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Ba Le is well known – I found out about it from Check Please of all places. Despite it’s fame, lines are short and service is fast. The location in Uptown makes it a little out of the way I guess.
The shop mainly sells Vietnamese Bahn’ Mi sandwiches so if you are looking for Pho you’ll have to find somewhere else on Argyll Street. We’ve gotten the Vegetarian, Chicken and BBQ Pork bahn’ mi – all were good and popular even with the kids. The spring rolls from the fridge are also very good. The hot appetizers should be avoided. The smoothies aren’t so great either. There is a large choice of Vietnamese desserts, various combinations of beans, corn and tapioco in coconut milk. I’ve had some I loved and some I hated but I can never remember which ones were good! I still make the longish drive from Evanston so by revealed preference the good outweighs the bad, especially now I’ve learned what to avoid.
While I think my work sometimes serves important purposes, and that (sadly) I am probably better at blogging and running regressions than I am at more direct forms of assistance, perhaps some deeper reflection is in order.
Of course, what I actually do is say to myself, “well, at least I don’t work in finance.”
The brief moment of concern passes, and I turn back to dispassionately regressing death and destruction.
Kevin Murphy is a John Bates Clark Medal winner, he has a MacArthur “Genius” Award and is a superstar in the economics profession. But the green-eyed monster has finally stirred because I found out he is consulting for the basketball players in the current labor negotiations.
Teams pay a luxury tax if they go over a salary cap specified by the league. The revenue generated by the tax is transferred to the other teams. If the luxury tax is too high, teams will not go over the salary cap and the labor market for payers will be moribund. But if it is low, the rich teams will go over the salary cap and the poorer teams will get the revenue this generates and will themselves compete to hire players. The labor market for players will be active. There is some threshold luxury tax below which the market is active and above which it is inactive. The players want a tax that is below the threshold. Who might be able to work out this threshold? Kevin Murphy:
[An ESPN reporter] asked a union official how they know where that player-friendly effect stops, and where the de facto hard cap kicks in.
His answer was that their economist Kevin Murphy had the task of predicting how owners would spend under the last CBA, back when it was new. Looking back, they realize his work was, the official says, “pretty much perfect.”
Who is the consultant to the teams I wonder?
(HT: MR)
The number of laws grows rapidly, yet the number of regulators grows relatively slowly. There are always more laws than there are regulators to enforce them, and thus the number of regulators is the binding constraint.
The regulators face pressure to enforce the most recently issued directives, if only to avoid being fired or to limit bad publicity. On any given day, it is what they are told to do. Issuing new regulations therefore displaces the enforcement of old ones.
One rejoinder would begin by observing that the origin of the problem is that future legislators are short-run players. Given that, it may even be normatively optimal for today’s short-run legislators to speed up the pace of their own regulations so that they are in effect as long as possible before their eventual displacement by the next generation. Of course this is conditional on today’s regulation being better than the marginal old one being displaced, which is presumably the case otherwise it wouldn’t have been under consideration in the first place.
You and your spouse plan your lifetime household consumption collectively. This is complicated because you have different discount factors. Your wife is patient, her discount factor is .8; you are not so patient, your discount factor is .5. But you are a utilitarian household so you resolve your conflicts by maximizing the total household utility.
Leeat Yariv and Matt Jackson show in this cool paper that your household necessarily violates a basic postulate of rationality: your household preferences are not time consistent. For example, consider how you rank the following two streams of household consumption:
- (0,10,0,0, …)
- (0,0,15,0,0, …)
Each of you evaluates the first plan by computing the present value of 10 units of consumption one period from now. Total household utility for the first plan is the sum of your two utilities, i.e. 
But now consider what happens when you actually reach date 1 and you re-consider your plan. Now the total utilities are 
Indeed your household exhibits a present bias: present consumption looms large in your household preferences, so much so that you cannot forego consumption that, earlier on, you were planning to delay in exchange for a greater later reward.
Jackson and Yariv show that this example is perfectly general. If a group of individuals is trying to aggregate their conflicting time preferences, and if that group insists on a rule that respects unanimous preferences and is not dictatorial, then it must be time inconsistent.
Tom Sargent on why he joined NYU:
”I need other people to do my best work. Economics is like sports — the real stuff is being done by young guys, and you have to work hard to keep up with them. Old guys like me are like boxers — we’ve seen a lot of moves, but our reflexes are slower. There are a lot of young guys here to keep me sharp.”
To add to this: when someone comes up with some supposedly “new” moves, old guys can tell whether they are reinventing the wheel or whether it is a really new move. Zvi Griliches used to play this role at Harvard. Does this knowledge help you to come up with some really new moves yourself? I’m not sure.
