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Whenever I teach the Vickrey auction in my undergraduate classes I give this question:
We have seen that when a single object is being auctioned, the Vickrey (or second-price) auction ensures that bidders have a dominant strategy to bid their true willingness to pay. Suppose there are k>1 identical objects for sale. What auction rule would extend the Vickrey logic and make truthful bidding a dominant strategy?
Invariably the majority of students give the intuitive, but wrong answer. They suggest that the highest bidder should pay the second-highest bid, the second-highest bidder should pay the third-highest bid, and so on.
Did you know that Google made the same mistake? Google’s system for auctioning sponsored ads for keyword searches is, at its core, the auction format that my undergraduates propose (plus some bells and whistles that account for the higher value of being listed closer to the top and Google’s assessment of the “quality” of the ads.) And indeed Google’s marketing literature proudly claims that it “uses Nobel Prize-winning economic theory.” (That would be Vickrey’s Nobel.)
But here’s the remarkable thing. Although my undergraduates and Google got it wrong, in a seemingly miraculous coincidence, when you look very closely at their homebrewed auction, you find that it is not very different at all from the (multi-object) Vickrey mechanism. (In case you are wondering, the correct answer is that all of the k highest bidders should pay the same price: the k+1st highest bid.)
In a famous paper, Edelman, Ostrovsky and Schwarz (and contempraneously Hal Varian) studied the auction they named The Generalized Second Price Auction (GSPA) and showed that it has an equilibrium in which bidders, bidding optimally, effectively undo Google’s mistaken rule and restore the proper Vickrey pricing schedule. It’s not a dominant strategy, but it is something pretty close: if everyone bids this way no bidder is going to regret his bid after the auction is over. (An ex post equilibrium.)
Interestingly this wasn’t the case with the old style auctions that were in use prior to the GSPA. Those auctions were based on a first-price model in which the winners paid their own bids. In such a system you always regret your bid ex post because you either bid too much (anything more than your opponents’ bid plus a penny is too much) or too little. Indeed, advertisers used software agents to modify their standing bids at high-frequencies in order to minimize these mistakes. In practice this meant that auction outcomes were highly volatile.
So the Google auction was a happy accident. On the other hand, an auction theorist might say that this was not an accident at all. The real miracle would have been to come up with an auction that didn’t somehow reduce to the Vickrey mechanism. Because the revenue equivalence theorem says that the exact rules of the auction matter only insofar as they determine who the winners are. Google could use any mechanism and as long as its guaranteed that the bidders with the highest values will win, that can be accomplished in an ex post equilibrium with the bidders paying exactly what they would have paid in the Vickrey mechanism.
Suppose there are players and each has private information about how tough they are. The two toughness parameters together determine the probability of winning should there be a war. If the parameters are common knowledge, it is possible to avoid war by making a transfer that makes war pointless. By making a transfer, the target has less resources to capture and the challenger has more to lose and an appropriate transfer can create the right balance to avoid war. But if there is incomplete information, a player might start a war.
Is it possible to set up transfers to completely prevent inefficient war? Myerson and Satterthwaite asked this question in a classical model of trade with incomplete information. We can use similar techniques to answer a similar question in a conflict scenario. In other words, we can use the revelation principle and ask whether it is possible to design transfers as a function of reports to guarantee peace in all circumstances. Players’ types – their toughness parameters – directly affect their payoffs only if there is war. Since there is no war in equilibrium, it is impossible to separate out different types and transfers must be constant as a function of reports. The constant payoff each player then receives must be enough to dissuade his toughest type from starting a war. If this is impossible to guarantee for both players’ toughest types simultaneously, there must be war. Here are the slides.
If you’ve ever sat down at a pub to a plate of really good fish and chips—the kind in which the fish stays tender and juicy but the crust is supercrisp—odds are that the cook used beer as the main liquid when making the batter. Beer makes such a great base for batter because it simultaneously adds three ingredients—carbon dioxide, foaming agents and alcohol—each of which brings to bear different aspects of physics and chemistry to make the crust light and crisp.
The CO2 escaping from the frying batter makes for a light texture. This effect is enhanced by the low surface tension, (which in the glass makes the foamy head), keeping the bubbles in place for the duration of the cooking process. And the alcohol evaporates faster than water so that the crust sets quickly reducing the risk of overcooking. The story is in Scientific American.
I was walking along, and I saw just this hell of a big moose turd, I mean it was a real steamer! So I said to myself, “self, we’re going to make us some moose turd pie.” So I tipped that prairie pastry on its side, got my sh*t together, so to speak, and started rolling it down towards the cook car: flolump, flolump, flolump. I went in and made a big pie shell, and then I tipped that meadow muffin into it, laid strips of dough across it, and put a sprig of parsley on top. It was beautiful, poetry on a plate, and I served it up for dessert.
Here’s one of the thorniest incentive problems known to man. In an organization there is a job that has to be done. And not just anybody can do it well, you really need to find the guy who is best at it. The livelihood of the organization depends on it. But the job is no fun and everyone would like to get out of doing it. To make matters worse, performance is so subjective that no contract can be written to compensate the designee for a job well done.
The core conflict is exemplified in a story by Utah Phillips about railroad workers living out in the field as they work to level the track. Someone has to do the cooking for the team and nobody wants to do it. Lacking any better incentive scheme they went by the rule that if you complained about the food then from now on you were going to have to do the cooking.
You can see the problem with this arrangement. But is there any better system? You want to find the best cook but the only way to reward him is to relieve him of the job. That would be self defeating even if you could get it to work. You probably couldn’t because who would be willing to say the food was good if it meant depriving themselves of it the next time?
A simple rotation scheme at least has the benefit of removing the perverse incentive. Then on those days when the best cook has the job we can trust that he will make a good meal out of his own self interest. He might even volunteer to be the cook.
But it might be optimal to rule out volunteering too. Because that could just bring back the original incentive problem in a new form. Since ex ante nobody knows who the best cook is, everyone will set out to prove that they are incapable of making a palatable meal so that the one guy who actually can cook, whoever he is, will volunteer.
