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Chief Justice Roberts and four others found that the individual mandate could not be justified via the Commerce Clause (CC) in the Constitution. The CC allows the federal government to “regulate” interstate commerce. Roberts found that precedent allows the government to regulate activity via the CC but the individual mandate regulates inactivity and is hence unconstitutional (p. 20 of Roberts’ opinion):
The individual mandate, however, does not regulate existing commercial activity. It instead compels individuals to become active in commerce by purchasing a product, on the ground that their failure to do so affects interstate commerce. Construing the Commerce Clause to permit Congress to regulate individuals precisely because they are doing nothing would open a new and potentially vast domain to congressional authority.
Moreover (p. 22-23),
Indeed, the Government’s logic would justify a mandatory purchase to solve almost any problem…To consider a different example in the health care market, many Americans do not eat a balanced diet. That group makes up a larger percentage of the total population than those without health insurance…..The failure of that group to have a healthy diet increases health care costs, to a greater extent than the failure of the uninsured to purchase insurance….Those increased costs are borne in part by other Americans who must pay more, just as the uninsured shift costs to the insured….Congress addressed the insurance problem by ordering everyone to buy insurance. Under the Government’s theory, Congress could address the diet problem by ordering everyone to buy vegetables.
Let’s take a quick look at the broccoli market. At the prevailing price, absent regulation, some consumers are active in the market and buy broccoli and other are inactive and don’t buy broccoli. Similarly, there are some producers who sell broccoli and other potential sellers who, given the prevailing price, produce chilis. Domestic broccoli growers are mainly in California but many broccoli consumers live in the Acela corridor so there is interstate commerce.
Then, the government enters the broccoli market. Some say this is because of the health benefits of broccoli, others say this is because the broccoli growers have formed an effective lobby, much like the sugar producers. The government intervention comes in the form of a subsidy to broccoli consumers. Consumers who consume 1 lb of broccoli/week get a $300 deduction on their taxes (Whole Foods immediately starts selling an annual contract which can easily be appended to your IRS form to get the broccoli deduction.)
Consumers who were active before still continue to buy: after all they are getting an extra incentive to buy. But also consumers who were inactive before now start to buy: after all the broccoli vs arugula margin now favors broccoli. In fact there is a new annual demand curve for broccoli D’(p) where D’(p)=D(p-300) where D was the original demand curve. There is higher demand at every price and the price of broccoli goes up. This changes the broccoli-chili margin for producers and inactive broccoli producers now switch to activity. (Also, profits go up for broccoli producers giving them the incentive to lobby for a consumer subsidy.)
Therefore, intervention in the “active” market changes the active-inactive decision and influences inactivity. An equivalent policy is to use to stick rather than a carrot and impose a penalty of $300 on consumers who are consuming less that 52 pounds of broccoli/year. Appropriately chosen carrots and sticks are equivalent in terms of broccoli trade. (More broadly, a tax or subsidy to broccoli production could also implement the same output of broccoli.) This simple analysis has some implications for Democrats and Republicans.
First, many instruments can implement the same output so the fact that one kind of intervention has been deemed unconstitutional is not important. A carrot can replace a stick.
But, second, the instruments differ in their revenue implications. Carrots are expensive to the government and sticks raise revenue. More use of carrots means bigger deficits or distortionary taxes.
And, third, since penalizing inactivity is equivalent to incentivizing activity, we appear to have conflicting precedents. It is legal to regulate activity but not to regulate inactivity. But regulating activity impacts inactivity and if regulating inactivity is unconstitutional, in a roundabout way, the Roberts et al applies. On the other hand, there are plenty of precedents for regulating activity even if they influence inactivity. In the (in)famous Wickard case, quotas on farmers reduced activity and increased inactivity. I am not a lawyer so I can not sure what happens in this circumstance. I guess the Supremes get to vote and they can rationalize votes one way or the other based on conflicting precedents. All bets are off – will Roberts switch his vote at the last minute etc.?
Plenty of stuff for us citizens to contemplate on July 4. I’ll be grilling broccoli.
At an all-you-can-buffet lunch, the incentives are clear: go back again and again, refill your plate and guzzle away. You would eat less if each new plate came with another price tag. Add to that a lack of self control and you get overconsumption and a desperate desire for a nap in the afternoon.
A CEO has a salaried employee. The employee gets paid much the same however much work he does. So, the CEO asks him to sit on this committee or investigate that new market or run recruiting etc. etc. Add to that moral suasion so it is a duty to work hard for the firm and you get overwork and a desperate desire to avoid the CEO. There will be many task forces and layers of bureaucracy as the cost of each initiative is so small. Better to pay for performance and internalize some of the costs of each extra foray into administration and work.
What is the difference between the Bowles-Simpson plan for deficit reduction vs President Obama’s plan? Ever wondered? I have. It seems the President’s plan calls for less cuts in Defense and Social Security but has more cuts in annual domestic spending. An Obama for America document summarizes the differences and of course does a comparison with the Romney plan. Romney’s plan is short on details so there is a lot of extrapolation. Is there an equivalent document put out by the Romney campaign?