Do you know about the Nemmers Prize in Economics? It is a prestigious prize awarded biennially in recognition of “major contributions to new knowledge or the development of significant new modes of analysis.” It comes with a significant monetary award funded originally via a gift from the Nemmers brothers to Northwestern University. (There are also Nemmers Prizes in Mathematics and Music Composition.)
The Nemmers wanted the prize to eventually carry a degree prestige that would rival the Nobel Prizes. So far 9 prizes have been awarded and 5 of those recipients have gone on to win Nobel Prizes. (The Nemmers charter forbids giving the award to a previous Nobel Laureate.) They are
- Peter Diamond (Nemmers 1994 Nobel 2010)
- Tom Sargent (Nemmers 1996 Nobel 2011)
- Bob Aumann (Nemmers 1998 Nobel 2005)
- Dan McFadden (Nemmers 2000 Nobel later that same year)
- Ed Prescott (Nemmers 2002 Nobel 2004)
Indeed each of the first 5 Nemmers winners later won Nobels. The next four, Ariel Rubinstein, Lars Hansen, Paul Milgrom, and Elhanan Helpman are perennial favorites in department pools and polls.
If you had placed your Nobel bets over the last decade based on the Nemmers record you would have made some money.
John Gruber of M.I.T. who helped design Romney’s healthcare plan in Massachusetts. In an interview with MSNBC, he says:
Romney is “the father of health-care reform…. think he is the single person most responsible for health care reform in the United States. … I’m not trying to make a political position or a political statement, I honestly feel that way. If Mitt Romney had not stood up for this reform in Massachusetts … I don’t think it would have happened nationally. So I think he really is the guy with whom it all starts.
On the “individual mandate” which stipulates that everyone buy insurance or face a penalty:
“This was a big decision to be made and Governor Romney clearly stated that he believed without an individual mandate healthy people could just free ride on the system.”
On Romney’s claim that the Massachusetts law led to no tax increases:
[Gruber] also noted that the Massachusetts law didn’t require any increase in taxes only because it received federal health-care funds that defrayed the costs of the new law.
These comments are bad for Romney – they weaken him against Obama and Perry. They are good for Perry. Are they good for Obama? This depends on whether Perry or Romney would be stronger against Obama…
My sister-in-law asked me how many new PhDs in economics find jobs in academia (as opposed to taking private sector jobs.) I said “More than half.” Her reply surprised me, for a moment. She said “Really, that few?”
I was surprised because my answer gave her only a lower bound. “More than half” could easily mean “100%.” But after a moment I realized that my sister-in-law is very sophisticated and her response made perfect sense.
I have now seen this paper presented twice and I really like it. It’s Gul, Pesendorfer, and Strzalecki modeling the implications of limited attention on asset prices. They show how competitive equilibrium requires large fluctuations in prices in extreme states of productivity.
Their model is very simple and the logic can be explained in a few sentences. Output in the economy is stochastic so that there are high productivity and low productivity states. There is one simple behavioral assumption: each agent is limited in his cognition, (or attention, or flexibility) so that he must partition states into a small number of categories. His limitation is modeled by a constraint that his consumption must be the same in all states belonging to the same category.
Qualitatively, the results of the paper follow almost immediately now. Consider the very small probability event that productivity is at the extreme low end. Agents will lump these states together with other states and so they will not be able to reduce their consumption in response to the very low output. So in order for the market to clear there must be some agent, or small set of agents, who do pay attention to these states and reduce their consumption exactly when output is this low.
Think about these agents. They are committing their scarce resource, namely attention, to this rare event. Its very unlikely that this use of their attention will pay off. In order to give them enough incentive to do this, the reward must be very large. And the way to reward them is to make the price extremely high in these low productivity states. The ability to sell at these extreme high prices is the necessary incentive.
A similar logic explains why prices must be extremely low in high productivity states. Overall there are large price fluctuations, larger than in a standard economy without the need for these incentives.
The paper is a beautiful example of the value of abstraction. Rather than getting into details about how complexity/attention constraints actually work, it is enough to model their essential implication, namely the partition. This keeps the canvas clean for the economic logic to stand out.
There is one conceptual point that I haven’t been able to come to terms with. It has to do with feasibility. In competitive equilibrium, feasibility–the assumption that total consumption equals the total endowment– is just a way of modeling market clearing. And market clearing is the essential assumption of competitive equilibrium.
If markets didn’t clear then there would be excess demand and supply and the resulting competitive pressures would cause prices to adjust so that market clearing was restored. That’s the usual story behind competitive equilibrium. But it doesn’t work here, at least not in the usual way.
