You are currently browsing the monthly archive for September 2011.
- I can’t wait for the Rick Perry Presidency.
- The most surreal thing about this 1958 Mike Wallace interview with Salvador Dali is the advertisement for Parliament cigarettes at the beginning.
- The last Turing test: appropriately appending “That’s what she said.”
- Various lies.
- The McGurk effect.
- Economics abstracts in haiku form.
- Sit on a spade fuyuh.
- Fall on a flaming can of Raid fuyuh.
- Reach into the garbage disposal to save a hastily discarded tapenade fuyuh.
He has a new book of aphorisms.
What’s the difference between a tweet and an aphorism?
A line like “what if hot dogs were the cut off horns of meat unicorns” can be interesting on Twitter because in Twitter it will burst into your feed like a surprise, it’ll be free, and there won’t by any high-minded literary expectation waiting for it in you. But copied & pasted into the literary form of the book and it becomes much more boring (at least to me) especially if it’s a book I’ve paid for, because while briefly interesting, its central juxtaposition doesn’t target anything I more than superficially care about.
The process:
I’d overhear someone use the verb ‘carom’ or something… and the little sweatshop in my head would get to work thinking, okay, that’s a strange-yet-familiar verb… what could carom?… death caroms… life caroms… time caroms… okay… off what… time caroms off life… off death… poetry caroms off death… no… more sound… character caroms off time…. okay a context… when does it do this… in death our character caroms off… grief… wait… what does that even mean… I can’t see it… start over… more visceral… laughter caroms off… laughter cannons off… laughter is a cannon fired by…” and so on. Often I would get to something that look and sounded right but wasn’t actually true. Or was true and wasn’t interesting. Basically cycling through until I gave up or found something that pleased all the gods. Sometimes it would be that clinical. Other times it would just come out. I would be writing something else or talking about a movie and an aphorism would erupt like a turd or Minerva in perfect form.
Comedy verus tragedy:
I tend to find more meaning in narrative and monologue, in broader emotional or psychological arcs, than in individual words, or the ephemeral joke-arc of a non sequitur. I think humor depends on depth of tension. There is just so little tension in randomness. Or in a pattern that is only available to the speaker. The first random thing that happens — pig-ponies! — can be funny for a second. But the next time it happens, it’s less funny because you’re ready for it. The listener has less anxiety about the end of the poem because the listener knows anything can happen. But if the joke is stripped of all non sequitur and pushed, relentlessly, along a path of logic which is blatantly available to both listener and speaker, both can have anxiety about where it will end up, and what it will ultimately mean. Maximizing this anxiety and then, at the last second, shattering it, is a key trope of humor. Part of keeping on that path is not breaking. It’s like how if someone told you that The Matrix was the best movie in the world, and then winked, that’s lame comedy. That to me parallels the flat effect of jokey poetry. But if they told you The Matrix was the best movie in the world and just stared into your eyes without blinking… until you blinked, that’s a tragedy so unbearable you have to laugh. You have to say that’s absurd. But this buffoon thinks it’s real? That’s impossible. Because that buffoon is a human like me. The irreconcilability of that wedges into us and leaves a giant triangle of anxiety. We survive by laughing. Otherwise we would simply kill that person. It feels good to laugh. Laughter is the orgasm of fear.
Dodd-Frank contained the so-called Durbin amendment which capped debit card fees that could be charged to merchants. And now banks are charging $5/month to card holders because
[A]s Jamie Dimon, chief executive of JPMorgan Chase, put it after passage last year of the Dodd-Frank Act, “If you’re a restaurant and you can’t charge for the soda, you’re going to charge more for the burger.”
But if you can charge for the burger, why weren’t you charging for it in the first place? There is a good reason why a bank could charge for the debit card: It is tied to a checking account and the cost of switching to a new bank will mean that the bank can get away with a small fee without much drop off in demand deposits. So to paraphrase Dimon:
“If you’re a restaurant and you can charge for a burger, you’re going to charge for it, whether the soda is free or not.”
Digitopoloy.org: Josh Gans, Erik Brynjolfsson, and Shane Greenstein. Should be good.
I was born on Jan. 31, but I’ve always wanted a summer birthday. I set my Facebook birthday for Monday, July 11. Then, after July 11, I reset it for Monday, July 25. Then I reset it again for Thursday, July 28. Facebook doesn’t verify your birthday, and doesn’t block you from commemorating it over and over again. If you were a true egomaniac, you could celebrate your Facebook birthday every day.
He noted that for July 11th, he received 119 birthday wishes via Facebook. Four close friends were confused, but “most of them attributed the confusion to their own faulty memories.” When July 25th came around, he received another 105 birthday wishes. The number of people suspecting something was up was nine. The really stunning thing:
Of the 105 birthday wishes, 45 of them—nearly half—came from people who had wished me a Facebook happy birthday two weeks earlier.
On July 28th, just three days later, when it was his birthday again, he still ended up with 71 birthday wishes.
Casquette cast: Mallesh Pai.
This looks like a big deal.
Prestigious US academic institution Princeton University will prevent researchers from giving the copyright of scholarly articles to journal publishers, except in certain cases where a waiver may be granted.
