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I have a bad, bad neighbor. He’s actually a lovely guy but he spoils his kids and let’s them do crazy stuff. Several concussions and broken bones later, my bad, bad neighbor has not learned his lesson – the kids are still wild.

My kids are quite envious of the neighbor’s kids. They’re allowed to perform death-defying acts our kids can only dream of doing. My kids think I’m a bad dad because I won’t let them do death-defying stuff.

So I had a chat with the neighbor to try to persuade him to internalize externalities. Unfortunately, he is an argumentative lawyer. He appears to have heard of the Coase Theorem. So he says I should pay him to be a good neighbor. After all, he wants to indulge his children so, for him, doing what I want has a negative effect. I super-Coased him and pointed out that my transferring stuff to him creates perverse effects – he has the incentive to create more crazy activities – perhaps even ones he himself thinks are crazy to extract surplus from me. (By the way, of course it is not about the money. He is a competitive neighbor so he would love to “win” just for the sake of it.)

So, really, he should pay me not me pay him. That was my counter-proposal. He is puzzling over it – frankly, it has obvious flaws, though not ones I will reveal in this post just in case he reads it. In the meantime, crazy stuff continues.

(Of course many elements of the post are fictionalized and are a composite of many experiences and incidents, most involving my spouse.)

Explaining why authors should support Amazon in its dispute against Hachette, Amazon says:

A key objective is lower e-book prices. Many e-books are being released at $14.99 and even $19.99. That is unjustifiably high for an e-book. With an e-book, there’s no printing, no over-printing, no need to forecast, no returns, no lost sales due to out-of-stock, no warehousing costs, no transportation costs, and there is no secondary market — e-books cannot be resold as used books. E-books can be and should be less expensive.

It’s also important to understand that e-books are highly price-elastic. This means that when the price goes up, customers buy much less. We’ve quantified the price elasticity of e-books from repeated measurements across many titles. For every copy an e-book would sell at $14.99, it would sell 1.74 copies if priced at $9.99. So, for example, if customers would buy 100,000 copies of a particular e-book at $14.99, then customers would buy 174,000 copies of that same e-book at $9.99. Total revenue at $14.99 would be $1,499,000. Total revenue at $9.99 is $1,738,000.

The important thing to note here is that at the lower price, total revenue increases 16%. This is good for all the parties involved:

* The customer is paying 33% less.

* The author is getting a royalty check 16% larger and being read by an audience that’s 74% larger. And that 74% increase in copies sold makes it much more likely that the title will make it onto the national bestseller lists. (Any author who’s trying to get on one of the national bestseller lists should insist to their publisher that their e-book be priced at $9.99 or lower.)

* Likewise, the higher total revenue generated at $9.99 is also good for the publisher and the retailer. At $9.99, even though the customer is paying less, the total pie is bigger and there is more to share amongst the parties.

Thanks Amazon for giving me a great example for class. But no thanks for really solving the puzzle about the terms of your dispute with Hachette because, as you say above, if you are right, the drop in price is “good for the publisher”. Hachette should be into your strategy too. Why aren’t they? Some say that the drop in e-book prices cannibalizes hardcover sales so you are not telling the whole story. This is true but if try to expand your story we do not reach an Aha moment because Amazon also sells hardcovers as well as e-books. Amazon should also care about cannibalizing hardcover sales just like Hachette. So they should have similar interests when it comes to e-book prices even taking hardcover sales into account.

So, is Hachette, a French company, confused because in France they put price on the x-axis and quantity on the y-axis so marginal revenue is upside down? Surely Jean Tirole can sort that out for you.

I suppose there is some long run issue. If hardcovers die off as e-books become cheap, why will authors need Hachette? Amazon can just cut out the middleman and publish authors directly. Would be great of some journalist can get an answer out of Hachette not the authors whom they publish.

Clayton Christensen responds to Jill Lepore. One passage:

One criticism Lepore makes is that some of the firms you describe as failed incumbents—whether it’s in the disk drive industry or the mechanical excavator industry or the steel industry—the companies that are ostensibly being disrupted, don’t disappear but continue to do very well, in some cases continue to dominate their industry. In 1960 there were 316 department stores in North America—department stores like Macy’s. Then the discount department stores like Korvettes and Kmart and Woolco and Target and Walmart came in, starting in 1962, and they were disruptive because for the department stores to go down-market and compete with discount prices, their profitability would have been decimated, so they had to move upmarket and get out of hard goods where margins were small and get into clothing and cosmetics where margins were higher. (My emphasis.) Now, how long has it been? Fifty-two years, Jill. Just so you understand, disruption doesn’t happen overnight. There are now six or eight traditional department stores in existence in North America. Let’s just call it less than 10. And Walmart is quite a large company. Target is quite a big company. So has disruption been at work in the retailing industry? It’s a question. Macy’s still exists. So—Jill, tell me, what’s the truth? If you could just be Jill’s answer for me.