So, we have found by Chris Bosh’s absence and then his presence that he is a significant part of the Miami Heat. But who is the fourth most important man on the team? An argument can be made that it is Shane Battier. A New Yorker story espouses the same theory. It led me to an old article by Michael Lewis. But just why is Battier so good? Lewis makes a telling point:
There is a tension, peculiar to basketball, between the interests of the team and the interests of the individual. The game continually tempts the people who play it to do things that are not in the interest of the group. On the baseball field, it would be hard for a player to sacrifice his team’s interest for his own. Baseball is an individual sport masquerading as a team one: by doing what’s best for himself, the player nearly always also does what is best for his team….It is in basketball where the problems are most likely to be in the game — where the player, in his play, faces choices between maximizing his own perceived self-interest and winning. The choices are sufficiently complex that there is a fair chance he doesn’t fully grasp that he is making them.
Taking a bad shot when you don’t need to is only the most obvious example. A point guard might selfishly give up an open shot for an assist. You can see it happen every night, when he’s racing down court for an open layup, and instead of taking it, he passes it back to a trailing teammate. The teammate usually finishes with some sensational dunk, but the likelihood of scoring nevertheless declined. “The marginal assist is worth more money to the point guard than the marginal point,” Morey says. Blocked shots — they look great, but unless you secure the ball afterward, you haven’t helped your team all that much. Players love the spectacle of a ball being swatted into the fifth row, and it becomes a matter of personal indifference that the other team still gets the ball back…
Having watched Battier play for the past two and a half years, Morey has come to think of him as an exception: the most abnormally unselfish basketball player he has ever seen. Or rather, the player who seems one step ahead of the analysts, helping the team in all sorts of subtle, hard-to-measure ways that appear to violate his own personal interests.
This has two Holmstrom and Milgrom ideas: tension between individual incentives and team incentives; use of easily identifiable measures of output distorting incentives to invest is less identifiable costly tasks. And in the absence of monetary incentives and market efficiency, the only solution to the moral hazard problem is in ethical behavior (Arrow made similar points many years ago).
Cogent analysis by James Surowiecki at New Yorker:
[P]olicymakers are seriously discussing a so-called Grexit—in which Greece would default on its debts and abandon the euro.
This isn’t an outcome that anyone wants. Even though a devalued currency would make Greece’s exports cheaper and attract tourists, it would do so at a terrible price, destroying huge amounts of wealth and seriously harming the country’s G.D.P. It would be costly for the rest of Europe, too. Greece owes almost half a trillion euros, and containing the damage would likely require the recapitalization of banks, continent-wide deposit insurance (to prevent bank runs), and more aid to Portugal, Spain, and Italy, which seem to be the next countries in line to default. That’s a very high price to pay for getting rid of Greece, and much more expensive than letting it stay……
But the catch is that Europe isn’t arguing just about what the most sensible economic policy is. It’s arguing about what is fair. German voters and politicians think it’s unfair to ask Germany to continue to foot the bill for countries that lived beyond their means and piled up huge debts they can’t repay. They think it’s unfair to expect Germany to make an open-ended commitment to support these countries in the absence of meaningful reform. But Greek voters are equally certain that it’s unfair for them to suffer years of slim government budgets and high unemployment in order to repay foreign banks and richer northern neighbors, which have reaped outsized benefits from closer European integration……
The basic problem is that we care so much about fairness that we are often willing to sacrifice economic well-being to enforce it…. a famous experiment known as the ultimatum game—one person offers another a cut of a sum of money and the second person decides whether or not to accept—shows that people will walk away from free money if they feel that an offer is unfair. Thus, even when there’s a solution that would leave everyone better off, a fixation on fairness can make agreement impossible.
Hart and Moore and Hart and Holmstrom have offered theories of centralization based on behavioral issues. I’m not familiar with the other work on behavioral contract theory. But my guess is there is plenty of room for interesting research in the area along lines implicit in this article.
Jean Tirole gave a paper on “Laws and Norms” as his Schwartz Lecture last week. He has been working on psychology and economics for many years with Roland Benabou. The presentation was an extension of that work. Consider a game where a costly action generates a positive externality. Agents are motivated to take such an action by a monetary reward and a private value from the action. However, they also care what others think of them. How can we think about this formally and what implications does it have for contributions to the public good?
Tirole’s (and Benabou’s) first contribution is to provide a simple, tractable model of this psychological effect. Each agent’s payoff is a function of others’ expectation of his private value given his action and monetary reward. Hence if you contributed to the public good but received no monetary reward, the expectation is different that if you contributed and got paid. From this simple formulation much can be deduced. If a contribution is elicited via a monetary reward, it carries less positive information about the contributor than one when there was no monetary reward. There might be a bigger contribution if there is no monetary reward. The less observable the contribution, the smaller is the incentive to make it etc.
The contribution was twofold. First, the mathematical modeling of the psychological effect requires some art and effort. Second, the model is intuitive and simple enough that others can use it to express their own ideas. One of my colleagues is thinking about two papers based on the basic Tirole model.