The new rule is part of an Open Access policy aimed at broadening the reach of their scholarly work and encouraging publishers to adjust standard contracts that commonly require exclusive copyright as a condition of publication.
I would guess that the waiver would be given routinely, but this is a step in the right direction. via Andrea Ortolani.
Suppose you are going to fly Delta from O’Hare to Atlanta. You could buy a ticket now for price p or try to get a ticket later at the last minute. After all, later on you will have a more accurate picture of your willingness to pay for the flight. Luckily for you, Delta has adopted a bidding system where you can compensate another passenger who gets bumped to seat you. How does the bidding procedure affect Delta’s incentives to overbook or underbook the flight? How does it affect the initial price p?
First, there is some “marginal consumer” who is indifferent between paying p for the flight now or waiting and taking their chances in the bidding system. Consumers with “higher” signals than the marginal consumer strictly prefer to buy at price p and are left with surplus. Consumers with “lower” signals strictly prefer to wait and take their chances. Opening up the bidding system increases the value of the ticket to the marginal buyer: now he has the option of reselling it and capturing some of the rents from people who find they desperately need to go to Atlanta after all. This extra rent is simply recaptured by the seller by raising the price p. This has the additional benefit that more rent is extracted from consumers with higher signals. Finally, to make the resale market active, Delta had better overbook the flight.
Close your eyes. Apparently your opponent will have an increased tendency to imitate your move increasing the chance of a draw. At least that is what is reported in this study. A blindfolded player played RSP against a sighted player and their outcomes were compared to a control treatment in which two blindfolded players played.
A draw was achieved almost exactly 1/3 of the time when the two blindfolded players met, but that rate increased to 36.3% in the blind-sighted treatment, a statistically significant difference. The authors attribute this to a sub-conscious tendency to imitate the actions of others. In particular, when the blind player completed his move more than 200 miliseconds prior to the sighted player, the sighted player had an increased tendency to play the same move.
200 miliseconds is too fast for conscious reaction but still within the time necessary for the visual signal to be sent to the brain and an impulsive response signal to be sent to the hand.
If this is true then you should be able to increase your chance of winning in RSP by holding rock until the very last opportunity and then throw paper. You will sometimes trigger an automatic imitation of your rock and win with your paper.
Are there even more draws when both players have their eyes open?
(Fez float: Not Exactly Rocket Science.)
Last month… San Diego’s Stone Brewing Co., whose rare Vertical Epic beers are sometimes listed on eBay for more than $1,000 per bottle, began selling the first beer in its new Quingenti Millilitre series via a lottery system, and Stone has announced that people who try to resell it will be banned from future drawings. “We have involuntarily been a part of the eBay aftermarket for many years,” says Greg Koch, Stone’s co-founder and chief executive. “This is the first time we’ve come out, laid it on the table and said very point-blank, ‘Please, do not resell.’”…
Stone’s use of a lottery is intended to keep its beer accessible and relatively inexpensive. The brewery hopes to reward devotees rather than opportunists, and although it is selling the beer for $25 per bottle, that price reflects the cost of production instead of what the market will bear.
If resale can be controlled by ejection from future purchases, the lottery might work. But if not, Stone is going to give money away to resellers and no devotees will get it for cheap. Luckily for me, Stone Levitation is in elastic supply.
A lot of economic theory is empirically empty. Most of what is “under the hood” in an economic model makes no difference whatsoever from the point of view of the “empirical implications.” Here is an example to illustrate what I mean.
There are two ways I could present to you the standard theory of bidding behavior. The first way, and the way we actually do it, starts with some primitive hypotheses and derives the theory from them. So I might start by specifying the rules of the auction, then state some assumptions like that the bidders have certain payoff functions, they are maximizing utility, they have some specific information, and they play an equilibrium. All of these assumptions together tell you what bids you can expect.
The second way is simpler. I just write down the bids you can expect. That is my theory. I hypothesize a certain (joint distribution of) bidding behavior. Now, this theory is incredibly boring. But from an empirical point of view; i.e. in terms of the observable predictions it makes, it is equivalent to the first version of the theory.
(You might be thinking that the first theory makes more hypotheses and these hypotheses can be tested independently of their joint implications. I have two responses. A) that’s probably not true. Utilities, information, optimization, and equilibrium are all separately vacuous assumptions. They have implications only in conjunction with each other. B) from the empirical point of view that’s only a stronger argument that the simpler theory is preferred. If we can match the data on bids, does it matter whether the underlying hypotheses are rejected?)
If the point of economic theory was to generate empirical predictions, most of economic theory would be a waste of time. But it’s not the point.
There is value in a theory that describes the route from parameters to conclusions even if those parameters could never even be measured. And that is because the users of economic theory have a source of data that is unavailable to empirical researchers, and would not be permissible anyway: personal experience and intuition.
If you are about to compete in an auction, you look around you and see your competitors, the context, and the object up for sale. This is a unique situation because every situation is unique. You have a sense that one guy is an insider, one guy is bankrolled, and one guy is his competitor. You know that all of these things matter for how you should bid but you want to know how they matter. A theory is a recipe for translating your completely subjective description of the situation into an educated hypothesis about what is going to happen.