The stuff in italics is a slightly more elaborate version of the replacement effect from a previous post. So it seems Christensen’s logic is in fact based on the replacement effect. But actually Christensen does not correctly account for the impact of competition.

Suppose an incumbent is making profits from the high-end hard good market. If there is no threat of entry, he has a weak incentive to create discount stores for these self-same goods because of the risk of cannibalizing his own high-end sales. This is the replacement effect. But facing the threat of entry, the incumbent’s logic changes. The entry destroys the incumbent’s profits from his core activity. Since these profits were holding the incumbent back and now there will be no such profits, the incumbent has good incentives to enter the low end. Knowing that the incumbent will enter the low end, the entrant may actually stay out as profits are going to be shared at the low end and price competition will dissipate them anyhow. The bottom line is that “disruption” can rationally increase the incentives of the incumbent to innovate even at the low end.

How does this fit in with the previous post? If the entrant’s product is differentiated from the incumbent’s (eg MOOCs are quite different from HBS classes) and poses little threat to the core business, the replacement effects is the key force and the incumbent innovates less than the entrant.

(All this analysis is quite generic. We have MBA homeworks exercises based on it. Tirole’s textbook has a great exposition of key intuitions and cites papers from the early 1980s. I should not be blogging about old stuff. But if old stuff is having impact on business practice and is only partially understood, why not? After all, Krugman goes over IS-LM repeatedly!)

From the WSJ:

“I think the rate of innovation is just getting faster and faster,” Mr. Mokyr said over noodles and spicy chicken at a Thai restaurant near the campus where he and Mr. Gordon have taught for four decades.

“What’s the evidence of that?” snapped Mr. Gordon. “There isn’t any.”

The men get along fine when talk is limited to, say, faculty gossip. About the future, though, they bicker constantly. When Mr. Mokyr described life-prolonging medical advances, Mr. Gordon cut in: “Extending life without curing Alzheimer’s means people who can walk but can’t think.”
Lots to argue about with both men in this article (e.g. arguments do not rise to level of logical structure and falsifiability normally required of academic discourse but hey this is a newspaper article after all).
Here is one other thing I disagree with:
Mr. Gordon, the more famous of the two men, has the credentials to buck conventional wisdom…..
Since when is Bob Gordon more famous than Joel Mokyr?  I suppose it depends on the audience you ask – Joel is not known to journalists. But in academic circles, the fame ranking is reversed.

A division in a company, division A,  is trying to find talented people. They have a number of positions to fill and they can fill them now or wait to find better candidates. Once a position is filled, it is hard to terminate employment for a few periods at least. The profits of the division depend both on the quantity and quality of the people employed.

This system creates an option value to waiting. Given its payoff function, the division has a quality bar for hiring. The quality bar depends on the number of unfilled slots. It leaves some slots empty deliberately to capitalize on option value. There is another threshold for firing, also with an important option value component in its determination.

A CEO is hired to build value. He is focussed on the short term. For him, unused resources mean lower output – the quality is less important. So he starts allocating resources across divisions. If a division has unused resources or positions, the CEO gives them to another division if they can come up with a candidate that passes their bar.

Let’s assume the divisions have private values – they put zero value on the other division’s success. (Microsoft recently reorganized itself because different parts of the company were at war with each other.)

For each division, the option value of an empty slot declines – it can now be filled by someone from the other division. The incentives are obvious – both divisions lower their standards for hiring and firing. There is a race to the bottom.

Counterintuitive effects arise if there are common values – each division takes the other’s success into account. Suppose division A’s standards for hiring are originally higher than division B’s. Division A faces much the same incentives as in the case of private values – it will lower standards to pre-empt slot reallocation to division B. But division B, since it now wants to prevent the decline of division A, will raise standards so the principal will not give it division A slots. The fact that this seems so implausible argues in favor of private values.

In any case, even in the case of common values, the divisions’ equilibrium response to principal short termism will not achieve the first best. A better strategy is to reallocate slots between divisions ex ante. The reallocation should reflect the principal’s payoff function as well as those of the divisions. Then, let the divisions make their own decisions on hiring and firing.