The American Economic Review publishes an unrefereed conference volume, Papers and Proceedings, in May of every year. Of course, the AER also a publishes a refereed journal which rejects more than 95% of submissions. Someone with an AER P&P might be tempted to pass it off as an AER on their CV. There is a possible gain in prestige at the cost of being found out and facing a social sanction. Snyder and Zidar call this the obfuscation theory. Alternatively, perhaps these AER P&Ps have real academic value and those who describe their own such papers as real publications should also cite other such papers more. Different conventions of citation may develop among different subgroups. This is the convention model. Snyder and Zidar find support for the convention model in the data. They mention that AER P&Ps had more citations that AERs in the past and hence older economists tend to see P&Ps as real publications while younger economists do not. This should imply that younger economists should be more careful about distinguishing P&Ps from AERs on their CVs.
I have two questions/comments.
An economist who lists a P&P as a refereed publication faces dissonance. On the one hand, they would like to see themselves as good people, on the other they know they are doing something shady. One way to resolve the dissonance is to cite other researchers P&Ps more. This helps propagate the self-deception that P&Ps are legitimate pieces of refereed research and hence listing them as such is justified.
Second, another possible paper: Do P&Ps have more errors than refereed publications? One job of a referee is to catch errors after all. If so, how many cites come from people pointing out mistakes?
(Hat Tip: MR)
Michael Ostrovsky (Stanford GSB) and Michael Schwarz (Yahoo! Research) helped Yahoo! to improve its click price per ad. Yahoo! was charging 10c/click. Ostrovsky and Schwarz ran some field experiments:
Reserve prices in the randomly selected “treatment” group were set
based on the guidance provided by the theory of optimal auctions, while in the “control” group
they were left at the old level of 10 cents per click. The revenues in the treatment group have
increased substantially relative to the control group, showing that reserve prices in auctions can in
fact play an important role and that theory provides a useful guide for setting them.
It seems they made money for Yahoo!:
We conclude with a quote from a Yahoo! executive, describing the overall impact of
improved reserve prices on company revenues.
On the [revenue per search] front I mentioned we grew 11% year-over-year in the quarter
[. . . ], so thats north of a 20% gap search growth rate in the US and that is a factor of,
attributed to rolling out a number of the product upgrades we’ve been doing. [Market
Reserve Pricing] was probably the most signi cant in terms of its impact in the quarter.
We had a full quarter impact of that in Q3, but we still have the bene t of rolling that
around the world.
Sue Decker, President, Yahoo! Inc. Q3 2008 Earnings Call.
But it seems Yahoo! is eliminating the entire research group in its downsizing, including I suppose Michael Schwarz. Preston McAfee had already left for Google Research. I hope others also have a soft landing.
Derrick Rose is out for the season and a weekend that started badly might have ended sadly with another super dark episode of Mad Men. Instead, we got a few comedic rays of sunshine to break through the gloom – Pete tricking Megan’s pretentious father, Peggy’s mother’s surprise that Abe’s favorite dish is ham etc. Those of us looking to enliven our courses with the odd example here or there had to wait till the end.
Don is busy trying to drum up new business at his award dinner. He got the award for an anti-cancer ad he took out in the newspaper after losing the Lucky Strike cigarette account. But a colleague’s father rains on Don’s parade. He says that no-one will give Don any new business after he stabbed Lucky Strike in the back. Don signaled to the wrong audience in the last period of the Lucky Strike game. He tried to co-opt consumers by pretending to be concerned about their welfare. But consumers will not give his firm new accounts, firms selling crap to them will. And with them Don lost his reputation – will he also throw them under the bus if things turn sour? Life is an infinite horizon game with many bilateral interactions. Lose your reputation in one and, if your behavior is publicly observable, lose your reputation in all.
I am catching up on my Mad Men viewing after a spring break trip abroad. I watched three episodes in one sitting last night. In Episode 3, copywriter Peggy interviews candidates for an open position. She likes the work of Michael Ginsburg whose portfolio is labelled “judge not, lest you be judged”. Her co-worker agrees with Peggy’s assessment of Ginsburg’s work but advises her not to hire him because, if Ginsburg turns out to be a better copywrite than Peggy, she risks losing her job to him. Later in the episode (or was in the next?), Pete humiliates Roger, taking credit for winning an account for the advertising company. Roger storms out. He says he was good to Pete when he was young, recruited him and look how he is lording it over Roger now. A portend of Peggy’s future?
Recruiting and peer review are plagued with incentive problems in the presence of career concerns. If you recruit somebody good, you risk the chance that they replace you later on. You have an incentive to select bad candidates. You have an incentive to denigrate other people’s good work (the NIH syndrome) for even deliberately promote their bad work in the hope that it fails dramatically and this allows you to leap over them in some career race. The solution in academia is tenure. If you have a job for life, you can feel free to hire great candidates. (Various psychological phenomena such as insecurity compromise this solution of course!) Peggy does not have tenure and even Roger who is a partner faces the ignominy of playing second fiddle to a young upstart. Watch out Peggy!
You are Chair of your Department and the Department hires two people at the senior level. It is hard to hire at the senior level and many people congratulate you on your success. But the candidates were proposed by others and wooed by others. One is moving because of a divorce and the other is a lemon who is despised by his former colleagues. All you did as Chair was handle the admin stuff and yet everyone still congratulates you. If you had failed to hire, they would have blamed you, even though all that happened was that a marriage worked out and a lemon went elsewhere.