(Drawing: Summer Off-site from www.f1me.net)
This joke has been internetting for the past week. (Karakul kick: Noam Nissan)
Here’s the game theorists’ version: Three game theorists with identical preferences but asymmetric information walk into a bar. The server asks “Does everyone want a beer?” They respond in sequence:
- Game Theorist #1: ”Yes!”
- Game Theorist #2: ”Yes!”
- Game Theorist #3 ”I don’t know.”
Two radio stations compete for advertisers. They run ads during 10 minute slots that they can locate anywhere within a given hour of air time. They know that listeners don’t like ads and will switch to another station to avoid them. Will their commercial times be disjoint, overlapping or will they exactly coincide?
Whatever they do, the listeners will adjust their behavior. Disjoint advertising intervals would mean that listeners, regardless of which station they are currently tuned to, will switch as soon as the ads start and always be listening to music. So that’s not an equilibrium.
Suppose they overlap. Radio station B is trying to be clever by starting its ads just a minute later than A. Those listening to radio station A switch to B when the ads start to get an extra minute of music. But when the ads start on B, the listeners know that the music will begin sooner on radio station A. But since you don’t know exactly when the ads will end, and in the meantime you have ads on either station, the time to switch to A is now. That’s not an equilibrium either.
If the ad intervals exactly coincide then listeners learn there is no point in switching. And if listeners aren’t switching then the stations can do no better than to have their ad intervals coincide. So that’s the equilibrium.
This paper by Andrew Sweeting shows empirically that stations coordinate their advertising intervals and explores the motives.
My simple model omits NPR. What programming runs on public radio during the ad intervals on commercial radio? Do commercial radio stations change their behavior during NPR pledge drives?
I am attending an antitrust conference hosted by the Searle Center at Northwestern University. In my attempt to Americanize, I am drawn to any paper involving sport. And if British sport is thrown in for comparison, resistance is impossible.
Haddock, Jacobi and Sag offer an analysis of American NFL football stadiums versus English soccer stadiums. Their thesis is simple: the NFL controls entry of new teams in the league and teams can move from one city to another. So, if the New Jersey government does not cough up $1 billion for the New Meadowlands, teams can threaten to move and the NFL can refuse to allocate another team to the state. For example:
When the Houston Oilers threatened to move to Jacksonville, Florida in 1987 Harris County, Texas, responded with $67 million in improvements to the funded by property tax increases, doubling the county’s hotel tax, and underwriting bonds to be paid over the next 30 years. Within six years the Oilers began lobbying for a new stadium with club seating. Rather than opposing the Oilers rent seeking, NFL Commissioner Paul Tagliabue warned Houston that “If the Oilers’ situation doesn’t work down there, I don’t see any circumstances in which we’re going to guarantee a team, especially when one team’s already found it unsatisfactory.” The message was clear, if Houston lost the Oilers because it refused to accede to the team’s demands, it was unlikely to receive a prompt replacement. At the end of the 1996 season the Oilers left Houston for Nashville where city officials had promised to contribute $144 million toward a new stadium.
In England, entry is easy. If a team attempts to hold up a city, it can create its own new team. This reduces the bargaining power of the team.
Jerry Hausman, the discussant, found much to disagree with. Hausman claimed many British teams were simply no-hopers. Very few teams are actually competitive. Arsenal is not one of them and hence no-one would fund a stadium for them. In the NFL, many teams are competitive. Hence, they can extract rents from the local community. He thought politics was an the center of problem: Why did Massachusetts fund a new high school in Newton rather than soend money in poorer areas? He displayed a surprising amount of knowledge about English soccer and claimed to have worked for the Chicago Bulls (I didn’t catch what he did for them). He speaks fast so I may have missed some details.
It’s hard to measure media bias in general because bias is hard to quantify. Movie reviews are one way forward, a cool idea in a new paper by DellaVigna and Kennedy. Here’s the abstract:
Fueled by the need to cut costs in a competitive industry, media companies have be- come increasingly concentrated. But is this consolidation without costs for the quality of information? Concentrated media companies generate a conflict of interest: a media outlet can bias its coverage to benefit companies in the same group. We test empirically for bias by examining movie reviews by media outlets owned by News Corp.–such as the Wall Street Journal–and by Time Warner–such as Time. We find a statistically significant, if small, bias in the review score for 20th Century Fox movies in the News Corp. outlets. We detect no bias for Warner Bros. movies in the reviews of the Time Warner outlets, but find instead some evidence of bias by omission: the media in this group are more likely to review highly-rated movies by affiliated studios. Using the wealth of detail in the data, we present evidence regarding bias by individual reviewer, and also biases in the editorial assignment of review tasks. We conclude that reputation limits the extent of bias due to conflict of interest, but that nonetheless powerful biasing forces are at work due to consolidation in the media industry.
Tubeteika toss: Josh Gans.
Al Roth starts a list of comparative advantages of the new electronic parking meters relative to old school coin-fed.
In Brookline, where I live, one can already begin to catalog some of the relative advantages and disadvantages of the old and new technologies, aside from those mentioned above, regarding credit cards in particular.
