick up the bread or just stick your grubby hand into the bread basket? If you think like homoeconomicus, you decision is obvious: Unlike you, many other people followed the proper procedure and headed over to the cheesy delight before the little sweet dessert tarts. They have used the tongs before you and the supersized tweezers are covered in cheeky little germs just hopping with excitement at the prospect of giving you H1N1 for Christmas. If you stick your grubby hand into the bread basket, you avoid the tong devils but deposit your own cooties on a baguette slice that someone else will pick up. But you are homo economicus so you do not face any moral dilemma: Ignore the “negative externality” and stick your hand into the bread basket.
Then, you are brought to a stop again, this time by a major “Aha” moment. Your shove into the line and all your procrastination is causing much grumbling in the cheesy delight queue. But you’re not even aware of this because you’ve had a huge epiphany: Following the recommendation of homo economicus is also the right thing to do from the perspective of society’s objective of minimizing germ transmission. You guess that Adam Smith must have had a similar experience when the idea of the “invisible hand” hit him just before he was about to tuck into his haggis and scotch.
You reason as follows: When you stick your hand into the bread basket, you might not even hit another bit of bread other than your own. Even if you aim misses because of the two glasses of champagne you drank on an empty stomach, you’re only going to hit a few other slices of ever staler bread. While if you use the tong, you are guaranteeing that the long line of people behind you get to experience your lack of good hygiene. It is better for everyone if you stick your hand in the bread basket.
Your face disfigured by an angelic smile, confident your are doing the right thing for once, you follow the route Immanuel Kant himself would take and finally consume some cheesy delight. You turn around to see the President looking at you as if you’re some kind of animal. You wipe your cheese covered hand on your jeans and grasp his. You say, “Call me Ricky.” You run out before your cover is broken.
A white bank robber in Ohio recently used a “hyper-realistic” mask manufactured by a small Van Nuys company to disguise himself as a black man, prompting police there to mistakenly arrest an African American man for the crimes.
Congratulations Jeff!!! NU is lucky to have you.