This kind of stuff happens all the time. Why?
The simplest explanation comes from the Principal-Agent model with the Chair as the Agent and the Department as the Principal. In an optimal contract, the Agent is punished for low output and rewarded for high even though in equilibrium we know he has already sunk high effort and output reflects a random shock. If we forgave the agent low output – after all it was a random shock – it would undercut the Agent’s ex ante incentive to exert effort. Similarly, the Department should venerate or denigrate the Chair based on success or failure at senior hiring. Otherwise, you would never work at all on senior recruiting.
The nationally recognized Piven Theatre Workshop would play a leading role in the revitalization of the Noyes Cultural Arts Center, occupying renovated space and a state-of-the-art theater in the building under a plan that received backing Monday from a city committee…
With past efforts to change things at the city owned building “not going as smoothly, as easily as we wanted,” the new plan seems to heading the city in the right direction, said Alderman Judy Fiske, in whose 1st Ward the building is located….
Piven Theatre officials are proposing to occupy the southern one-third of the building and would extensively renovate the area with new classrooms, rehearsal space, offices and a new theater, he said……
The building, which leases space at below-market rates to artists, faces substantial repairs, including a new roof and heating and air conditioning system.
City officials have looked at a new model for operating the center, a former school building, including asking tenants to take a greater role in the building’s upkeep.
Because of the ambiguity, Piven officials told [officials] last fall they were likely moving out of the building, and possibly out of Evanston…
Clear property rights are necessary to resolve the hold up problem.
But a battle to establish property rights can generate a war of attrition and hence the hold up problem. For the Church of thew Holy Sepulchre inthe Old City in Jerusalem:
The primary custodians are the Eastern Orthodox, Armenian Apostolic, and Roman Catholic Churches, with the Greek Orthodox Church having the lion’s share. In the 19th century, the Coptic Orthodox, the Ethiopian Orthodox and the Syriac Orthodox acquired lesser responsibilities…
Under the status quo, no part of what is designated as common territory may be so much as rearranged without consent from all communities. This often leads to the neglect of badly needed repairs when the communities cannot come to an agreement among themselves about the final shape of a project….A less grave sign of this state of affairs is located on a window ledge over the church’s entrance. Someone placed a wooden ladder there sometime before 1852, when the status quo defined both the doors and the window ledges as common ground. The ladder remains there to this day, in almost exactly the same position it can be seen to occupy in century-old photographs and engravings.
If one church fixes something, they then claim property rights over the thing they fix. Hence, all repair is vetoed
The big event of this week in the U.S. will be the Supreme Court discussion of the Affordable Care Act aka “ObamaCare”, a supposedly derogatory nickname now embraced by the Obama campaign. At the heart of the fight is the so-called individual mandate which requires everyone to purchase health insurance. A related and important argument is that additional provisions, such as requiring coverage for individuals with preexisting conditions, become prohibitively expensive without the individual mandate. This is because, without the mandate, healthy individuals will not buy insurance till they become sick and this drives up costs of insurance companies. So, if the individual mandate is struck down, the argument goes, the court should also strike down the requirement that insurance companies cover individuals with pre-existing conditions.
I am not a lawyer but the main argument for canceling the individual mandate turns on whether the federal government has the right to penalize an individual if they do NOT take a certain action. There is plenty of precedent for taxing “action” but can the federal government tax “inaction”? Many amicus briefs have been filed but there are two key ones by economists.
David Cutler, who worked in the Obama administration, has filed one with many co-signatories (including Akerlof, Arrow, Maskin, Diamond, Gruber, Athey, Goldin, Katz, Rabin, Skinner etc.). They say there is no such thing as inaction. A conscious decision to forego healthcare is an action and hence under the purview of existing law. Foregoing insurance also affects outcomes largely by shifting costs to others and hence is not a neutral decision.
The other side of the argument is filed by Doug Holtz-Eakin with co-signatories inclusing Prescott, Smith, Cochrane, Jensen, Anne Krueger, Meltzer etc.) First, they argue that if an individual does not want to buy converage it must be because the costs outweigh the benefits. Second, they argue about the numbers, claming the costs imposed by the uninsured on the insured (“cost-shifting”) are far below the $43 billion estimated by the Government Economists and are more like $13 billion.
The first part of the Holtz-Eakin argument is, to me at least, odd. Uninsured individuals can get healthcare for free in the emergency room. Hence, they can get the benefits of healthcare -or at least healthcare in extreme circumstances – without the costs. So, of course for them the benefits are outweighed by the costs because they get the benefits anyway. The argument by Holtz-Eakin presumes that the individuals are not free-riding and so their private decisions fully reflect the costs and benefits but they do not. Then, the second part of the argument which admits there is cost-shifting going on basically makes the point I am making – if there is cost-shifting, there is free-riding and then individual’s decisions do not fully internalize costs and benefits.