Waiting time and queues: old meters took your quarters immediately (if they were working well enough to take them at all); new meters take some time even if you are first in line, and since they serve multiple spots, you may have to wait while they take that time for the people ahead of you.
Parking at 7:45am: old meters made you start paying even if you rolled up to the curb before payment was required; new meters know that you don’t have to pay until e.g. 8am, and so can sell you parking until 8:30 without charging you for the first 15 minutes until 8.
Adding time to the meter: old meters let you add another quarter to add time, e.g. if you glanced in at the coffee shop after you had already put money in the meter and noticed that there were no vacant tables, so you would have to go across the street, and wouldn’t be back by 8:30. New meters print a receipt for you to put on your dashboard, and don’t let you add time to the end of the time interval you have already bought.
To which I would add: No Free Riding. There is no more hope of rolling into a space with time still left on the meter from the last guy.
And a spinoff list of disadvantages of both systems. Pre-payment. The meter forces me to bear the risk associated with my own uncertain parking duration. I pay in advance and hope I don’t pay too much or too little. If I pay ex post I am insured against that risk and I am willing to pay a higher per-minute rate. (What is the effect on my incentive to park for longer? With ex-post payment I bear a constant cost per minute I stay. With pre-payment that incremental cost is zero up until the meter expires and from there increases with the probability that the meter maid turns up.)
David Pogue has also been thinking/fuming about the Netflix price change which effectively increases prices from $10 to $16 for streaming plus one-DVD-at-a-time. He ends with:
[W]hat makes me unhappiest is how calculated all of this feels. In July, a spokesman told me that Netflix had already taken the subscriber defection into account in its financial forecasts.
And sure enough. When I tweeted that Netflix had lost one million of its 25 million customers, @npe9 nailed it when he wrote:“It damages their brand and images, but 24 million customers paying $16 is still better than 25 million @ $10. Increases revenue by >50%.”
This article in The New Yorker about Federer’s loss to Djokovic in the US Open Semi-final is absolutely worth a read. You don’t have to care about tennis as long as you have a personal stake in the deep question of what style of perfection really wins.
http://www.newyorker.com/online/blogs/sportingscene/2011/09/roger-federer-novak-djokovic.html
But I have a slightly different take.
All Fed-Heads knew right away when he won the second set to go up 2-0 that nevertheless was going to lose the match. The tragedy of that match, and of Roger Federer in general is not that perfection failed. He was never perfect or anything close to it. The irony is that, by comparison to Nadal and Djokovic, especially Nadal, Roger Federer is so much more like the rest of us mortals.
Nadal has pure animal fighting spirit branded onto his DNA. Yes, his tennis is wrong, but that doesn’t matter because he is the one who has the aura of invincibility, not Federer. You can count on Roger to make impeccable shots. To play like an artist. But you can count on Nadal to win.
Federer is not like a superhero who just effortlessly deploys his superpower and watches the results roll in. When you watch him long enough you start to see how tightly wound he is at every moment, mustering every ounce of concentration to keep himself in that groove. If he is a master of anything he is a master of trying.
What you learn from watching his matches the last year is just how unstable that groove is. And what makes his decline so depressing is how it reminds us that if you have to try you are not a master. He carried the banner for all of us who have nothing going for us except the will to try, and even he The Master Tryer, the man who tried so hard that he was Perfect, can’t beat those guys whose strokes are hacker strokes next to his, but who were born winners.
And that is why this particular match was really his most tragic. Match point against Djokovic. After tanking sets 3 and 4 and then pulling himself together to go up a break and serve for the match in the fifth set, we still knew he was going to lose. It was just a matter of how.
Djokovic is not Nadal. He does not win by sheer will. A lot of trying went in to his streak this year. And to Federer fans, Djokovic is something of an interloper. You look at his game and there is no real reason he should be pushing Roger out of the top 2. He is super solid. But we want our iconic battle between Mr. Made-Perfect against Mr. Passion. Djokovic doesn’t belong.
But when Federer had Djokovic match point down, Djokovic did something that made a total mockery of everything about Federer’s game. He took a blind swing on a service return and hit it for a stinging winner. He became Nadal for a single shot. You are not supposed to be able to become Nadal. That is not something you can try to do. And indeed there was no trying involved whatsoever. He just did it.
Federer could never, ever do that.
- Second-sourcing. You are a monopolist selling a durable good that requires periodic upgrades. Think enterprise software. The monopoly price extracts the lifetime user-value of the product. To maximize the lifetime user-value of the product you should set the price for future upgrades at cost. The problem is that your users don’t trust you. They foresee that at the time of the upgrade, when the original purchase price of the software is a sunk cost you are not going to set upgrade prices at cost. Indeed you will again try to extract the (remaining) lifetime user-value of the product with the upgrade price. You need a device to commit yourself not to try to exploit your customers in the future so that you they will submit to your exploitation today. By spinning off a division of your company you can create a competitor for upgrades. This competition guarantees that you cannot act like a monopolist for upgrades and the upgrade price will be competitively priced at cost.