It may help to keep the identity of the cook secret. Then when a capable cook actually has the job he can feel free to make a good meal without worrying that he will be recruited permanently. It will also lower the incentive for the others to make a bad meal because nobody will know who to exclude in the future.
Even if there is no scheme that really solves the incentive problem, the freedom to complain is essential for organizational morale.
Well, this big guy come into the mess car, I mean, he’s about 5 foot forty, and he sets himself down like a fool on a stool, picked up a fork and took a big bite of that moose turd pie. Well he threw down his fork and he let out a bellow, “My God, that’s moose turd pie!”
“It’s good though.”
- Watson v Pynchon v McCarthy
- When chivalry was still alive, you would never put a bag over her head. A gentleman would use a basket instead.
- “However there was one catch, he would have to be awake and playing the banjo whilst under the knife.” (with video.)
- PDF of junior Ghaddafi’s PhD thesis from the LSE.
Research by Chris Avery, Andrew Fairbanks and Richard Zeckhauser showed that early admissions (EA) programs give applicants a boost in college admissions. Improved chances of admissions might reflect a better applicant pool and not an advantage built into the early admissions process. But Avery et al controlled for this and still found that EA gives applicants an advantage.
EA applicants are constrained in their choices should they actually be admitted. To attract them, colleges have to offer lower standards for acceptance for early admission than for regular applicants who have more freedom of choice. Done in isolation, EA might benefit a college, as it steals above average students from its competitors. But if one college is employing EA, so must others, to recapture some of those students they lost. When all colleges use EA, the average quality of the student pool in each college may actually decline, because slots are taken up by the lower quality early applicants who crowd out high quality regular applicants. A Prisoners’ Dilemma.
There are other effects. Early applicants get worse deals on financial aid as they cannot play off multiple offers. So, early admission will attract wealthy students. They will also be more clued into the system. There are impacts on diversity.
But one or two colleges cannot change the equilibrium on their own. All have to give it up. Harvard and Princeton tried to drop EA but most other colleges did not. After all, the quality of Yale etc EA applicants goes up as Harvard and Princeton drop their programs. So it all fell apart and now both Princeton and Harvard have reinstated EA. A Harvard Dean says:
“We looked carefully at trends in Harvard admissions these past years and saw that many highly talented students, including some of the best-prepared low-income and underrepresented minority students, were choosing programs with an early-action option, and therefore were missing out on the opportunity to consider Harvard.”
EA can impact all sorts of settings. A player can try to cream skim before competitors notice. And so NU student Kota Saito heads off to Caltech without even going on the job market. I know MEDS has dome something similar in the past. Will other universities start doing this sort of thing too?
My duaghter’s 4th grade class read the short story “The Three Questions” by Tolstoy (a two minute read.) This afternoon I led a discussion of the story. Here are my notes.
There is a King who decides that he needs the answers to three questions.
- What is the best time to act?
- Who is the most important person to listen to?
- What is the most important thing to do?
Because if he knew the answers to these questions he would never fail in what he set out to do. He sends out a proclomation in his Kingdom offering a reward to anyone who can answer these questions but he is disappointed because although many offer answers…
All the answers being different, the King agreed with none of them, and gave the reward to none.
So instead he went to see a hermit who lived alone in the Wood and who might be able to answer his questions. The King and the hermit spend the day in silence digging beds in the ground. Growing impatient, the King confronts the hermit and makes one final request for the answers to the King’s questions. But before the hermit is able to respond they are interrupted by a wounded stranger who needs their help. They bandage the stranger and lay him in bed and the King himself falls asleep and does not awake until the next morning.
At it turns out the stranger was intending to murder the King but was caught by the King’s bodyguard and stabbed. Unkowingly the King saved his enemy’s life and now the man was eternally grateful and begging for the King’s forgiveness. The King returns to the hermit and asks again for the answers to his questions.
“Do you not see,” replied the hermit. “If you had not pitied my weakness yesterday, and had not dug those beds for me, but had gone your way, that man would have attacked you, and you would have repented of not having stayed with me. So the most important time was when you were digging the beds; and I was the most important man; and to do me good was your most important business. Afterwards when that man ran to us, the most important time was when you were attending to him, for if you had not bound up his wounds he would have died without having made peace with you. So he was the most important man, and what you did for him was your most important business. Remember then: there is only one time that is important– Now! It is the most important time because it is the only time when we have any power. The most necessary man is he with whom you are, for no man knows whether he will ever have dealings with any one else: and the most important affair is, to do him good, because for that purpose alone was man sent into this life!”
We are left to decide for ourselves what the King will do with these answers. The King abhors uncertainty. This is why he discarded the many different answers given by the learned men in his Kingdom. The simplicity of the hermit’s advice is bound the appeal to the King. It is certainly a rule that can be applied in any situation. And it is indeed motivated by acknowledgement of uncertainty in the extreme. The Here and Now are the only certainties. And it follows from uncertainty about where you will be in the future, with whom you will be, and what options will be before you that the Here and Now are the most important.
(The hermit is not only outlining a foundation for hyperbolic discounting, but also a Social Welfare analog. Your social welfare function should heavily discount all people except those who are before you right now.)
But what would come of the King were he to follow the advice of the hermit? Imagine what it would be like to live like that. Would you ever even make it to the bathroom to brush your teeth? How many opportunities and people would distract you along the way?
If the hermit’s advice were any good then surely the hermit himself must follow it. Perhaps the hermit was a King once.
You probably know the Ellsberg urn experiment. In the urn on the left there are 50 black balls and 50 red balls. In the urn on the right there are 100 balls, some of them red and some of them black. No further information about the urn on the right is given. Subjects are allowed to pick an urn and bet on a color. They win $1 if the ball drawn from the urn they selected is the color they bet.
Subjects display aversion to ambiguity: they strictly prefer to bet on the left urn where the odds are known than on the right urn where the odds are unknown. This is known as Ellsberg’s paradox, because whatever probabilities you attach to the distribution of balls in the right urn, there is a color you could bet on and do at least as well as the left urn. This experiment revealed a new dimension to attitudes towards uncertainty that has the potential to explain many puzzles of economic behavior. (The most recent example being the job-market paper of Gharad Bryan from Yale who studies the extent to which ambiguity can explain insurance market failures in developing countries.)