There has to be a better argument against the individual mandate than this. I looked at Senator Rand Paul’s brief. The precedent for this case is a 1942 case involving an Ohio farmer who was exceeding his quota of wheat production. Footnote 6 caught my eye:
So infamous is the case, it has been set to music, to the
1970s tune of “Convoy”:
“His name was farmer Filburn, we looked in
on his wheat sales. We caught him exceeding
his quota. A criminal hard as nails. He said,
“I don’t sell none interstate.” I said, “That
don’t mean cow flop.” We think you’re
affecting commerce. And I set fire to his crop,
HOT DAMN! Cause we got interstate
commerce. Ain’t no where to run! We gone
regulate you. That’s how we have fun.”
Will this convince Justice Kennedy or is it cow flop?
Dr Richard Weitz, Senior Fellow and Director of the Center for Political-Military Analysis at Hudson Institute said: “From our perspective, China should have done more in terms of security. From their perspective, they didn’t need to; they could free-ride, we were going to do it anyway. They didn’t see any point because all they would do is incur a lot of sacrifice and antagonise the Taliban and the global terrorist movement, and they’d rather let us incur that.”
Why aren’t Western countries going in there themselves?
Peter Galbraith, former deputy head of the UN mission in Afghanistan, said: “Western companies are exceptionally timid when it comes to operating in places where there is even the remotest hint that it might be a little risky, and the Chinese are not and are willing to go to these places. And the Chinese have business practices that Western countries … let’s just say that Chinese generosity towards local officials exceeds that of what Western companies are capable.”
I guess some might argue trade is good for Afghanistan and hence for us if trade leads to a stable prosperous economy. But as I have made it to Chapter 4 of Acemoglu and Robinson’s Why Nations Fail, I worry that Afghanistan will adopt “extractive political institutions” and all this trading will lead nowhere except a Swiss bank account.
A Generalist is good at many tasks, a Specialist only good at one. Demand for the output at each task fluctuates so it is good to have someone who can perform many tasks so “supply can match demand”. So, the Generalist is better for the firm than the Specialist.
But the Generalist’s life is hard – she is taking on a lot of risk. What will she be working on next? And she is the same rank as the specialist so she gets the same rewards. Better to coast on the tasks she likes least and work hard on one. More predictability and a better idea of what task to get better and better at performing.
So, generalists should disappear in the long run and the firm will just have specialists. Unless they can think of some way to reward generalists.
There are three divisions in a firm, A, B and C. Each makes a different kind of product. Resources are allocated from Center and the three divisions compete for them. Over time the members of each division generate ideas for new products that need funding. The ideas may be good or bad and the division members get an accurate signal of the quality of the idea. The members of other divisions get a noisy signal or no signal at all. The three divisions have to send a vote to the Center which will determine whether to fund the idea or not. The greater the number of divisions supporting an idea, the more likely it is to be funded by Center.
Division A is “honest”. They only push their ideas if they are good. They support the ideas of other divisions if and only they become convinced by objective arguments that they are good.
Division B is an “empire builder”. They push all their ideas as if they are all good. They thrash other divisions’ ideas if they feel threatened.
Division C is “honest yet strategic”. They push their ideas if and only if they are good. How should they vote on other divisions’ ideas? Division A is likely to be on their side when they push an idea. After all, Division C only support their own ideas if they have a good signal. They can then convince Division A of the strength of their case. To convince Center, it would be even better to have a unanimous decision with Division B on board. So, Division C supports Division B’s ideas. If Division A proposes an idea for funding and Division B opposes it, Division C sides with Division B. A quid-pro-quo equilibrium develops between Divisions B and C.
In the long run, Division A will die out. This is bad for Center as Division A’s good products are good for profits and Division B’s bad products are not. So perhaps Center will intervene. Or Division A may also become strategic. They should deliberately destroy some of Division C’s good potential products and persuade them to switch their support to them over Division B.
In an under-caffeinated state yesterday morning, I picked up the NYT Travel section to see where I might escape once my teaching is over in a few weeks. Nogales, Mexico, seemed easy to get to – you just go to Nogales, Arizona, and walk across the border. Good for tacos and cheap dental work.
A few hours and several coffees later, I settled down to read Why Nations Fail, Daron Acemoglu and Jim Robinson’s new book. It summarizes their many years of research (some with Simon Johnson) on political and economic institutions and their impact on economic growth. The book has no equations, graphs or tables and is aimed at a popular audience. The book begins by comparing the colonial history of Mexico and the U.S.
Mexico was settled by Spanish conquistadores who extracted as much gold and silver as possible and used the population as slave labor. The British tried to take the same approach when they arrived in Virginia. But there was no gold or silver and the population density was low. They were forced to set up political institutions that fostered economic activity. Settlers eventually got to keep a large slice of any surplus they generated and got the right to vote on taxation (this led to trouble for the British in the long run!). All very interesting and yet it seemed familiar. Eventually it dawned on me that a key Acemoglu and Robinson motivating example, used to show the importance of institutions, is Nogales Arizona vs Mexico. The geography is the same and yet the political institutions are quite different. And so are the economic outcomes. So, geography is not the major determinant of economic outcomes (roughly the theory of Jared Diamond) and political institutions are at the core of economic development.