- Pre-emption. You are currently a monopolist in an industry that can accommodate at most two firms. It is inevitable that there will be an entrant eventually and your monopoly profits will turn into duopolist profits. Since you are going to have a competitor anyway why not create your own competitor? You could sell half of your company to the highest bidder. He will be willing to pay up to the duopolist profits and then he will compete with you driving the profits of your remaining half down to the duopolist profits. In total your profits are equal to the sum of the two duopolist’s profits rather than just a single duopolist profit. That’s necessarily less than the monopoly profit but that wasn’t going to last anyway.
This issue is perplexing many of us who teach in business schools – are we going to have to change our classes as one of the firms in many of our key examples goes bankrupt?
We are not sure we have a good answer to our question so we will satisfy ourselves with a brain dump.
First, it may very well be true that, as CEO Reed Hastings is saying, Netflix does not want to end up like Borders or AOL in the garbage can of history when the next new technology comes along. After all, Blockbuster has never really recovered from missteps when Netflix DVDs arrived on the scene.
Therefore, Netflix wants to be ahead of the curve when DVD technology dies and everyone watches streaming movies. Here is one way to do this: keep the total price of 1 DVD at a time +streaming at $10 but price streaming alone at $6 and 1 DVD alone at $8. What they did instead, to maintain margins we assume, is raise prices by 60% so I DVD at a time + streaming is now $16. Of course this going to cause some serious fall in demand and also create a media frenzy.
There is a broader point: we gave one example of how Netflix might shuffle prices to create switching but we do not have the internal data on revenue and costs so the optimal pricing might be different. But whatever it is, the optimal pricing requires the DVD and streaming prices to be coordinated. If you split these two services into different (competing?) companies, you might create a price war and not only undermines your whole strategy but destroys your profits….
Even if completely separating the two businesses is the only way Netflix feels it can incentivize its streaming business to move ahead properly, there is absolutely no reason the company should expect consumers to care about its internal strategy issues – the strange angle taken by Hastings’ blog postings and emails to customers. It seems to us that it is the large price hike, far more than any other aspect, which has upset customers.
As a final comment, even if Netflix gets everything right operationally in its streaming business, it is hard to see how they plan to maintain margins and demand given that their suppliers (the content producers and owners) have a great deal of bargaining power and have every incentive to treat Netflix as only one outlet among many competing ones for their product. Other companies in the content delivery business, such as cable & satellite operators, face similar issues, but have the advantage of higher barriers to entry in terms of local franchise rights and physical infrastructure that gives them greater scope to raise prices……Our guess is that we will have more posts as more information arrives.
Sandeep Baliga and Peter Klibanoff
Ethan Iverson has the rundown. Some highlights:
6) My Old Man (Joni Mitchell): “Blue”, a masterpiece, turned me upside-down when it came out in 1971. Her lyrics, way with harmony, her chord progressions and the uniqueness of her voice are unsurpassed. She is one of the great setters of text of all time. I had a hard time trying to figure out these chords as a high-schooler!
11) If I Were A Bell (Miles Davis): This is the record (“Live at the Blackhawk”) that made me want to play jazz as my life’s work. Wynton Kelly’s comping under Miles’ and Hank Mobley’s solos, his energy and time feel and the live-ness of the recording are still great to listen to today – so direct and swinging.
12) 1 X Love (Charles Mingus): This is the record that made me want to be a jazz composer. It sounds like Ellington on acid.
15) Old Devil Moon (Ahmad Jamal): This trio (with Israel Crosby and Vernel Fournier) is one of the two greatest of all time (the other being Bill Evans, Scott LaFaro and Paul Motian). Ahmad had the most beautiful sound and touch of any jazz pianist – and his sense of drama and arrangement is unsurpassed.
19) Serpentine (Earth, Wind and Fire): My favorite soul/R&B band had the most killing grooves – and many of their songs carried social messages as well. Played by real musicians, not machines.
27) Nancarrow: Study for Player Piano #1: He became frustrated that live musicians couldn’t play the complex rhythms he imagined, so he composed for the player piano. His off-kilter – yet tonal – style really appeals to me. I wish I could play like this!
If you think about pain as an incentive mechanism to stop you from hurting yourself there are some properties that would follow from that.
When I was pierced by a stingray, the pain was outrageous. The puncture went deep into my foot and that of course hurts but the real pain came from the venom-laden sheath that is left behind when the barb is removed. Funny thing about the venom is that it is protein based and it can be neutralized by denaturing the protein, essentially changing its structure by “cooking” it as you would a raw egg.
How do you cook the venom when it is inside your foot? You don’t pee on it unless you are making a joke on a sitcom (and that’s a jellyfish anyway.) What you do is plunge your foot is scalding hot water raising the internal temperature enough to denature the venom inside. Here’s what happens when you do that. Immediately you feel dramatic relief from the pain. But not long after that you begin to notice that your foot is submerged in scalding hot water and that is bloody painful.
So you take it out. Then you feel the nerve-numbing pain from the venom return to the fore. Back in. Relief, burning hot water, back out. Etc. Over and over again until you have cooked all the venom and you are done. In all about 4 hours of soaking.