Just went to a talk by Jesse Shapiro where he gave an overview his work on the media, much of it joint with Matt Gentzkow. One theme is that competing newspapers with different party affiliations generate more information for the electorate. How fitting to return to my office and find this Guardian discussion (by Howard Reed) on FT takedown  of Piketty (by Chris Giles).  Main issue is that FT did not account for differences in way wealth is measured across separate series which are then merged into one time series:

To summarise, Chris Giles’s investigation of Piketty’s data has uncovered some errors and inconsistencies which Piketty will hopefully address in future work. This shows the importance of quality assurance and third party checking of all results from statistical analysis – particularly when they involve spreadsheets, where it is very easy to make errors.

However, Giles then goes on to make a very serious error of his own in handling the UK data: he treats changes in the way wealth inequality is measured over the decades as if they were real changes in the underlying distribution of wealth. This error leads him to the misleading conclusion that wealth inequality fell in the UK between 1980 and 2010, whereas in fact it has increased (although not by quite as much as Piketty’s published results would suggest).

In some ways, the Guardian discussion is even clearer than Piketty’s own response today. This reflects the universal truth that (good) referees and discussants can often explain your paper better than you can yourself.

But this all leaves one question unanswered: When is Piketty going to respond to Debraj? He disputed Piketty’s theory not his data.

Finally, a review I can understand. Here’s one simple but good bit:

The rate of return on capital tracks the level of capital income, and not its growth. If you have a million dollars in wealth, and the rate of return on capital is 5%, then your capital income is $50,000. Level, not growth. On the other hand, g tracks the growth of average income, not its level. For instance, if average income is $100,000 and the growth rate is 3%, then the increase in your income is $3000. Saying that r > g implies that capital income will grow faster than labor income is a bit like comparing apples and oranges. 

To make the point clear, I’m going to expand upon this argument in two ways. First, let us look at a situation in which the argument apparently holds. Suppose that capital holders save all their income. Then r not only tracks the level of capital income, it truly tracks the rate of growth of that income as well, and then it is indeed the case that capital income will come to dominate overall income, whenever r > g. But the source of that domination isn’t r > g. It is the assumption that capital income owners save a higher fraction of their income! 

Debraj adds his own sobering thoughts on technological progress and inequality at the end of his review.

From the AEA citation:

Matthew Gentzkow has made fundamental contributions to our understanding of the economic forces driving the creation of media products, the changing nature and role of media in the digital environment, and the effect of media on education and civic engagement. He has thus emerged as a leader in a new generation of microeconomists applying economic methods to analyze questions that were historically analyzed by non-economists. His empirical work combines novel data, innovative identification strategies and careful empirical methods to answer questions at the interface of economics, political science, and sociology.  This work is complemented by significant theoretical work on information, communication, and persuasion.  Gentzkow, both on his own and in collaboration with his frequent co-author, Jesse Shapiro, has played a primary role in establishing a new and extremely promising empirical literature on the economics of the news media.

I think of Matt’s work as straddling political economy and industrial organization. The latter area is extremely mature and yet Matt, often with Jesse Shapiro, has made extremely original contributions with a focus on the media. (I note that he has produced interesting papers on brand preferences more recently, closer to traditional IO concerns.)

I am most familiar with his work on media bias and reputation (JPE, 2006). Consumers want to take an action that fits the state of the world. They have some prior distribution over the states. The media can produce a signal that potentially informs this decision. The consumers are also trying to assess the quality of the media as well as take optimal actions. That is, there is a second dimension of uncertainty over the “type” of the media. If the media’s signal has low probability given the consumers’ prior, they will infer the media is bad quality. Hence, there is an incentive for the media to lie or “spin” to fit the prior of the consumers. There are many other results but this key logic underlies all of them. The model uses differing priors which is a non-standard assumption. It is non-standard as it may not yield a tractable model or crisp, falsifiable results (among other more philosophical reasons). But Gentzkow and Shapiro show that it is possible to handle such a setting.

I am less qualified to judge empirical work but I did see Matt and Jesse’s paper on ideological separation on the internet. Cass Sunnstein has claimed that the internet has created polarization of opinions as people just go to websites that fit their ideological preferences. Using data on internet use, reporting of ideological preferences, and measures of media bias of a site based on fraction of conservatives and liberals visiting the site, Gentzkow and Shapiro calculate conservative exposure of conservatives and liberal. The difference is a measure of isolation. This number is surprisingly low.

Finally, Kamenica and Gentzkow have introduced a new kind of principal-agent/receiver-sender into economic theory. The receiver’s (e.g. a judge or jury) action depends on the state of the world. The sender (e.g. a prosecutor) has his own preferences and chooses an information structure, i.e. a distribution of signals as a function of the state, to influence the receiver. They show that the sender will deliberately choose a noisy signal structure to persuade the receiver. For example, the prosecutor may choose an investigation that deliberately delivers guilty signals for innocent defendants. If this probability is low compared to the probability of guilty signals for guilty defendants, the judge will convict any defendant for whom there is a guilty signal, even though the defendant might be innocent. If the prosecutor wants to maximize the rate of conviction, by using noisy signals, we can achieve a higher conviction rate than with perfect signals. This paper has stimulated research on “Bayesian persuasion”.