Serendipity, synchronicity, call it what you will, but the time seems ripe for this book. Acemoglu and Robinson have a blog to accompany their book. I suppose they will interpret comtemporary events through the lens of their theory. I look forward to reading it on a regular basis.
Liberal website Daily Kos announces Operation Hilarity:
It’s time for us to take an active role in the GOP nomination process. That’s right, it’s time for those of us who live in open primary and caucus states—Michigan,North Dakota, Vermont and Tennessee in the next three weeks—to head out and cast a vote for Rick Santorum.
Why would we do such a crazy thing? Lots of great reasons!…..
The longer this GOP primary drags on, the better the numbers for Team Blue. Not only is President Barack Obama rising in comparison to the clowns in the GOP field, but GOP intensity is down—which would have repercussions all the way down the ballot.
The longer this thing drags out, the more unpopular the Republican presidential pretenders become. Just look at Mitt Romney’s trajectory, which followed Herman Cain’s trajectory, and Newt Gingrich’s trajectory, and Michelle Bachmann’s trajectory, and so on.
But we have naysayers in the comments:
makes a mockery of the democratic process and descends to the level of idiots on the other side of the fence.
casting a false vote is ‘ dirty tricks’ writ small – a stunt for small minds – and is undignified, and imo cynical and even a bit unamerican.
Is this a Republican voter messing with the minds of stalwart liberals?
Many people’s thoughts turn to contraception on Valentine’s Day. But thanks to the election campaign and the implementation of the Affordable Care Act, Americans have been thinking about contraception for several days. The ACA mandates provision of contraception by healthcare plans including those managed by Catholic hospitals.
What is the rationale for a mandate in a competitive labor market? The Becker model of discrimination predicts the mandate is unnecessary. Suppose employers choose not to offer contraception benefits in healthcare plans. But talented workers may value these benefits. Then an employer can deviate and offer contraception benefits or a new firm can enter and offer benefits. They can attract individuals who value the benefits, produce higher quality products at lower costs etc. etc. The classic textbook economics model. The mandate requires the contraception benefits be free. But the insurance companies will simply include them in the price they charge for other services. Nothing is really free.
I suppose that if the government simply makes it illegal for any healthcare plan to offer contraception benefits, this argument breaks down. But is any politician advocating this position, even Santorum? Instead, the Republicans run the risk of alienating independent and moderate voters. They have a coherent libertarian style argument against the mandate and have succumbed to a weaker argument. Meanwhile President Obama seems to have “turned a crisis into an opportunity” to use a MBA teaching cliche. According to Andrew Sullivan,
The more Machiavellian observer might even suspect this is actually an improved bait and switch by Obama to more firmly identify the religious right with opposition to contraception, its weakest issue by far, and to shore up support among independent women and his more liberal base….
Take a look at the polling. Ask Americans if they believe that contraception should be included for free in all health-care plans and you get a 55 percent majority in favor, with 40 percent against. Ask American Catholics, and that majority actually rises above the national average, to 58 percent. A 49 percent plurality of all Americans supported the original Obama rule forcing Catholic institutions to provide contraception coverage.
If the GOP really makes this issue central in the next month or so, Santorum (whose campaign claims to have raised $2.2 million in the two days following his victories last week) is by far the likeliest candidate to benefit..—especially since Romneycare contained exactly the same provisions on contraception that Obamacare did before last week’s compromise was announced. That’s right: Romneycare can now accurately be portrayed as falling to the left of Obamacare on the contraception issue. This could very well be the issue that finally galvanizes the religious right, especially in the South. Imagine how Santorum could use that on Super Tuesday. In fact, it could be the issue that wins him the nomination. And do you really think that would hurt Obama in the fall?
The answer is tantalizingly close and yet just out of reach. An interested reader can find some of the relevant information here, in a Deutsche Bank prospectus for potential investors in Bain Capital. On pages 16 and 17, the prospectus lists all the investments made by Bain Capital from 1984-1998, roughly the time that Mitt Romney ran the company. For example, their 1984 investment of $2 million in Key Airlines led to an annual return of 52.9%. It does not tell you how much money investors made because you would have to subtract off Bain’s fees which this Table does not have (other parts of the prospectus may help you to do that). The thing that is impossible to work out is the employment impact of Bain’s investments. The prospectus does not say anything about that issue. But the names of the companies are listed in the left hand column. So, it might be possible to work out what happened to these companies via a web search and come up with some answers.
If someone had the time and the ability to do that, it would be very interesting I think. I’d certainly be interested in the answer.
I am reading Robert Trivers’ The Logic of Deceit and Self-Deception. It is a lot of fun and incredibly interesting – my wife keeps on nabbing it, she is enjoying it so much.
His main thesis is simple: In our evolutionary past, we had to lie a lot to get ahead, to deal with parent-offspring conflict etc. We are better liars if we can convince ourselves that we are not liars. Hence, this leads to self-deception. I was reminded of the strength of this claim today.
I set an old question to my students (not one of my own but inherited from the past cohorts of teachers). This question has been used recently by many fellow teachers and it has been taught by TAs. I happened to look at the historical answer to the question and found a mistake. And the topic had not really been covered in class. A student then came to ask me about precisely this question. I decided to pretend the answer in the answer key was right – it would only have confused him more if I had gone into the right answer and I had not taught the subtlety in class, I rationalized to myself. A few minutes later he came back and asked me why the answer wasn’t in fact the one I had found earlier. I was found out. I told him his answer was correct too.