Decades and thousands of papers on the subject later, there remains a famous critique of the experiment and its interpretation due to Raiffa. The subjects could “hedge” against the ambiguity in the right urn by tossing a coin to decide whether to bet on red or black. To see the effect of this note that if there are n black balls and (100-n) red balls, then the coin toss means that with 50% probability you bet on black and win with n% probability and with 50% probability you bet you red and with with (100-n)% probability giving you a total probability of winning equal to 50%. Exactly the same odds as the left urn no matter what the actual value of n is. Given this ability to remove ambiguity altogether, the choices of the subjects cannot be interpreted as having anything to do with ambiguity aversion.
Kota Saito begins with the observation that the Raiffa randomization is only one of two ways to remove the ambiguity from the right urn. Another way is to randomize ex post. Hypothetically: first draw the ball, observe its color, and then toss a coin to decide whether to bet on red or black. Like the ex-ante coin tossing, this strategy guarantees that you have a 50% chance of winning. Kota points out that theories that formalize ambiguity assume that these two strategies are viewed equivalently by decision-makers. If a subject is ambiguity averse, then he prefers either form of randomization to the right urn and he views either of them as indifferent to the left urn.
But the distinct timing makes them conceptually different. In the ex ante case, after the coin is tossed and you decide to bet on red, say, you still face ambiguity going forward just as you would have if you chosen to bet on red without tossing a coin. In the ex post case, all of the ambiguity is removed once you have decided how to bet. (There is an old story about Mark Machina’s mom that relates to this. See example 2 here.)
Kota disentangles these objects and models a decision-maker who may have distinct attitudes to these two ways of mixing objective randomization with subjectively uncertain prospects. In particular he weakens the standard axiom which requires that the order of uncertainty resolution doesn’t matter to the decision-maker. With this weaker assumption he is able to derive an elegant model in which a single parameter encodes the decision-makers pattern of ambiguity attitudes. Interestingly, the theory implies that certain patterns will not arise. For example, any decision-maker who satisfies Kota’s axioms and who displays neutrality toward ex post ambiguity must also display neutrality toward ex ante ambiguity. All other patterns are possible. As it happens, this is exactly what is found in an experimental study by Dominiak and Shnedler.
What’s really cool about the paper is that Kota uses exactly the same setup and axioms to derive a theory of fairness in the presence of randomization. A basic question is whether the “fair” thing to do is to toss a coin to decide who gets a prize, or to give each person an identical, independent lottery. Compared to theories of uncertainty attitudes, our models of preferences for fairness are much less advanced and have barely touched on this kind of question. Kota’s model brings that literature very far very fast.
Kota is a Northwestern Phd (to be) who just defended his dissertation today. You could call it a shotgun defense because Kota’s job market was highly unusual. As a 4th year student he was not planning to go on the market until next year, but CalTech discovered him and plucked him off the bench and into the Big Leagues. He starts as an Assistant Professor there in the Fall. Congratulations Kota!
Believe it or not that line of thinking does lie just below the surface in many recruiting discussions. The recruiting committee wants to hire good people but because the market moves quickly it has to make many simultaneous offers and runs the risk of having too many acceptances. There is very often a real feeling that it is safe to make offers to the top people who will come with low probability but that its a real risk to make an offer to someone for whom the competition is not as strong and who is therefore likely to accept.
This is not about adverse selection or the winner’s curse. Slot-constraint considerations appear at the stage where it has already been decided which candidates we like and all that is left is to decide which ones we should offer. Anybody who has been involved in recruiting decisions has had to grapple with this conundrum.
But it really is a phantom issue. It’s just not possible to construct a plausible model under which your willingness to make an offer to a candidate is decreasing in the probability she will come. Take any model in which there is a (possibly increasing) marginal cost of filling a slot and candidates are identified by their marginal value and the probability they would accept an offer.
Consider any portfolio of offers which involves making an offer to candidate F. The value of that portfolio is a linear function of the probability that F accepts the offer. For example, consider making offers to two candidates 
![q_O [ q_F (v_F +v_O - C(2))+( 1 - q_F )(v_O - C(1) ) ]](http://s0.wp.com/latex.php?latex=q_O+%5B+q_F+%28v_F+%2Bv_O+-+C%282%29%29%2B%28+1+-+q_F+%29%28v_O+-+C%281%29+%29+%5D&bg=ffffff&fg=545454&s=0 "q_O [ q_F (v_F +v_O - C(2))+( 1 - q_F )(v_O - C(1) ) ]")
![+(1 -q_O)[q_F v_F-C(1)]](http://s0.wp.com/latex.php?latex=%2B%281+-q_O%29%5Bq_F+v_F-C%281%29%5D&bg=ffffff&fg=545454&s=0 "+(1 -q_O)[q_F v_F-C(1)]")
where 
![q_F \left[q_O\left(v_F-MC(2)\right)+(1- q_O) \left(v_F - C(1)\right) \right] + const.](http://s0.wp.com/latex.php?latex=q_F+%5Cleft%5Bq_O%5Cleft%28v_F-MC%282%29%5Cright%29%2B%281-+q_O%29+%5Cleft%28v_F+-+C%281%29%5Cright%29+%5Cright%5D+%2B+const.&bg=ffffff&fg=545454&s=0 "q_F \left[q_O\left(v_F-MC(2)\right)+(1- q_O) \left(v_F - C(1)\right) \right] + const.")
where 
In particular, if
It’s not to say that there aren’t interesting portfolio issues involved in this problem. One issue is that worse candidates can crowd out better ones. In the example, as the probability that
For example, suppose that the department is slot-constrained and would incur the Dean’s wrath if it hired two people this year. If 
In general, I guess that the optimal portfolio is a hard problem to solve. It reminds me of this paper by Hector Chade and Lones Smith. They study the problem of how many schools to apply to, but the analysis is related.
What is probably really going on when the titular quotation arises is that factions within the department disagree about the relative values of
Another observation is that Deans should not use hard offer constraints but instead expose the department to the true marginal cost curve, understanding that the department will make these calculations and voluntarily ration offers on its own. (When
If you were the President of the United States and, on camera, you were asked
If there is an uprising in Saudi Arabia the likes of which we have seen in Tunisia, Egypt, and Libya, will the United States stand by the protestors and ask the regime to leave?
how would you answer?