All this work is quite original and quite sophisticated. The AEA is right in concluding:

His work is creative without sacrificing quality.   He has established himself as a role model in both substance and execution.

Your kid leaves her phone lying around. You find the scatterbrain never bothered to change her password as you guiltily break into her phone. You follow the trail of texts from last Saturday night. The slang is beyond you but Google translates. Shocked you find the supposed naïf and her friends were trying score some pot and booze from the cool crowd in school.

How should you respond?

You immediately want to go Putin-style hard on her ass. Confrontation, grounding, extra math classes. But any confrontation will likely reveal you accessed her phone. The stakes will only increase. Password changes, another phone purchased with the proceeds from the baby-sitting business..who knows where it will all end up?

You think through your strategy. Before this crisis, your threshold for the gateway drug was caffeine. So no Coca Cola has crossed the girl’s lips. But it seems she’s graduated from Izzes to Corona. Surely that worse than Coca Cola so you should come down like a ton of bricks? But one thing is certain – your access to her secret life is over because she’ll close off the information superhighway. How will you know if and when she’s “chasing the dragon” as people apparently said when you were young? You realize your threshold for intervention is coke (the drug) not Coca Cola. Just keep an eye on her messages till you see “yeyo” and then intervene.

You contemplate home schooling. You head over to the liquor cabinet and fix yourself a Scotch. Straight, no chaser.




Harold Pollack of UofC interviews Jon Gruber on the future of the healthcare act. Here is one exchange:

Jon:Right now, there is a successive subsidization of healthcare for many through Medicare – many rich people don’t need the excessive benefits of getting Medicare – and for many through the employer system. So I think we can get there in a different sharing route, but the bottom line is right. The constraint is going to be the financing.

Harold: By the way, you have now permanently prevented yourself from winning a high elective office in the United States despite your charisma, they be playing this tape back in an endless loop with a guy with a deep voice in the background.

Jon: I’ll guarantee it further by highlighting that guns are a public health issue.

From Bloomberg:

The latest fare study, by a Boston-area travel-tech startup called Hopper, found that Thursday is the cheapest day to purchase a ticket, with weekends the worst. The best fares were found for Wednesday departures, while returns were cheapest on Tuesday for domestic flights and on Wednesday for international trips. Friday was the most expensive day to fly home both domestically and abroad, likely because Friday and Sunday are two of the heaviest traffic days for airlines worldwide.

But don’t get too excited:

Still, as airlines become ever-more sophisticated at pricing—and keep tight checks on seat capacity—savings are relatively narrow. The difference between the “worst” and “best” purchase days was $10 for domestic flights and $25 internationally. Fare differences in departure and return days topped out at $60 for international flights, and even less domestically, according to Hopper. “I think the airlines have just become a lot better at the yield management piece so there’s no longer this predictable way you can outwit them,” says Patrick Surry, Hopper’s data scientist, calling the days of frequent consumer “big wins” largely over.

Wutherings Heights singer sells tickets for $80-$250 but they are on sale for $1000s on eBay.  She’s still running up that hill when it comes to ticket pricing


Farhad Manjoo has an interesting article on Netflix’s selection of oldish movies:

Like salmon, Hollywood movies are governed by rigid life cycles. First, a movie is released in theaters. A few months later, it heads to second-run outlets like airlines and hotel pay-per-view, and later it goes to Blu-ray, DVD and digital services that allow you to purchase or rent films à la carte.

Then, about a year after a film’s theatrical release, trouble kicks in. That’s when a movie is made available to pay-TV channels like HBO, Starz and Epix. These premium periods are exclusive; when a movie gets to a pay channel, it often can’t be shown on any other streaming service. This usually means it gets pulled from à la carte rental services, too. Right now, for instance, HBO is showing “This Is 40,” “The Hobbit” and “Moonrise Kingdom,” among other titles. Because of the network’s exclusive hold over those titles, you can’t rent those films from any other digital service….

Why are movies released in this staggered way? And why can’t the system change to accommodate an all-you-can-eat plan? Money, of course.

HBO and other premium networks have agreed to pay billions of dollars for the exclusive run of major studio films. HBO has said that, despite the cultural cachet of its original programs, movies are its most popular content; consequently, it has purchased rights to about half of all the movies released by major studios in the United States until beyond 2020. At least in this decade, then, a monthly movie plan that offers all of the movies isn’t going to happen.