For example, suppose that nobody was paying attention to the lowest state. All traders are grouping it with higher productivity states and so they are planning to consume more than the total output in this lowest state. There will be excess demand. That can’t be a competitive equilibrium, therefore someone must be paying attention to the lowest state.
But notice we cannot explain this “equilibration” by the textbook story of how prices adjust to clear markets. No matter how much the price adjusts, since nobody is paying attention to this lowest state, nobody can change their behavior in response to changes in prices.
Instead, the story has to work something like this. If nobody is paying attention to the lowest state, the price in that lowest state has to rise so that somebody starts paying attention to it. That is, it’s as if there is some ex ante stage where everybody is paying attention to every state, and on the basis of all that information they decide which states to then stop paying attention to.
Probably this is taking the model too literally and there is an as if interpretation that doesn’t sound so convoluted. I am still trying to find that.
January of 1996 I was on the junior job market and I had just finished giving a recruiting seminar at the University of Chicago. This was everything a job market seminar at Chicago was supposed to be. I barely made it through the first slide, I spent the rest of the 90 minutes moderating a debate among the people in the audience, and this particular debate was punctuated by Bob Lucas shouting “Will you shut up Derek? Contract theory has not produced a single useful insight.”
Suffice it to say that my job market paper had nothing in common with either contract theory, Bob Lucas, or the Derek in question. But it was the most fun I have ever had in a seminar.
So I was going out to dinner with Tom Sargent and Peyton Young. Peyton was visiting the Harris school for the quarter and we would be going in his car to the restaurant. Actually it was his mother’s car because his mother lived in the area and he was borrowing it while he was visiting. It was one of those Plymouth Satellite or Dodge Dart kinda cars: a long steel plinth on wheels. Peyton warned us that it hadn’t been driven much in recent years and it had just gotten really cold in Chicago so there was some uncertainty whether it would actually start.
We got in with me on the passenger side and Sargent in the back seat and sure enough the car wasn’t going to start. It was making a good effort, the battery was strong and the starter was cranking away but the engine just wouldn’t turn over. After a while Tom says let him have a crack at it. I am sitting there freezing my never-been-out-of-California butt off thinking that this is the comical extension of the surreal seminar experience I just went through. First I had to play guest emcee while they hashed out their unfinished lunchtime arguments, and now I am going to have to get out and push the car through the snow.
But when Sargent got into the front seat there was this look on his face. I know these American cars, he says, you gotta work with them. He leans forward to put his ear close to the dashboard, he’s got the ignition in his right hand and his left hand looped around the steering column holding the gear shift. And then he goes to work. He turns the key and starts wiggling the gear shift while he is pumping the gas pedal. This makes the car emit some strange sounds but apart from that it doesn’t accomplish much and he starts over. He’s mumbling something under his breath about engine flooding, his head is bobbing manically and his eyes are folding down giving the effect of a cross between Doc Brown and Yoda. In the back seat Peyton appears to have total faith in this guy’s command of the machine, meanwhile I am about to start laughing out loud.
After three or four more cycles, he starts ramping up the body English. He is bouncing off the seat to get extra leverage on the gear shift. His ear is right up against the steering wheel, his eyes are shut and from the look on his face you would assume he was straining to heed the car’s wheezing, last dying wish. But then there is a different sound. The dry electric sound of the starter motor starts to give way to the deep hum of internal combustion. The car begins to bounce along with Professor Tom Sargent. Bounce, bounce, bounce, vrum –ayngayngayng– vrum ayng vrum -vrum -vrum, BANG. That backfire knocks me out of my seat, but it just gently opens Sargent’s eyes and Peyton’s look is pretending that he saw all of this coming.
Sargent turns back the ignition, pauses and draws his face back away from the wheel. His head turns toward me and a grin comes over his face. He’s saying here it goes, watch this. He turns the key one last time and the engine rolls over like a cat, stretching out its neck for one more scratch.
“You don’t mind if I drive do you Peyton?”
On Monday, me and some dudes are gonna tailgate outside the Kellogg School of Management before the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel is announced. You should totally come. It’s gonna be ill. My pick to click this year is N. Gregory Mankiw. They’re gonna say it’s for his work on menu costs and price stickiness, but that’s bunk. It’s really so they can hand it over to someone who isn’t Paul Krugman.
Who’s on your Nobel fantasy team?
In related news, Harvard has shut down its Nobel pool (and Al Roth plans on a late breakfast.)