When a pet owner decides to give up a pet for adoption or breed more pets, he is callously ignoring the implications for other potential pets. The pet he gives up for adoption crowds out a home for another animal. The pet exerts a negative externality on other potential pets. The decision-maker – i.e. the pet owner – does not take this externality into account and there is overproduction of pets. Excess pets are euthanized.
When a tomato farmer sells more tomatoes, he is callously ignoring the welfare of other tomato farmers. The tomatoes he sells crowd out a home for other tomatoes. But we think the market for tomatoes in principle works quite well.
Why of your fat cat couch potato not like a tomato? In a new publication, Coate and Knight answer this question. In the tomato market, there is a market price for tomatoes. Each tomato producer is small and his output does not affect the price. But there is a market price for pets and neither buyers nor sellers of pets affect the price. So what’s the big difference?
Tomatoes you are bored with or cannot support financially do not have to be euthanized. Stray tomatoes do not wander the city, scavenging rotten meat from trash cans. Pet euthanasia imposes an external cost that the pet owner does not pay. Stray pets must be caught by public services. There is no easy way to charge the pet owner for these costs. If there were, pets would be like tomatoes. But pet owners can avoid euthanasia fees by dumping unwanted pets as strays. Coate and Knight argue that this ”moral hazard” problem makes it impossible to effectively deal with the externality created by pet owners. Hence, there is overproduction of pets.
What is to be done? Taxation of pet ownership is one solution. Subsidies for spaying are another. Dog licenses act as a tax. But cat owners face no government imposed barrier to acquisition of a furry friend. There must be serious overproduction of cats. We all know cats generate more allergies than dogs – another negative externality. This is serious
Obama has made an effort to improve healthcare. Hopefully he or whoever replaces him will take up pet – particularly cat – overpopulation in the next term.
The Texas legislature is on the verge of passing a law permitting concealed weapons on University campuses, including the University of Texas where just this Fall my co-author Marcin Peski was holed up in his office waiting out a student who was roaming campus with an assault rifle.
This post won’t come to any conclusions, but I will try to lay out the arguments as I see them. More guns, less crime requires two assumptions. First, people will carry guns to protect themselves and second, gun-related crime will be reduced as a result.
There are two reasons that crime will be reduced: crime pays off less often, and sometimes it leads to shooting. In a perfect world, a gun-toting victim of a crime simply brandishes his gun and the criminal walks away or is apprehended and nobody gets hurt. In that perfect world the decision to carry a gun is simple. If there is any crime at all you should carry a gun becuase there are no costs and only benefits. And then the decision of criminals is simple too: crime doesn’t pay because everyone is carrying a gun.
(In equilibrium we will have a tiny bit of crime, just enough to make sure everyone still has an incentive to carry their guns.)
But the world is not perfect like that and when a gun-carrying criminal picks on a gun-carrying victim, there is a chance that either of them will be shot. This changes the incentives. Now your decision to carry a gun is a trade-off between the chance of being shot versus the cost of being the victim of a crime. The people who will now choose to carry guns are those for whom the cost of being the victim of a crime outweigh the cost of an increased chance of getting shot.
If there are such people then there will be more guns. These additional guns will reduce crime because criminals don’t want to be shot either. In equilibrium there will be a marginal concealed-weapon carrier. He’s the guy who, given the level of crime, is just indifferent between being a victim of crime and having a chance of being shot. Everyone who is more willing to escape crime and/or more willing to face the risk of being shot will carry a gun. Everyone else will not.
In this equilibrium there are more guns and less crime. On the other hand there is no theoretical reason that this is a better outcome than no guns, more crime. Because this market has externalities: there will be more gun violence. Indeed the key endogenous variable is the probability of a shootout if you carry a gun and/or commit a crime. It must be high enough to deter crime.
And there may not be much effect on crime at all. Whose elasticity with respect to increased probability of being shot is larger, the victim or the criminal? Often the criminal has less to lose. To deter crime the probability of a shooting may have to increase by more than victims are willing to accept and they may choose not to carry guns.
There is also a free-rider problem. I would rather have you carry the gun than me. So deterrence is underprovided.
Finally, you might say that things are different for crimes like mugging versus crimes like random shootings. But really the qualitative effects are the same and the only potential difference is in terms of magnitudes. And it’s not obvious which way it goes. Are random assailants more or less likely to be deterred? As for the victims, on the one hand they have more to gain from carrying a gun when they are potentially faced with a campus shooter, but if they plan make use of their gun they also face a larger chance of getting shot.
NB: nobody shot at the guy at UT in September and the only person he shot was himself.
Yuliya Tymoschenko, a former prime minister of Ukraine, wrote in Al Jazeera that Egyptians should learn from the disappointments that followed Ukraine’s 2004 Orange Revolution. She advises that democracy is not made by elections alone, and that a strong civil society is needed to protect a new democracy from being hijacked by elements of the old regime who only pretend to embrace democratic norms. But she also describes civil society as an intricate and mysterious entity that evolves over decades, if not centuries.
This advice is good, but it is also a call for social scientists to develop a deeper and more precise understanding of what is needed from civil society, if we are to understand the essential factors for successful democratic development. It is not enough to advise Egyptians or Ukrainians to go back and have a century or two like England around 1600 before they attempt to build a democracy. We must try to identify the essence of what is needed from civil society and how it can be most directly developed where it is lacking.
It may be instructive to consider an example from Maye Kassem’s discussion of civil society in her insightful book on Egyptian Politics. Kassem describes how opposition groups, in their efforts to acquire some autonomy from state domination under the Mubarak regime, cooperated to gain positions of leadership in professional organizations. This process was tolerated by the government until the Cairo earthquake of 1992. But then the Doctors’ and Engineers’ Syndicates, under leadership from the Muslim Brotherhood, provided conspicuously better assistance to earthquake victims than the official government relief agencies. In response, new laws were decreed to give the government greater control over such professional syndicates.