Zeke Emanuel, healthcare advisor to President Obama (and brother of Rahm and Ari) thinks:

Even though the health law’s “employer mandate” requires that companies with 50 or more workers pay a penalty of $2,000 per employee if they do not provide health care, many large companies now spend far more than that to offer coverage. As a result, Mr. Emanuel says they will be able to pay the penalty, give workers a raise and shed the burden of providing coverage by sending workers to the public exchanges.

The press is picking this up and focussing on the $2000 penalty and saying it is too small. But note the “give workers a raise” part. In a competitive labor market, just dumping workers on the exchanges without compensating them is not an option. They would exit and find jobs with companies that do offer them health insurance. To prevent this, you would have to raise their salaries. It would have been great if the NYT article could have added analysis of expense of this and hence whether the end of employer provided health insurance is really on the horizon.

Also, the big advantage Walmart etc have over the private exchanges is the ability to negotiate volume discounts. Is a decentralized private exchange ever going to be able to match those rates?

Economists of all stripes agree that there is no reason companies should also be in the business of providing health insurance to their employees. But there still seem to be many steps to there from here.

From NU:

Jean Tirole, chairman of the Foundation Jean-Jacques Laffont/Toulouse School of Economics and scientific director of the Institute for Industrial Economics, University of Toulouse Capitole in France, is the recipient of the 2014 Erwin Plein Nemmers Prize in Economics.

The prize carries a $200,000 stipend, among the largest monetary awards in the United States for outstanding achievements in economics. The 2014 prize marks the 11th time Northwestern has awarded the prize. The Frederic Esser Nemmers Prize in Mathematics and the Michael Ludwig Nemmers Prize in Music Composition will both be announced this spring.

The Nemmers prizes are given in recognition of major contributions to new knowledge or the development of significant new modes of analysis. Six out of the past 10 Nemmers economics prize winners have gone on to win a Nobel Prize. (Those who already have won a Nobel Prize are ineligible to receive a Nemmers prize.)

Looking forward to hanging out with Jean next year.


The standard story about Obamacare has two steps: (1) We need young people to join so that average costs are low. Prices will reflect average cost because of insurer competition and so healthy young people will cross subsidize less healthy older people. (2) This cross subsidy will only operate if the young get Obamacare. They may not because the price is greater than their payoff from going without insurance. Hence, the individual mandate is necessary to hold this together. If the tax is too small or the website failure too forbidding, young people will not join and the whole thing will collapse as adverse selection drives up prices and further reduces participation etc – the so-called “death spiral”.

But this story is persuasive if young and old people are in the same pool. Obamacare allows pricing based on age so young and old people are in different pools. The young do not subsidize the old. If the young do not get Obamacare the old still get their insurance and they can live happily ever after (or at least get statins and heart bypasses). At a second cut there is a bit of a cross subsidy because Obamacare imposes a 3-to-1 ratio on prices of older age groups versus new. If this constraint does not bind, no problem. Even if it binds, it is relaxed if the young do not participate in their pool so prices go up in that pool allowing higher prices in the older pools.

Still, within a fixed age based pool there can be adverse selection. How big is it?  There is a working paper by Handel, Hendel and Whinston that gives us an idea. There is an impact of adverse selection because at least when you allow just two plans, one covering 90% of costs and the other 60%, only the latter trades. But what happens if you also drop the individual mandate? The last column of Table 12 on page 41 gives their forecast based on their model and the data. Participation is 87%-90% for those 50 and older. But is only 63-70% for those 25-40.

This is the death spiral, but only among the young. It does not affect the older population. First, age-based discrimination innoculates the old from the non-participation of the young. Second, the 50+ crowd (which I am fast approaching!) need health insurance so they all get it.

(Also, this analysis ignores subsidies which would increase participation further even in 25-40 age group…)

Melissa Harris at the Chicago Tribune has written a nice story about Purple Pricing at NU.    (The photographer asked us to look serious and we complied!) Melissa also interviewed Nick Kokonas whom we talked to originally. He decided not to use auctions for Next restaurant tickets. Here is his current rationale:

“Even if we could charge more, I don’t want to,” he said. “The economists say I’m being inefficient; that it’s a rational thing to take more money, if people are willing to pay it. But I’m convinced people would be willing to pay it only once. If we allowed people to pay $2,000 to eat at Next, but it feels like it’s worth $500, they’re not coming back. And I’m not in this for a one-time sale of some gizmo. We want to be around for 20 years.”