A good incentive scheme is reference-dependent. There’s no absolute zero. Zero is whatever baseline you are currently at and rewards/penalties incentivize improvement relative to the baseline. When the venom was the most dangerous thing, the scalding hot water was painless. Once the danger from the venom was reduced, the hot water became the focus of pain. And back and forth.
Second Observation. After three weeks of surfing (minus a couple of days robbed by my stingray friend) I came away with a sore shoulder. Rotator cuff injuries are common among surfers, especially over the hill surfers who don’t exercise enough the other 11 months of the year. The interesting thing about a rotator cuff injury is that the pain is felt in the upper shoulder, not at the site of the injury which is more in the area of the shoulder blade. It’s referred pain.
In a moral hazard framework the principal decides which signals to use to trigger rewards and penalties. Direct signals of success or failure are not necessarily the optimal ones to use because success and failure can happen by accident too. The optimal signal is the one that is most informative that the agent took the appropriate effort. Referred pain must be based on a similar principle. Rotator cuff injuries occur because of poor alignment in the shoulder resulting in an inefficient mix of muscles doing the work. Even though its the rotator cuff that is injured, the use of the upper shoulder is a strong signal that you are going to worsen the injury. It may be optimal to penalize that directly rather than associate the pain with the underlying injury.
(Drawing: Scale Up Machine Fail, from www.f1me.net.)
Many homeowners are taking advantage of low interest rates to refinance their mortgage. One group is conspicuously absent: low income homeowners with a history of shaky credit. Refinancing would help them and the economy at large but the costs of refinancing plus the reluctance of lenders to lend has compromised the availability of credit to this group. What is the solution? There are three proposals that are in the public domain.
1. Inflation: This has been proposed by Ken Rogoff. He would use inflation to reduce the value of debt and get borrowing moving again. The difficulty is that the FED has carefully nurtured a reputation as an inflation fighter for the last couple of decades. Once it loses that reputation can it recover in time for an inflationary period? This issue makes he Rogoff solution unpopular with many central bankers.
2. Loan Modification: Posner and Zingales propose a loan modification program. The details are complex but require some Congressional input to change bankruptcy law or pass new legislation. This is politically impossible in the current political climate so whatever the merits of the plan, it does not seem feasible.
3. Refinance: Boyce, Hubbard and Mayer propose to ease lending rules and offer loans at 4% to eligible homeowners whose loans are guaranteed by Fannie and Freddie. How much if this plan is implementable by the President without Congressional approval? That is the question. On first blush, this plan seems the most politically feasible to me.
Pennsylvania is considering a change in how it allocates electoral votes in Presidential elections. Currently, like nearly all other states, Pennsylvania’s electoral votes are up for grabs in a winner-take-all contest. All 20 of its votes go to the candidate who receives the largest share of the popular vote in the state. The state’s Republican party, currently in control of the legislature and the governor’s office, is considering a switch to a system in which each of the 18 congressional districts in the state would award a vote to the winner in that district. (I believe the remaining two would be decided by state-wide popular vote.)
There are a number of ways to think about the incentives to switch between these two systems. One way is to ask how it will effect the overall flow of campaign dollars/favors to the state. On this score, in a state like Pennsylvania, the proportional-vote system is clearly better.
Only one Republican Presidential candidate has carried the state in the last 25 years. The cost of increasing Republican vote share by a few percentage points would be wasted in a state where Democrats begin with such a large advantage. But in a proportional system such an investment can pay off. The Republican party will now spend to compete for the marginal vote and Democrats will likely spend to defend it.
Of course the real question is how a state with a strong Democratic leaning could be expected to vote to switch to a system that will not only channel money to Republican districts but also help the Republican Presidential candidates.
Note that the opposite ranking holds in a more competitive state. If the two parties are on equal terms in a state, then a winner-take-all system gives a huge reward to a party who invests enough to gain a 1% advantage in vote-share. By contrast a proportional system offers at most a single vote in return for that same investment. Such a state maximizes its electoral spoils by sticking with winner-take-all. And with no majority party these economic incentives should dominate.
Taking stock of both of these two cases, it is not surprising that almost all states use a winner-take-all system. Indeed, Nebraska, one of the few states with a proportional system may soon switch to winner-take-all.
The end of summer heralds the annual ritual of the suburban block party. The street has to be blocked off, notices have to be put up so no-one parks on the street, food has to be ordered or cooked etc. The burden falls on the people with kids because “The block party’s for the kids” we all say. Obviously, there is a huge free-rider problem – we can all enjoy the benefits of the block party without spending time on setting things up. If you don’t hang out with your neighbors much, “repeated game” effects are minor. Hence, morality and peer pressure must step in to provide incentives.
For example, suppose you sign up to put up notices warning people not to park on the street on the day of the block party. You write up some flyers and put them under car windscreen wipers. You print off notices and staple them to trees. You think you’ve done a pretty good job. The next day you wander round putting in new flyers 
under car wipers and check on the notices. Mysteriously, someone has taken it upon themselves to put up their own notices. These are taped to the trees not stapled. Is that really superior? You are not sure but you see the implicit rebuke in the intervention. Homo economicus would revel in the intervention – he could slack off even more knowing someone will do his job for him. But homo normalicus feels a tad pissed off and even a bit guilty, even though no guilt is truly warranted. Next year, normalicus will go back to picking up the fried chicken from Jewel-Osco. But if economicus/evilicus pops out, he will do the same job worse out of rationality or spite.