This story puts the focus on one essential factor that institutions of civil society can provide: an independent supply of people who have good reputations for providing public services. From the perspective of economic theory, we easily see how the supply of such reputations can be vital for democratic competition. Voters are unlikely to hold corrupt leaders accountable in democratic elections if they believe that alternative candidates would be as bad or worse. More generally, economists understand that market competition may fail to reduce suppliers’ profits when there are high barriers against new competitive entrants, and this insight can be applied to political competition (where political profit-taking is called corruption). Autonomous public-service organizations allow new leaders to develop the reputations that they need to compete for the voters’ trust, thus facilitating new competitive entry into the political arena.
So the key question to ask is: what is the best way for a newly democratic nation to increase its vital supply of individuals who have good reputations for using resources responsibly in public service? The obvious place to look is in subnational governments for provinces and cities, where independently elected political leaders could demonstrate their qualifications to compete for offices at higher levels. An elected mayor or governor who provides better public services than the established national leaders can become a strong competitive candidate for president or prime minister in the future.
Unfortunately Ukraine’s Constitution does not allow such opportunities for independent local leaders to prove themselves below the national level. In the governments of Ukraine’s provinces (oblasts) and major cities, executive authority is exercised by governors and mayors who are appointed and dismissed by the national President. Such centrally appointed officials have no incentive to serve the public better than the leader on whom their jobs depend. If Ms. Tymoschenko truly wants to build a stronger system of democratic competition in Ukraine, she might start by proposing a constitutional amendment to allow locally elected councils to choose their own governors and mayors.
If the new leadership in Egypt wants to maintain a political system in which national leaders are protected from serious competition from below, then they may be expected to craft a similar constitution that allows a President or Prime Minister to control state power at all levels. But even under old regime, Egypt’s Constitution promised (in Article 162) that popularly elected local councils would be gradually formed and given local governmental authority. If the leaders of the new regime are serious about promoting competitive democracy in Egypt, they could do well by fulfilling this promise and writing a new constitution that devolves a substantial share of power to separately elected provincial governments. Supporters of democracy in Egypt should watch carefully what they do on this dimension.
My daughter’s 4th grade class is reading a short story by O. Henry called The Two Thanksgiving Day Gentlemen. (A two minute read.) In about an hour I will go to her class and lead a discussion of the story. Here are my notes.
In the story we meet Stuffy Pete. He is sitting on a bench waiting for a second gentleman to arrive. We learn that this is an annual meeting on Thanksgiving day that Stuffy Pete is always looking forward to. Stuffy Pete is a ragged, hungry street-dweller and the gentleman who arrives each year treats him to a Thanksgiving feast.
But on this Thanksgiving, Stuffy Pete is stuffed. Because on his way to the meeting, he was stopped by the servant of two old ladies who had their own Thanksgiving tradition. They treated him to an even bigger feast than he is used to. And so he sits here, weighed down on the bench, terrified of the impending arrival.
The old gentleman arrives and recites this speech.
“Good morning, I am glad to see that the vicissitudes of another year have spared you to move in health about the beautiful world. For that blessing alone this day of thanksgiving is well celebrated. If you will come with me, my man, I will provide you with a dinner that should be more than satisfactory in every respect.”
The same speech he has recited every year the two gentlemen met on that same bench. ”The words themselves almost formed an institution.”
And Stuffy Pete, in tearful agony at the prospects replies “Thankee sir. I’ll go with ye, and much obliged. I’m very hungry sir.”
Stuffy’s Thanksgiving appetite was not his own; it now belonged to this kindly old gentleman who had taken possession of it.
The story’s deep cynicism, hinted at in the preceding quote, is only fully realized in the final paragraphs which contain the typical O. Henry ironic twist. Stuffy, overstuffed by a second Thanksgiving feast collapses and is brought to hospital by an ambulance whose driver “cursed softly at his weight.” Shortly thereafter he is joined there by the old gentleman and a doctor is overheard chatting about his case
“That nice old gentleman over there, now” he said “you wouldn’t think that was a case of almost starvation. Proud old family, I guess. He told me he hadn’t eaten a thing for three days.”
Social norms and institutions re-direct self-interested motives. Social welfare maximization is then proxied for by individual-level incentives. But they can take on a life of their own, uncoupled from their origin. This is the folk public choice theory of O. Henry’s staggeringly cynical fable.
Check out Michael Chwe’s book Folk Game Theory: Strategic Analysis in Austen, Hammerstain, and African American Folk Tales. It’s a study of game theory in the context of literature and of literature through the lens of game theory. But it’s more than that. Each of the stories in the book illustrates what happens out of equilibrium.
The fox gets tricked by the rabbit because the fox has not understood the strategic motivation behind the rabbit’s actions. The master pays the price when he underestimates the slave. A folk tale is an artificially constructed scenario which purposefully takes the characters off the equilibrium path in order to teach us to stay on it.
By recovering a “people’s history of game theory” and gaining a larger understanding of its past, we enlarge its potential future. Game theory’s mathematical models are sometimes criticized for assuming ahistorical, decontextualized actors, and indeed game theory is typ- ically applied to relatively “neutral” situations such as auctions and elections. Folk game theory shows that game theory can most inter- estingly arise in situations which are strongly gendered or racialized, with clear superiors and subordinates. By looking at slave folktales, we can see how the story of Flossie and the Fox is a sophisticated discus- sion of deterrence. We can see from Austen’s heroine Fanny Price that social norms, far from protecting sociality against the corrosive forces of individualism, can be the first line of oppression. We can see from Hammerstein’s Ado Annie how convincing others of your impulsive- ness can open up new strategic opportunities. Folk game theory has wisdom which can be explored just as traditional folk medicines are now investigated by pharmaceutical companies.
There are many dimensions to this question . Let me focus on just one – collective decision-making.
Say there are two well-defined groups, A and B, in the division doing related but different work. Group A cannot judge collective decisions on hiring, investment etc that impinge on Group B and vice-versa. But the members of Group A certainly have opinions on how they should hire, fire and invest in their own group and so does Group B. Suppose the two groups vote together on all decisions within the division even if they mainly concern one group and not the other. There are two polar cases.
The members of each group have near common values and want pretty much the same thing. Then voting by each group on its own decisions aggregates information. The uninformed group should abstain. And if there are collective decisions that must be made at the division level, there is no need to break the group up.