But here is the point: Since the tickets can be resold, they end up on Craiglist etc and people pay $2000. People do not end up with the great deal Kokonas wants to give them to persuade them to be repeat customers. They still end up paying $2000 for a $500 meal but the extra $1500 goes to a scalper and not to Kokonas. The scalpers are exploiting Kokonas’s “irrationality” to make money. So, if Kokonas really wants to achieve his objective he must be more old school and sell tickets at the door. This subverts his business model as Next becomes more like Frontera Grill with a set menu and random revenue stream. A compromise might be to auction off some fraction of seats and sell some at the door. This at least captures scalper surplus. If you do not want the extra money, use it to set up a Achatz- Kokonos Institute for the Culinary Arts (AKICA).

In the Tribune article, Jeff talks about interesting ideas to leverage the secondary market if resale can be fully controlled by the originator. When this happens, it would be possible to implement the Kokonas social welfare function: Set a price P for a ticket. All resale has to go through your system and the resale price must be P. You can set P as low or as high as you want depending on your desire to give consumers a good deal.

A couple of days ago, someone who currently has individual insurance could either sign up for insurance on an Obamacare exchange or pay a penalty. Now, these people can keep their current insurance and they will not have to pay a tax penalty. In other words, their outside option to the exchanges just got better.

But what about the inside option? First, the policies traded on exchanges are regulated. They have a cap on the maximum amount consumers can be charged per year. They cover pre-existing conditions etc. They are higher quality than the contracts traded outside the exchange. Second, the plans on the exchange are subsidized based on income. These two factors can imply the inside option is better than even the new outside option.

There are two countervailing effects. First, given the disfunctionality of, it is impossible to calculate the inside option! Second, there could be a selection effect that makes the prices increase on the exchanges and leads to a “death spiral”. Specifically, if the people who currently have individual insurance are healthy and stay out of the exchanges, and there are a large number of them, prices could skyrocket in the exchanges. Then, paying the tax penalty makes more sense and the exchanges collapse.

Surely resolving the first countervailing effect is only a matter of time. This debacle should have been avoided but it is possible to fix. The second effect is potentially more problematic. It should be possible to estimate the size of the death spiral with enough data. Jon Gruber should be able to do it. I don’t have the data and can only offer an anecdote. On my way to the airport, my cab driver and I started discussing Obamacare. He and his two kids are on his wife’s individual insurance which costs them $1600/month and has huge deductibles. He was looking forward to getting Obamacare. He did not know about the subsidies. When I told him he got very excited. I used by smartphone to access the Kaiser Family Foundation subsidy calculator to guess what his family would have to pay for a silver plan. It was well below their current payments because they got a big subsidy. But how many people like him are there? How many people are buying plans in the individual marketplace in the first place? Someone should work this out.

Amazon wants to use small bricks-and-mortar retailers to sell more Kindles and eBooks. They are trying to incentivize them to execute their business strategy:

Retailers can choose between two programs:
1) Bookseller Program: Earn 10% of the price of every Kindle book purchased by their customers from their Kindle devices for two years from device purchase. This is in addition to the discount the bookseller receives when purchasing the devices and accessories from Amazon.
2) General Retail Program: Receive a larger discount when purchasing the devices from Amazon, but do not receive revenue from their customers’ Kindle book purchases.

EBooks are an existential threat to retailers. But no one small bookstore can have a significant effect on the probability of the success of the eBook market through its own choice of whether to join Amazon’s program or not. Hence, it can ignore this existential issue in making its own choice. Suppose it is beneficial for a small bookstore owner to join the program ceteris paribus. After all, people are coming in, browsing and then heading to Amazon to buy eBooks – why not capture some of that revenue? Many owners independently make the decision to join the program. Kindle and eBook penetration increases even further and small bookstores disappear.

From Bloomberg:

UnitedHealth will “watch and see” how the exchanges evolve and expects the first enrollees will have “a pent-up appetite” for medical care, Hemsley said. “We are approaching them with some degree of caution because of that.”

An interpretation from Think Progress:

Get that? The company packed its bags and dumped its beneficiaries because it wants its competitors to swallow the first wave of sicker enrollees only to re-enter the market later and profit from the healthy people who still haven’t signed up for coverage.

From the always interesting Erik Erickson at Red State:

So the question is do we want to stop Obamacare or do we want to stop the debt ceiling increase? My view is that we cannot do both at the same time. We might dare to dream, but the debt ceiling will be increased one way or the other.

Right now the GOP is holding up very well in the press and public opinion because it is clear they want negotiations. The GOP keeps passing legislation to fund departments of government. It has put the Democrats in an awkward position.