But the question and (incorrect) answer had been posed unchanged for 8 or so years without anyone pointing out the answer was wrong. Why was it discovered now? I suppose the student who spotted the right answer could be quite smart – and he is. But there are many smart students in previous generations who never found the right answer.
So, my explanation is really the Trivers’ explanation. I did not lie convincingly. My doubts about the answer manifested themselves somehow to the student. He investigated further and cracked the problem. In previous years, the teachers were convinced the answer was right and never even questioned it. They never had to lie because they truly believed they were telling the truth, just like the Trivers’ thesis on self-deception. Students left convinced. If they had doubts, they stifled them.
The student who spotted the error will be on the PhD market soon. I will write him a strong letter.
Gingrich, Santorum (and I guess also Ron Paul) keep splitting the conservative vote in the Republican primaries. Romney gets through because of the split.
Gingrich and Santorum are playing a dynamic version of Chicken (a war of attrition) with budget constraints. With complete information, a war of attrition has the player with the lower budget dropping out immediately in equilibrium. He knows that eventually there will be a penultimate stage where the player with the bigger budget will definitely fight because he knows he will be the only player left standing the next and final period and hence will win the prize with certainty. The player with the dwindling budget might as well drop out and save his money at the penultimate stage. But then we can backward induct to the pen-penultimate stage etc. and the player with the smaller budget drops out immediately.
This solution relies on a lot of rationality and complete information. Both of these are suspect in the Republican primaries. On the one hand Gingrich seems to be in the better financial position. He has a billionaire bankrolling him, Santorum does not. But on he other hand, the billionaire might not want to waste money on a lost cause. And it appears Santorum does have more money in the bank than Gingrich because he does have some support. And both men display the mixture of nutty self-belief and guile that is characteristic of politicians. Plenty of reason for the race to go on for along time.
Perhaps too long for Obama supporters. I think they should prefer Gingrich as the Republican candidate in the general election not Romney. In Florida, Romney showed that he has strong support among moderates. Moderates are the key to victory in the general election. A Democratic billionaire has to pitch in, help out the casino billionaire and bankroll the Gingrich SuperPac. They can do this by setting up an anonymous company with a PO box, keep their identity hidden and sign over a check. A big enough donation should trigger a Santorum exit as in analysis above. Then, it’s Romney vs Gingrich the rest of the way (with fringe support for Paul).
My family have decided that I am too sarcastic. I concurred. So, I agreed to sign an anti-sarcasm contract :
“Under pain of having to donate $1 toward Lego for every infraction, I hereby declare my intention to eschew sarcasm.”
The kids were making $8/day for the first few days till I learned a little self-control. So far so good.
Then, weird little things started happening. A child would ask innocently: “Can we have second dessert?” Or “Can I skip homework today?” etc. I would unfortunately respond with sarcasm.
I realized that the attempt to deal with my sarcasm by giving me incentives had created another incentive problem. I tried to change the contract so the money goes to charity but my kids refused to renegotiate….Is there some corollary of the Holmstrom moral hazard in teams model that says our it is impossible to implement optimal incentives with budget balance?
You are managing a small team. You are meant to make sure they work hard. Monitoring is costly and you would like to shirk your responsibilities. But your monitoring is observable to the worker bees. They incur no costs to observe your effort. If you shirk your duties, there will be payback from the workers. There is always the possibility that they turn you in to your supervisor. This could be a deliberate act. More likely, it is inadvertent because “loose lips” that sink ships. So, you are left with no choice but to monitor. And since you are monitoring, the workers are left with no option but to work. Everyone is worse off. If only the workers could keep their mouths shut and the manager could shirk.
My colleaque, political scientist Tim Feddersen, says he does not understand recent U.S. elections. He understood Bill Clinton, Dick Morris and triangulation. He understood George W Bush and “compassionate conservatism”. These are all consistent with the logic suggested by the median voter theorem: politicians should adopt policies that will win the support of the median voter (forget the fact that the politicians will renege on their promises as soon as they get in office!). But George W Bush was not a compassionate conservative in 2004. And for some reason, Tim can’t rationalize how President Obama got elected via the median voter theorem.
So there is a competing theory which is less well worked out, the ideological voter theory. In this theory, it is the extremes that determine elections so the candidate must play to them. One version of the theory would include turnout as a second dimension of voting strategy as well as how the citizen actually votes once she gets in the voting booth. Extremists have lower costs of turning out so the payoff to motivating them at the cost of alienating independents is greater than the benefit to motivating independents at the cost of not motivating extremists. This theory would say Santorum is the biggest threat to Obama. Watching Santorum’s speech the other night, I was moved by his story about his grandfather’s life as a coal-miner while I found Romney’s speech formulaic and artificial. So, I have some sympathy for this theory. (Of course, Jon Stewart has yet to fully explain to me what Santorum’s policy positions are If they are as extreme as my preliminary google search suggests, I might switch back to the median voter theory.)