Registration for the 2012 Allied Social Sciences Meetings has just opened up today. The ASSA meeting is the annual “winter meeting” in which hordes of economists descend on a rotating list of cities to spend a weekend shuffling papers around and stiffing cab drivers.
It was by sheer luck that last night I noticed that today would be the first day to register. And so this morning I was one of the first to login to the ASSA hotel registration system and reserve one of the better suites (we will be in the Fairmont) in one of the more central conference hotels where Northwestern Economics will conduct its job market interviews. (New PhD recruitment is one of the main, perhaps the main, activity at the ASSA meetings.) Had I been just a few hours later we would have been relegated to a remote hotel making it harder for interviewers and interviewees to get to and from the interviews.
(If that happened to you, you can follow @ASSAMeeting on Twitter to wait for announcements of new suites opening up. But wouldn’t you rather follow me? Sandeep?)
It’s funny that a conference run by economists uses a qeueing/rationing system to allocate scarce hotel space. The system doesn’t even allow ex post exchanges between departments which would undo inefficient misallocations. If MIT gets stuck in the Embassy Suites and Podunk U is in the Hyatt Regency, then tough luck MIT (maybe Podunk can build a stronger theory group, ha ha ha.)
The problem is that ASSA negotiates discounted rates for the suites by reserving them in bulk. Obviously that is good for everyone. But the discounted rate is below market clearing and therefore there will be excess demand for the best hotels. It would seem that the resulting inefficiency is the price we have to pay for our monopsony power.
Indeed it would not work to have ASSA negotiate hotel space at discount rates and then turn around and use an efficient auction internally to allocate it. The reason is somewhat subtle. Here’s one way of seeing it. An efficient auction for a single suite is (essentially) a second-price auction. It works efficiently becuase when I know that I will have to pay the second highest bid then I will bid exactly my willingness to pay. Therefore the winner will be the bidder who values the suite the most. However, because ASSA bought the suite at a rate that is below market clearing, the second highest bid for a suite is going to be more than ASSA paid for it.
That means ASSA makes money. Sounds good right? No. In fact it is a problem precisely because we all benefit from ASSA making money (we get lower registration fees, lower journal subscription fees, etc.) You see I internalize the benefits of ASSA’s revenue which essentially means that I get back some of the price I pay when I win the auction. In other words I am not really paying the second highest bid, I am paying something less. And because of that I no longer want to bid my true willingness to pay, and the mechanism breaks down. In the jargon, the efficient auction is no longer incentive compatible.
But there is a solution. The basic mistake ASSA is making is to negotiate discounted suites. Why does it do that? Well, it has monopsony power and it has different hotels in the area compete with one another for the business. Since we are buying hotel space it seems natural to make hotel discounts the currency of that competition. But we saw the problem with that. Instead ASSA should ask for lump sum cash bids from the hotels. The highest bidding hotel gets the right to auction off their suites to ASSA members using an efficient auction. The hotel keeps all revenues from the auction.
That way I don’t internalize any of the revenues from the auction. The mechanism is incentive compatible again and therefore gives an efficient allocation. The hotels make some money. And the amount of money they can expect to earn is exactly how much they are willing to pay to ASSA in advance for that right. So in fact ASSA comes away with their monopsony rents without having to sacrifice efficiency.
In the movie Inside Job, George Soros makes an analogy that made an impression on me. He talks about how oil tankers have partitions in their hulls with their oil divided across the compartments. That way when the seas are rough the oil sloshes around within its own restricted space rather than the entire cargo splashing forward and back the full length of the ship, as would happen if there were no partitions. This obviously makes the tanker more stable.
The analogy is to financial markets and regulation. Erecting partitions to make the market less liquid should improve stability. At first you say, oh that’s a nice piece of rhetoric but financial markets aren’t anything like oil tankers. At least I said that.
But let’s take it for a spin. Let’s analyze the partitioned tanker but forget that it is a mechanical system and instead analyze it in the same way we would use equilibrium theory to analyze a market. Here goes.
There is a shock (rough seas) and the oil starts to spill to one end of the boat. But the partition stops the oil from going where it wants to go. There is a friction in the market. The oil in one compartment and the empty space in the adjacent compartment want to make a voluntary exchange. And it would be Pareto improving (otherwise they wouldn’t want to do it.) But that partition is stopping them. This is welfare-reducing.
Moreover, there is a powerful incentive for arbitrage. Any small leak in the partition would allow equilibrium to be reached by removing the friction, allowing the oil to go where it wants to go, and relieving some internal pressure. That must be welfare-improving.
If you think about it, market models pretty much stop there. Pareto improving trades should and do happen. Financial innovation brings down those partitions and that’s good. What is almost always missing is any way of talking about the hard-to-define but clearly very real externality that is the effect of these trades on the stability of the system as a whole. That’s about process and transitional dynamics, not about equilibrium.
Indeed, in equilibrium the oil in the tanker is in the same place whether or not the partitions are there.