But the moment the GOP refuses to raise the debt ceiling, we are going to have problems. Remember, the last time you and I wanted the GOP to fight on the debt ceiling, the attacks from our own side were particularly vicious.

They’ve been vicious over the shutdown too, but now that we are here, the water ain’t so bad and only a few ankle biting yappers continue to take shots at conservatives from the GOP side.

It will not be so with the debt ceiling. And the GOP will no longer seem very reasonable. The debt ceiling fight will become an impediment to undermining Obamacare.

The main target is defunding Obamacare. Since the House will cave on the debt limit, not good to link defunding Obamacare to the debt ceiling. Link it to CR. Logic seems good if you like the objective. Also, it reveals that right believes debt limit will be raised. Hence, bondholders can relax.

Here’s my accurate but unsubtle description of Coase’s methodology (listen to audio for my brief moment of fame). Reporter does a good job though.

Ronald Coase has passed away.

Coase was the last “classical” economist. His style is closer to Marshall than to Samuelson. He asked deep questions and proposed simple but deep answers without using maths. So, a certain style of doing economics passes away with him.

The work of his I am most familiar with concerns the theory of the firm: Why are some transactions mediated through markets while others take place within firms? Suppose Microsoft and Nokia have to work together to supply phones. MS can own human capital that generates software, Nokia can generate the hardware and they can exist as separate firms and trade. Or MS can produce the end software/hardware product and employ Nokia workers in an integrated firm.  Coase’s point is that if there are no transactions costs, there is property-right neutrality. Both institutions should generate the same joint surplus and it does not matter whether they are integrated or not. People often stop there and that is all they know about the “Coase Theorem”. But in fact, Coase’s second point is that property right neutrality is crazy hence there must be transactions costs and we must study these as well as the usual costs of production we normally invoke. Once we have a good understanding of transactions costs, we will understand why some transactions take place through firms and other through markets.

The downside of having a classical style is that no-one really understands what you mean. First, there was controversy about the Coase Theorem itself – was it in fact a  theorem? Coase never called it that (I think it was Stigler who coined the phrase) and Samuelson though it was wrong. But, I think by now we do believe it is a theorem and the property right neutrality obtains for transferable utility (MasColell, Whinston and Green has a simple argument).  But what are these pesky transactions costs that determine the boundary of the firm? There we have no consensus. One leading theory invokes costs of haggling ex post if two firms are not integrated (Wiliamson got the Nobel Prize for this theory). The other says there are no costs of haggling ex post and bargaining in efficient but there is a hold up problem in bargaining as surplus is split. Knowing this firms underinvest ex ante. The allocation of property rights affects the ex post division of surplus and hence this leads to a theory of optimal property rights (this theory has been developed by Oliver Hart with his co-authors Sandy Grossman and John Moore (GHM)).

The counterargument to Williamson’s theory is typically that if haggling generates transactions costs, we should see vertical integration and no outsourcing. No interior solutions! The counterargument to GHM is more esoteric. It turns out that there are contracting solutions that are consistent with typical GHM solutions and resolve the hold-up problem. In some sense, the Coase Theorem goes through in GHM models.

So what can we learn from the Nokia and MS merger? It seems they are looking for a Ballmer replacement who is working at Nokia. And there are intellectual property issues:

Mr. Ballmer said Microsoft and Nokia had not been as agile separately as they would be jointly, citing how development could be slowed down when intellectual property rights were held by two different companies.

But also from the same NYT article:

Large acquisitions are fraught with peril, especially in the technology business, where there are challenges to integrating employees from different backgrounds into a coherent whole.

First, Coase is right – there are transactions costs that destroy property right neutrality. Second, both Williamson and GHM theories are consistent with the facts. Maybe ex post efficient trades are not occurring because of haggling over MS’s and Nokia’s intellectual property. Or knowing that surplus will be extracted by the other party ex post given its monopoly power over its patents, neither firms is fully invested in the joint venture.

So, the bottom line is that Coase had some simple but deep insights and we are still working out the implications.

I talked to my father a couple of days ago. He’s excited ahead of his trip to India because the British pound is trading at 100 Rupees!

Why is that and what does it have to do with the Food Security Bill that gives some minimal level of food support to the Indian population?

Debraj Ray answers these two questions:

1. Rupee fluctuations:

The basic economics of this is pretty simple. Imagine a huge stock of hard-currency-denominated investible funds, forever sloshing around in search of the best returns. For a developing country, the urge to tap into these funds is immense……. And so it was that India started on the Great Upward Path: money pouring into its coffers from abroad, accompanying tariff and quota liberalization then permitting easy purchase of foreign goods without a huge depreciation in the rupee, the outward drain being more than easily matched by the inward flow.