At the other extreme, suppose for instance there is serious disagreement in Group A – there are significant private values. The members of Group B also get weak signals of the best decision for Group A. There is also a seniority ranking over the members of Group A. If the members of Group B continue to abstain on all Group A decisions, then information is still aggregated.
But there is another possibility. Members of Group B want to curry favor with senior members of Group A. These senior members are involved in lots of firm level decisions and it is important to have them on board. Then, another equilibrium can develop. When Group B member think the senior members of Group A are wrong, they abstain. They think their signals are too weak to overrule Group A members. But if they think the senior members of Group A are right, they vote enthusiastically along with them. Career concerns screw up voting in the division. This division should be broken up.
By asking a hand-picked team of 3 or 4 experts in the field (the “peers”), journals hope to accept the good stuff, filter out the rubbish, and improve the not-quite-good-enough papers.
…Overall, they found a reliability coefficient (r^2) of 0.23, or 0.34 under a different statistical model. This is pretty low, given that 0 is random chance, while a perfect correlation would be 1.0. Using another measure of IRR, Cohen’s kappa, they found a reliability of 0.17. That means that peer reviewers only agreed on 17% more manuscripts than they would by chance alone.
That’s from neuroskeptic writing about an article that studies the peer-review process. I couldn’t tell you what Cohen’s kappa means but let’s just take the results at face value: referees disagree a lot. Is that bad news for peer-review?
Suppose that you are thinking about whether to go to a movie and you have three friends who have already seen it. You must choose in advance on ore two of them to ask for a recommendation. Then after hearing their recommendation you will decide whether to see the movie.
You might decide to ask just one friend. If you do it will certainly be the case that sometimes she says thumbs-up and sometimes she says thumbs-down. But let’s be clear why. I am not assuming that your friends are unpredictable in their opinions. Indeed you may know their tastes very well. What I am saying is rather that, if you decide to ask this friend for her opinion, it must be because you don’t know it already. That is, prior to asking you cannot predict whether or not she will recommend this particular movie. Otherwise, what is the point of asking?
Now you might ask two friends for their opinions. If you do, then it must be the case that the second friend will often disagree with the first friend. Again, I am not assuming that your friends are inherently opposed in their views of movies. They may very well have similar tastes. After all they are both your friends. But, you would not bother soliciting the second opinion if you knew in advance that it was very likely to agree or disagree with the first on this particular movie. Because if you knew that then all you would have to do is ask the first friend and use her answer to infer what the second opinion would have been.
If the two referees you consult are likely to agree one way or the other, you get more information by instead dropping one of them and bringing in your third friend, assuming he is less likely to agree.
This is all to say that disagreement is not evidence that peer-review is broken. Exactly the opposite: it is a sign that editors are doing a good job picking referees and thereby making the best use of the peer-review process.
It would be very interesting to formalize this model, derive some testable implications, and bring it to data. Good data are surely easily accessible.
(Picture: Right Sizing from www.f1me.net)
Schelling on dealing with threats:
“[I]f the person to be threatened is already committed, the one who would threaten cannot deter with his threat, he can only make certain the mutually disastrous consequences that he threatens.”
With “person” equal to professor and “the one” equal to student, Schelling adds:
“At Yale the faculty is protected by a rule that denies instructors the power to change a course grade once it has been recorded.”
Does Yale still have this rule? The threatener can apply a threat at a higher university level and not directly at the professor. Ideally, the threatener’s parents – the ones who sign the checks – can apply the threat. Then the rule will be changed and you can turn your attention back to the professor.
You receive an email with a question asking for advice or a suggestion or an opinion. To give a full answer you would have to take some time to think. You are a little busy and you would rather not give it too much thought but there is a second consideration that leads you to give the quick and dirty answer right away. The longer you wait the longer they will know you thought about it and the more credence they will give your answer. Not to mention that more of your reputation will be at stake if you are assumed to have thought carefully.
Still, some issues are important enough to give thought to. But how much? The same tradeoff is there, but now the characteristics of the correspondent matter. Every additional second you spend thinking allows you to make a slightly more thoughtful answer but also increases what he expects of you. If he is very sharp, he will be read your reply and possibly see deeper into the question than you did making you look bad. The gap only gets bigger the longer you wait. If he is less sharp, every second tilts the balance in your favor.
All of this is predicated on him knowing just how much time you spent on the question. You want to manipulate this by establishing a reputation for rapid-fire responses. Then if you wait a day but still give a lousy answer, he will put it down to you just having been busy for day before giving your usual top-of-your-head reply. Indeed you want everyone to think you are busier than you are.
Then along comes instant messaging, facebook, etc speeding up communications. You are expected to have seen the message sooner so its harder to pretend you were unavoidably delayed. On the plus side though now you can more easily commit to being busy. Just friend everyone. Your feed is so cluttered up with babble that these really important questions credibly get lost in the shuffle. He can directly see how overloaded you are.
So the value of your marginal friend is equal to the incremental publicly observed distraction she creates.
In economic theory, the study of institutions falls under the general heading of mechanism design. An institution is modeled as game in which the relevant parties interact and influence the final outcome. We study how to optimally design institutions by considering how changes in the rules of the game change the way participants interact and bring about better or worse outcomes.
But when the new leaders in Egypt sit down to design a new constitution for the country, standard mechanism design will not be much help. That’s because all of mechanism design theory is premised on the assumption that the planner has in front of him a set of feasible alternatives and he is desigining the game in order to improve society’s decision over those alternatives. So it is perfectly well suited for decisions about how much a government should spend this year on all of the projects before it. But to design a constitution is to decide on procedures that will govern decisioins over alternatives that become available only in the future, and about which today’s Constitutional Congress knows nothing.
The American Constitutional Congress implicitly decided how much the United States would invest in nuclear weapons before any of them had any idea that such a thing was possible.
Designing a constitution raises a unique set of incentive problems. A great analogy is deciding on a restaurant with a group of friends. Before you start deliberating you need to know what the options are. Each of you knows about some subset of the restaurants in town and whatever procedure the group will use to ultimately decide affects whether or not you are willing to mention some of the restaurants you know about.