(drawing: The Bigger Picture from www.f1me.net)
When do rational people seek militant leadership for their nation? By militant here, I mean bellicose or having an affinity for violent conflict. I have began thinking about this question while writing a paper on the rise of Nazism in Germany after World War 1. I would suggest that this question may be one of the most important for political theory. As a practical matter, we certainly do not want neighboring nations to choose militant leaders against us, and so we should avoid putting them in conditions that might cause them to do so. Thus, we need to understand what might cause normal rational citizens to support militant candidates for leadership of their nation.
People normally have very good reasons to not want militant national leaders. We are all at risk when our leader would not hesitate to send our loved ones and ourselves off to die in battle. To preserve the blessings of peace, we should normally prefer to have leaders of the nonmilitant sort, who have a healthy aversion to war.
But of course militant leaders can also have a positive deterrent effect. When we have a militant national leader, other nations might be less inclined to provoke any kind of trouble for us. So a perceived threat of deep invasion can create an incentive for us to seek a militant leader who can deter it. But we must also worry that a leader who has an affinity for war may take any opportunities that he can get to make one for us. This potential cost of militancy is reduced, however, when the serious risks of war seem remote from our borders. Thus, the incentive to seek militant leadership may be strongest when we fear a long-term or low-probability threat of a deeply destructive invasion but otherwise the immediate risks of conflict seem small.
This recipe was fulfilled in Germany around 1930. The post-WW1 reparations involved a persistent implicit Allied threat to invade Germany if it did not pay, but the immediate risks of militancy became remote after Allied troops withdrew from the Rhineland under the Young Plan of 1929.
Such conditions also existed in America after the attack of September 11, 2001. We felt profoundly vulnerable to deep invasion, but the immediate risks of our own militant posturing seemed remote. And indeed, a demonstrated willingness to use military force became a positive asset in American presidential politics for several years in the aftermath of the attack. We should understand that, even in America, politics could become more militant under such conditions.
Suppose a firm can enter one of several markets. Other things equal, the fewer competitors there are, the greater is the incentive to enter as profits are decreasing in the number of competitors. So, smart managers should enter markets with fewer competitors. The deregulation of local telecommunications services in 1996 led to entry by competitive local exchange carriers (CLECs). These varied in the experience and education of senior managers and hence allow a descriptive and analytic analysis of entry decisions. Goldfarb and Xiao perform this analysis and find
Our descriptive analysis, which characterizes the entry decisions of facilities based CLECs in 234 midsize US markets with populations between 100,000 and 1,000,000 as of
the 2000 Census, reveals that experienced CEOs, CEOs with an economics or business
education, and CEOs who attended the most selective undergraduate institutions tended to enter
markets with fewer competitors.
They also estimate a behavioral model of entry to try to identify strategic sophistication as defined by the Cognitive Hierarchy model of Camerer, Crawford etc. They find that the firms with strategically sophisticated managers are more likely to survive and be profitable. There are many things that one might ague with - e.g. Doesn't better (economics/business) education help you to motivate workers better, cut costs etc? Why is strategic sophistication identified only with competition avoidance? Many questions come to mind but this is still an interesting paper.
The efficient way to allocate scarce capacity on a flight is to hold an auction as close to departure time as possible. Allocating space prior to that point runs the risk that a ticketed passenger learns that his willingness to pay is lower than he expected (business meeting is cancelled, family member falls ill, etc.) Allocating space close to the time of departure ensures that passengers have resolved any uncertainty about their willingness to pay and those with the highest willingness to pay will be seated.
But with an auction the airline cedes a lot of consumer surplus to the passengers, because in an efficient auction the winner pays not his own willingness to pay, but the willingness to pay of the marginal bidder. The airline is willing to sacrifice efficient allocation in exchange for a mechanism that extracts more of the gains from trade.
The ideal for the airline would be to sell tickets to the auction and to put these tickets up for sale as early as possible, before passengers have any private information about their willingness to pay.
Here’s an extreme example to illustrate. There is a plane with one seat and two potential passengers. By the time of departure they will know their willingness to pay, but when they first enter this world they know only the probability distribution. The airline should announce that there will be a 2nd price auction at the time of departure but in order to be allowed to participate in that auction the passengers must purchase a ticket the moment they are born. The price of this ticket will be set equal to the expected value of consumer surplus from the auction. This way the airline achieves the maximal gains from trade and secures all the rents for itself.
Obviously the problem is that the airline cannot contract with every potential passenger still in the bassinet. Indeed contracting is initiated by the passenger, not the airline. Thus, in order to be able to extract consumer surplus the airline’s mechanism has to give the passengers the incentive to voluntarily contract early prior to the resolution of uncertainty.
A mechanism that accomplishes this will have two features. First, ticket prices must rise as the departure date approaches. This incentivizes early purchases. Second, flights will be oversold. This enables efficient re-allocation of seats on the basis of information realized after tickets are purchased. In particular, those with lowest realized willingness to pay will sell back their tickets in a reverse auction.
(This is ongoing research with Daniel Garrett and Toomas Hinnosaar, two NU students who will be on the job market this year.)