Unreleased ad with Steve Jobs voiceover:
This year’s votes in the Kellogg/NU poll:
Last year’s Kellogg/NU poll predicted the winner of the 2010 prize, if you decoded its message carefully. It seemed there was “inside information”. I am having a harder time this year. There are a large number of I.O. economists at Kellogg/NU. But, even given that, Tirole garners a huge number of votes..is this reflecting inside information or bias? Another dramatic change is the increase in votes for econometricians – Hausman, White, Hansen and Manski. This seem the closest to inside information so maybe this predicts an econometrics prize. My personal favorite is Robert Wilson. I have always loved his research and leadership. I also played Diplomacy at his home when I attended SITE once during grad school. This makes him my intellectual and sentimental choice. A prize for him perhaps joint with Kreps, Holmstrom and/or Milgrom would be great. If that does not work out, if Bob Weber and I split the prize, that would be fine with me.
Why would a narrow elite ever extend the vote to the masses? Perhaps the hand of the elite is forced by the threat of revolution. To convince the masses that the elite is committed to giving them surplus, the elite extend the franchise. This is argument of Acemoglu and Robinson.
Lizzeri and Persico have a quite different argument which has particular resonance for Britain’s Age of Reform in the nineteenth century. Suppose only a fraction of the population can vote. Two parties, the Whigs and the Tories compete for their vote. The parties can either offer a public good or a transfer with revenue generated via taxation. When the enfranchised group is a small elite, there is an incentive to tax the entire population and then target transfers to swing voters in the elite. That way a party can give them as much as they would get with pubic good provision and get into power. The mass of the elite that is not targeted gets no transfer.
When the franchise is extended pork barrel politics is not as powerful as the taxable endowment is not large enough to offer the now larger majority enough to compensate them for zero pubic good production. Each political party can at least get a 50% chance of getting elected by offering public goods. Hence, an extension of the franchise leads to less pork barrel politics and more public good production. Some members of the elite are indifferent to this change and others – those who were not receiving transfers when the franchise was small – strictly prefer it. Hence, extension of the franchise Pareto-dominates a small franchise. The franchise can be extended even when there is no threat of revolution by the disenfranchised masses.
The Pareto-domination property does not obtain in general (when voters are ideological and pubic good production is not zero-one) but the majority of the elite prefers extension of the franchise. In nineteenth century Britain, members of the elite clamoured for the extension of the franchise. There was less pork barrel transfer and more public good production after the franchise was extended.
The Mexico City Assembly is considering a measure which would enable marrying couples to specify a fixed, finite duration for the marriage contract.
The minimum marriage contract would be for two years and could be renewed if the couple stays happy. The contracts would include provisions on how children and property would be handled if the couple splits.
“The proposal is, when the two-year period is up, if the relationship is not stable or harmonious, the contract simply ends,” said Leonel Luna, the Mexico City assemblyman who co-authored the bill.
I wonder if they considered the various other margins along which to move to an interior solution. We could be married forever but only on Thursdays. Or if you are not yet ready to marry my I can still incentivize you to invest in me by writing you an option to marry me in the future. Or I can go public, issuing matrimony shares. My commitment to you is proportional to your ownership stake.
The NPR blog Planet Money is asking you to guess a number:
This is a guessing game. To play, pick a number between 0 and 100. The goal is to pick the number that’s closest to half the average of all guesses.
So, for example, if the average of all guesses were 80, the winning number would be 40.
The game will close at 11:59 p.m. Eastern time on Monday, October 10. We’ll announce the winner — and explain why we’re doing this — on Tuesday, October 11.
This is a famous game that has been used in numerous experiments investigating whether real people are as rational as game theory and economic theory assumes they are. Powerful logic suggests that you should guess the number zero:
- For sure the average will be no greater than 100 so half the average will be no greater than 50.
- Anybody who is smart enough to figure this out will guess something no greater than 50 so the average will be no greater than 50 and half the average will be no greater than 25.
- Anybody who is smart enough to figure this out will guess something no greater than 25, etc.
Of course time after time in experiments the actual guesses are very far from zero, demonstrating that people are in fact less rational than economic theory assumes.
Planet Money, however is an intelligent blog and when they analyze the results of their experiment, they won’t jump to that conclusion. They will be insightful enough to see past the straw man.
It all starts at point 2. It is true that people who are smart enough to figure out point 1 will guess something no greater than 50, but almost all of those people are also smart enough to know that there is a sizeable proportion of people who are not that smart. And thus these smart people, if they are rational, will not deduce in point 2 that the average will be no greater than 50. The induction will not take them past point 2.