So, the ideological voter theory suggests that Santorum is Obama’s most potent adversary. This implies Obama supporters should hope that Romney comes out alive from the Republican primaries. (I have yet to incorporate Larry Kotlikoff’s candidacy in my world view though I completely endorse Jeff’s fulsome praise. I visited BU Econ a couple of years ago and it has a great “corporate culture” that I too attribute to Kotlikoff.) But Romney has plenty of money so no need to bankroll him. Just give it to Obama.
Suppose you think centrist, independent voters decide elections. This is the median voter theory of elections. If you believe this theory, then Mitt Romney is the biggest threat to Obama. He is probably a moderate, like the father he hero-worships. He is responsible for Romneycare, the model for Obamacare etc. So, Obama supporters fear Romney as the Republican candidate. They should seek to weaken him as much as possible in the primaries or even try to ensure another candidate is left standing at the end of the primaries.
The strategy of Obama supporters who subscribe to this theory is simple: Give money to Newt Gingrich. He is promising to help Santorum and fight Romney. At worse, he will weaken Romney and at best, given Gingrich’s efforts, Santorum may squeak through.
They were all inspired by Isaac Asimov psychohistorian Hari Seldon:
Next Iron Chef is much better than Iron Chef. The latter almost always has Bobby Flay matching his Southwestern style cuisine against some hapless contestant who usually loses. Next Iron Chef has more uncertainty, some new faces and some better chefs. Last night’s episode had fun twists and turns coming out of the mechanism design and a tragic-comic outcome.
First, the chefs had to “bid” for ingredients in a Dutch auction with time allowed for cooking as the “currency”. There were five chefs and five ingredients. The lowest bid won for each of the first four ingredients. The chef who “won” the last ingredient was by the rules of the mechanism left with a cooking time of the lowest bid on the first four ingredients minus 5 minutes. The ingredients were revealed one by one. That was the first twist. The second was that the Chef Anne Burrell had “won” the previous episode and had an advantage coming into this one (more on this below).
Equilibrium analysis for the first twist is not available but instinct suggests very aggressive bidding towards the end since you begin bidding on the fourth ingredient knowing the maximum time you will have with the fifth. This will trigger aggressive bidding all the way through. This was true for all ingredients except sardines which Anne Burrell won for a bid of 50 minutes. Chef Alex Guarnaschelli got the last ingredient, lamb chops, with 25 minutes to cook. Since, Chef Anne had about 20 minutes more than the other chefs, she made three sardine dishes. It is always an error to make multiple dishes in this competition. The judges seem to use a lexicographic criterion. They compare your worst dish with the those of the other chefs. If your worst dish is tied with others’ dishes, then your best dish comes into play and you win. So, doing multiple dishes typically backfires because you cannot spend enough time perfecting each of your dishes so you invariably end up with the worst dish and your best dish gets ignored. The First Irony is that having more time made Chef Anne think she had to do more dishes (she did three) and one of them was Yuk.
Now the second twist: Chef Anne’s advantage was that she got to taste the other four dishes and decide which was of them was the worst. The theme of the episode was “Risk” and she decided, in my opinion voting honestly according to her preferences, that Chef Jeffrey Zakarian had the least risky dish. The two worst chefs from the first part of the competition face off in the second part. And the loser gets eliminated. Chef Anne got to chose one of the two potential losers. What if Chef Anne had voted strategically? The first instinct is to put the best chef in the knockout round but this is wrong. This chef will face one of the worst chefs in all likelihood, beat them and come back the next episode. It is is better to chose the chef you would like to face in case your dish ends up at the bottom. That chef is Chef Alex in my opinion. But Chef Anne chose Zakarian who is a star. And he defeated her in the knockout round. This is Second Irony.
Who would the judges have chosen if they had leeway? It seems Chef Alex would have been in the knockout round and probably Chef Anne would have dealt with her. This is Third Irony. This episode was Shakespearean, as Chef Alex pointed out.
At every OxBridge college, there is a Wine Committee. Many people want to get on it but first you have to serve on the Use of Space Committee. It might be fun if the latter plotted how the College could go to Mars. But what the committee really does is meet bi-monthly to decide where to put the photocopier. You grumble and serve as there is a chance you get on the Wine Committee.
Kellogg, as far as I am aware (!), has no Wine Committee so this cannot be used to give incentives. Monetary incentives are weak. This leaves moral suasion as the main instrument. For example, if a Dean looks miserable when he or she asks you to do something, you are likely to say yes. They look very, very sad after all, and so you would feel terrible if you refused them. To make Deans credibly miserable, they should be treated badly. QED.
This leaves open the question of why anyone would then want to become Dean. No-one has asked me (and no-one ever will!) so I have no practical experience. I guess moral suasion and guilt also operate there but am less clear as to the exact mechanism (e.g. “This institution has done so much for me, I should serve.”).
But I do have a solution that could make everyone happy – start a Wine Committee. Regular visits and tastings with wine distributors are enough to make many of us serve on the “where should the photocopiers be in the new building committee”. Then, we can treat the deans well, as they deserve, without unraveling incentives and run everything more efficiently.