Ideally you would like a procedure which encourages everyone to name all the good restaurants they know about so that the group has as wide a set of choices as possible. But you can’t just indiscriminately reward people for bringing alternatives to the table because that would only lead to a long list of mostly lousy choices.
You can only expect people to suggest good restaurants if they believe that the restaurants they suggest have a chance of being chosen. And now you have to worry about strategic behavior. If I know a good Chinese restaurant but I am not in the mood for Chinese, then how are you going to reward me for bringing it up as an option?
When we think about institutions for public decisions, we have to take into account how they impact this strategic problem. Democracy may not be the best way to decide on a restaurant. If the status quo, say the Japanese restaurant is your second-favorite, you may not suggest the Mexican restaurant for fear that it will split the vote and ultimately lead to the Moroccan restaurant, your least favorite.
Certainly such political incentives affect modern day decision-making. Would a better health-care proposal have materialized were it not for fear of what it would be turned into by the political sausage mill?
I am in Miami (or more precisely Coral Gables) to teach in Kellogg’s Miami Executive Program. Instead of flagging a cab and heading over to Gloria Estefan’s beach restaurant for lunch, I am glued to the internet checking the NYT website every few minutes to see what’s going on in Egypt.
Like all dictators who manipulate elections to stay in power, Mubarak invoked the Constitution to justify delaying and limiting the transfer of power. It seems laughable to invoke a constitution that has been ignored for decades to use it as an excuse for justifying anything. But I guess it is important.
As far as I can tell from my Hyatt vantagepoint, Mubarak has stepped down and has headed to his home in Sharm el-Sheik. He has handed over power to the army and his Vice President. Yesterday, Mubarak did pretty much the same thing but stayed as President and devolved powers up to the limits allowed by the Constitution. There was a danger than when the protestors calmed down, he would return to power. But it seems he can to something very similar from Sharm al-Sheikh, returning to power once the protests have subsided.
There is a key difference: In the former case, he can invoke his constitutional authority to return to power and in the latter, his return would be extra-constitutional as he would have stepped down. Even though the Constitution is cheap talk, it is a coördination device for the army. The leader the guns support will return to power. They are less likely to support Mubarak after he has formally stepped down. So, all the constitutional garb was relevant after all. It remains to be seen how the army will behave over the next few days. I will not be going to Gloria’s restaurant at all on this trip I suspect.
Following up on the Trivers-Willard hypothesis. The evidence is apparently that promiscuity, a trait that confers more reproductive advantage on males than females, is predictive of a greater than 50% probability of male offspring. A commenter claimed that there is a bias in favor of male offspring when the mother is impregnated close to ovulation and wondered whether the study controlled for that. A second commenter pointed out that there is no reason to control for that because that may be exactly the channel through which the Trivers-Willard effect works.
So now put yourself in the shoes of the intelligent designer. Suppose you are given that promiscuity is such a trait. You are given control over the male-female proportion of offspring and you are designing the female of the species. What you want to do is program her to have male offspring when she mates with a promiscuous male. But you cannot micromanage because there is no way to condition this directly on the promiscuity of the mate. The best you can do is vary the sex proportions conditional on biological signals, for example the date in the cycle.
How would you do this? Of all the “states of the system” that you can condition on, you would find the one such that conditional on having sex in that state, the relative likelihood that her partner was the promiscuous type was maximized. You would program her to increase the proportion of male offspring in those states.
Is sex close to ovulation such a signal? I don’t see why. But we could think of some that would qualify. How about the signal that he is delivering a small quantity of sperm? The encounter lasted longer than usual, this is the first time she had sex in a while, these sperm have not been seen before, etc…
(Regular readers of this blog will know I consider that a good thing.)
The fiscal multiplier is an important and hotly debated measure for macroeconomic policy. If the government spends an additional dollar, a dollar’s worth of output is produced, but in addition the dollar is added to disposable income of the recipients who then spend some fraction of it. More output is produced, etc.
It’s hard to measure the multiplier because observed increases in government spending are endogenous and correlated with changes in output for reasons that have nothing to do with fiscal stimulus.
Daniel Shoag develops an instrument which isolates a random component to state-level government spending changes.
Many US states manage pensions which are defined-benefit plans. Defined benefits means that retirees are guaranteed a certain benefit level. This means that the state government bears all of the risk from the investments of these pension funds. Excess returns from these funds are unexpected exogenous windfalls to state spending budgets.
With this instrument, Daniel estimates that an additional dollar of state government spending increases income in the state by $2.12. That is a large multiplier.
The result must be interpreted with some caveats in mind. First, state spending increases act differently than increases at the national level where general equilibrium effects on prices and interest rates would be larger. Second, these spending increases are funded by windfall returns. The effects are likely to be different than spending increases funded by borrowing which crowds out private investment.
According to the Trivers-Willard Hypothesis, individuals possessing a trait which improves the reproductive success of males more than females will be more likely to give birth to male offspring than to female offspring. I came across a study that claims to support the hypothesis where the trait in question is promiscuity.
Our analyses of two large nationally representative samples, from the General Social Survey in 1994 and the National Longitudinal Study of Adolescent Health, confirm this prediction. Controlling for a large number of social demographic factors that might be expected independently to influence offspring sex ratios, unrestricted sociosexual orientation significantly increases the odds that the first child is a boy. One standard deviation increase in the unrestrictedness of sociosexual orientation increases the odds of having a son by 12-19%.
That seems like a large effect, if true. Chullo chuck: Barking Up The Wrong Tree.
A player who seeks to be aggressive against an opponent prefers to catch him by surprise and passive and not well-prepared. The chance that an opponent may attack by surprise makes a player cautious and well prepared and not passive. Hence, uncertainty about each player’s intentions can create a vicious cycle where everyone turns aggressive. This was the topic of last week’s class.
Next we study if communication can provide a route out of conflict. But the same incentives that generate conflict generate incentives for deception: whether a player intends to be aggressive or passive, he wants his opponent to be passive. Hence, he might always send the message that maximizes the probability that his opponent is passive but then cheap-talk is not effective and does not affect the equilibrium. An argument along these lines was made by Aumann in a Stag Hunt game.