In fact, some of the smartest and most rational people in the world, professional chess players, guess numbers around 23 when they play these experiments. (To be precise, the chess players were playing a version of the Beauty Contest were you are supposed to guess 2/3 of the average. Their guesses would be somewhat lower in the Planet Money version, see below.) And that is because if someone is indeed as rational as game theory and economic theory assumes she is, and also she is smart enough to know that
- Not everybody is that rational,
- Most of the rational people know that not everybody is that rational,
- Most of the rational people know that most (but not all) of the rational people know that not everybody is that rational
etc., then she will never choose anything close to zero. Indeed, according to my calculations, the ultra-rational guess in the Planet Money Beauty Contest is about 16. Here is how I came up with that number.
I think that
- About 2/5 of the Planet Money readers will be confused by the rules of the game and guess 50.
- Another 3/10 will be smart enough to know that the rational thing to do is to guess something less than 50, and reasoning as in the straw-man argument they will guess 25.
- The remaining 3/10 of the population are the really smart ones.
What will the really smart ones guess? If they agree with me about the remaining 7/10 of the population then for sure they will not guess anything less than
because half the average will not be less than that. And if they agree with me that 3/10 of the population are really smart and won’t guess anything less than 8.75, then in fact they won’t guess anything less than
which is around 15. Notice that, unlike the strawman argument, the implications of rationality are now implying higher and higher guesses, not guesses converging to zero anymore. And if we take this to its logical conclusion and assume that this 3/10 of the population are the hyper-rational decision-makers that economic theory assumes, then the winning guess in the Planet Money Beauty Contest will be the value 
that solves
that solves
which is about 16. And that is what I just guessed.
Students anywhere can watch my old friend Ben Polak teach his famous Yale class. They can’t get a Yale grade for the class but that possibility is coming ever closer: A professor at Stanford is teaching a robotics class and everyone can sign up, do the assignments, take the exams and get a certificate of “accomplishment. Prospective employers do not know whether your friend took the exam for you. This means the certificate has little value. But surely it is only a matter of time before some verification mechanism is set up and this problem is dealt with.
The implications of this change are multifold but I just want to focus on one: the impact on the research university. Universities produce research as well as teaching and this other dimension is often forgotten in all the discussion of virtual teaching. Here is one possible sequence of events:
1. Virtual teaching cannibalizes face-to-face teaching. Tuition goes down and courses become quite cheap.
2. This destroys tuition-based universities which turn into vast teaching factories. A few universities try an “elite” approach with tiny classes taught by excellent teachers.
3. Endowment based universities continue to survive. Researchers become concentrated in these universities. They compete for government funding and do mainly PhD teaching.
4. A “top heavy” university structure emerges with a handful of research universities and a number of vast teaching universities.
This analysis assumes there is weak complementarity between research and teaching. If there is strong complementarity, the teachers have to be researchers to keep courses up to date, exciting etc. This will make step 2 above more difficult and leave a structure like today’s but with universities having virtual counterparts and huge scale.
The roses in your garden are dead and your gardener tells you that there are bugs that have to be killed if you want the next generation of roses to survive. So you pay him to plant new roses and spray poison to keep the bugs away.
Each week he comes back and tells you that the bugs are still threatening to kill the roses and you will need to pay him again to spray the poison to keep them away. This goes on and on. At what point do you stop paying him to spray poison on your roses?
Keep in mind that if there really are bugs waiting to take over once the poison is gone, you are going to lose your roses if you stop spraying. So you are taking a big risk if you stop. On the other hand, only he really knows for sure if the bugs are threatening, you are just taking his word for it.
Now add to that the possibility that the poison is not guaranteed. You may have an infestation even in a week where he sprays. Of course this only happens if the bugs are a threat. If you spray for many weeks and you see no infestation this is a pretty good sign that the bugs are not a threat at all.
If you do stop spraying at some point, on what basis do you make that decision? Assuming he is spraying vigilantly you would optimally stop after many weeks of no infestation. You would continue for sure if one week the bugs return even though he was spraying.
But you don’t know for sure that he is actually spraying. You are paying him to do it, but you are taking his word for it that he is actually spraying. If you assume that he is doing his job and spraying vigilantly, and you therefore follow the decision rule above, and if we wants to keep his job then he won’t be spraying vigilantly after all.
So what do you do?
Consider an infinite-horizon decision problem consisting of a sequence of beats. Each beat is divided into two eighth notes and you have to decide when to play them. If you have standard exponential discounting you will evenly space your beats through time. You will play a classical rhythm. But if you are what behavioral economists call a hyperbolic discounter and you have present bias, you will procrastinate the first eighth note. But then in order to complete the beat you will need to play the second eighth note in quick succession. This pattern will repeat through time. You will play a swing rhythm.
Cheap Talk 