We show that while deception occurs in equilibrium, it is still possible to transmit enough information to create less conflict. While players may always seek to minimize the probability their opponent is aggressive, they may also value information about his action so they can coordinate against it. If the trade-off between these two benefits is type-dependent in a conflict game with incomplete information, separating equilibria are possible and so is coordination on peace.
The ideas above relate to conflict and escalation, where it is known that aggression begets aggression. What if aggression may beget deterrence not escalation? For example, revealing weapons may create deterrence but trigger escalation. Revealing you have no weapons may reduce escalation but eliminate deterrence. In this situation it can be optimal to employ strategic ambiguity: neither reveal weapons if you have them, nor reveal you do not have them if you do not. Strategic ambiguity allows a player to employ “deterrence by ambiguity” as he may be armed behind the veil of ambiguity. He has less incentive to acquire arms as he can pretend to have arms even when he does not behind the veil of ambiguity. This reduction in arms proliferation can help all players not just the player employing ambiguity strategically.
Here are the slides.
I am a postalite, and not a blitzer. I am not good at coming up with ideas on demand and in the moment. Pretty much all of my work is based on waiting around passively for an idea to pop into my head. It happens in the shower, in the car, at 4:00 in the morning when I am awakened by the snow plow, etc. Whenever that happens I immediately send it to myself in an email.
Then a complicated system of tubes that I have set up routes that email to my Google Buzz feed, then my other blog, and finally to a mail folder where I keep all of these ideas archived. A typical auto-email looks like this:
—– Original Message ——–
Subject: Album of the summer Date: Wed, 18 Aug 2010 10:02:56 -0700 From: jeffrey ely <jeffely@northwestern.edu> To: post@cheepthoughts.posterous.com Tmbg flood Grownup now sounds like kids Snorkeling You're such a great Parker daddy Guy teaching daughter to surf The day it all came together Old man learning new tricks
Which has the bare outline of a post I never wrote about my experiences surfing this past summer, and being an old man learning new things at the same time my kids are learning new things.
I send myself about 4 of these per day on average, although most of them are just links to stuff on the web I might write about. People also send me links and I just forward them right away.
Every morning I go through my archive to find something I want to write about (If people have liked it on Google Buzz then I know its a go for the blog.) I try to keep it in mind all day and work on what I can say about it and how to write it. This allows me to take advantage of idle moments throughout the day to do most of the writing. Ideally, by the time I sit down to write (usually just before going to bed at night) I have a good outline and the only thing left to do is find the right words.
(Ron Siegel took this photo of the car cemetery on Chicago’s Lake Shore Drive in last week’s blizzard.)
Celebrity-Yogis like Bikram Choudry claim copyright of certain sequences of Yoga postures. That’s kinda like Wilt Chamberlain patenting his favorite, ehem, postures; but while the Kama Sutra has yet to establish priority, India’s Traditional Knowledge Library is placing all known yoga asanas into the public domain.
Nine well known yoga institutions in India have helped with the documentation. “The data will be up online in the next two months. In the first phase, we have videographed 250 ‘asanas’ — the most popular ones. Chances of misappropriation with them are higher. So if somebody wants to teach yoga, he does not have to fight copyright issues. He can just refer to the TKDL. At present, anybody teaching Hot Yoga’s 26 postures has to pay Choudhury franchisee fee because he holds copyright on them,” Dr Gupta added.
Fez flip: BoingBoing
You go around saying X. There are some people who agree with X and others who disagree. Those who agree with X don’t blink an eye when you say X. Those who disagree with X tell you X is wrong.
At some point you have to rethink whether you agree with X. You have a bunch of definitive signals against X but the signals in favor of X are hard to count. You have to count the number of times people didn’t say anything about X. You are naturally biased against X.
Eventually you change your mind and go around saying not-X. Repeat.
You are reorganizing your firm. There are many legacy employees the old CEO was too weak to fire. They are inefficient and incompetent but their connection to the old CEO – an insider – kept their jobs safe. You were hired from the outside and feel no particular affection for the old guard. There is one employee Mr X who is high up. He is terrible at his job but has survived by using his charm and by buttering up the customers. Sometimes he went too far. You hear rumors of “liasons” between your staff and the customers. Also, there were inappropriate exchanges of gifts. While nothing was strictly illegal, if news gets out, your firm will look bad and business will suffer.
You want to sack Mr X. Your problem is that he knows too much: if you fire him, he threatens to go to the press and tell them everything he knows. This would be a catastrophe. One thing can save you: what is bad for you is also bad for him. Mr X played no small part in the sleazy business he threatens to reveal. He’ll have a hard time getting a new job if he spills the beans. Even if he gets a new job, stabbing is old boss in the back will make his new boss worry if he can trust Mr X. It seems you are safe.
What can Mr X do to make his threat credible? This is an classic problem in game theory and perhaps I have something new to say. But it cannot be better than what Schelling and Ellsberg said many years ago. For example, see the Theory and Practice of Blackmail by Daniel Ellsberg. Ellsberg identifies four strategies for the blackmailer: (1) commitment, (2) contracts with third parties, (3) uncertainty about payoffs and (4) cultivating a reputation for irrationality.
Mr X might give his evidence over to a lawyer and instruct him to release it should Mr X ever be fired. He might write a contract with a third party stipulating that he will pay a large fine to the third party if Mr X is fired and does not release the evidence. These solutions seem far fetched to Mr X. He has no wealth to hand over as a fine and anyway contracts can be renegotiated (e.g. The third party knows that he will not get paid in equilibrium. So Mr X and the third party could agree to write a new contract after Mr X is fired. The agree to small payment to the third party even if Mr X does not reveal the evidence.)
So, Mr X is left with the last two options which are quite related. He has to look either as if he enjoys a fight for its own sake or that he does not but is crazy enough to take actions against his own self-interest. The topic of many subsequent papers in game theory.
Ellsberg’s paper is the text of a lecture he gave to a general interest audience. It is an easy and fun read. Ellsberg offers a very clear definition of rationality as used in economics. The paper is notable for an aesthetic in game theory that it espouses: Game theory offers qualitative intuition and is not inherently quantitative. And it is an art not a science.