QE, by keeping interest rates very low in the United States and the rest of the “developed world,” certainly helped here, as hot money scrambled to take advantage of relatively attractive portfolios in emerging markets.

And what money goes in comes out after the Fed hints that their easy money policy may be coming to an end and interest rates are on the rise. Hence fluctuations

2. Food Security Bill:

It is interesting that the very same business interests which have completely disregarded the dangers I’ve discussed are now floundering around for a scapegoat. Let’s see now: it must be the damn Government which is to blame. And we’re off to the usual races: cut back government spending, and yes, social spending for those lazy masses must be the first to go….

What we have is a bill that purports to bring food security to the majority of India’s population, and possibly the overwhelming majority of India’s poor, plus the additional benefits to mothers and children, for about 6% of the Indian government budget. Not for 12%, as in defense, or 9%, as in the fuel subsidy. And certainly not for the same impact, rupee for rupee, on India’s international deficit.

It’s crazy to link 2. with 1. Must the poor and innocent always pay for the vagaries of financial  markets? I hope not.


Foreign Policy reports:

India’s two most prominent economists have never really seen eye-to-eye. Amartya Sen, a Nobel Prize-winner and Harvard professor, believes in public interventions to alleviate extreme poverty and reduce inequality while Jagdish Bhagwati, a professor at Columbia and author of the bestselling book In Defense of Globalization, favors a more free-market, growth-first approach.

In recent weeks, the two have caused something of an uproar — “Academic Brawl,” proclaims the Economic Times — with a terse back-and-forth in the letters page of the Economist.

What is it all about? For the answer, I turned to the blog of a third prominent Indian economist (and apparently excellent cook) Debraj Ray:

1. Economic growth is fundamentally uneven.

2. Looking at rates of growth per person will fail to reveal this basic fact. High growth and extreme inequalities can co-exist. Indeed, they often do.

3. There are a number of ways to deal with uneven growth. The most important of these is occupational choice: education and training to enter new sectors. But occupational choice is slow (it will often take a generation), and it is imprecise (by the time we’re done retraining, the economy may have hared off somewhere else).

4. So other ways need to be found to even out that unevenness.

5. But wait — why won’t the good old market take care of it? It might: if growth in one sector trickles to another via expanding demand. If software engineers like potatoes, the potato farmer stands to gain. Or the tourist industry. Or hairdressers. Just how strong these intersectoral bonds are is a profoundly empirical question. Is there enough work on assessing these strengths? The simple answer is no: not nearly enough. To simply hope that the bonds will work is no good.

We have now arrived at the heart of the matter: is (5) enough? That is what the debate needs to be about. Not about Bhagwati, and not about Sen.

6. And if (5) isn’t enough, what then? Then we are left with two alternatives:

7. Active and sustained government intervention to even things out. Social spending on education. On health. [On] nutrition. On transportation and communication networks. On minimal safety nets. The market can take care of the cool stuff. The public sector gets a less sexy role: getting the basics right. That is what Drèze and Sen (and frankly, many others) are about.

Failing (7) and provided that (5) fails as well, we have just one option:

8. Sustained, crippling social conflict, not just cutting across class lines but along any marker which can be arrogated for the purpose: religion, caste, geography, language.

Via Matt Yglesias:

[B]efore Apple launched its own iOS Maps app, Google Maps for iOS was already markedly inferior to Google Maps for Android. Not because Google was incapable of producing a great Google Maps app for iOS but because they didn’t want to make one.

To get out of that bind, Apple has never needed to make a product that’s actually superior to Google Maps. What they’ve needed to do is produce an application that clears two bars. One is that it has to be good enough that your typcial doesn’t-care-too-much phone consumer doesn’t reject iOS out of hand. The other is that it has to be good enough such that if Google doesn’t want to lose the entire iOS customer base it has to scramble and release a great Google Maps app for iOS and not just for Android. Apple’s Maps app easily clears both of those bars. Before the release of iOS 6, the inferiority of Apple’s Google-powered iOS Maps app to Android’s Google maps was a real reason to prefer an Android phone. Today, there is no such reason. Not because Apple Maps is as good at Google Maps, but because Google Maps for iOS is as good as Google Maps for Android.

From his webpage:

Dani Rodrik will be the Albert O. Hirschman Professor of Social Science at the Institute for Advanced Study in Princeton as of July 1, 2013. Before then, he was the Rafiq Hariri Professor of International Political Economy at the John F. Kennedy School of Government, Harvard University. He has published widely in the areas of international economics, economic development, and political economy. His research focuses on what constitutes good economic policy and why some governments are better than others in adopting it.

Didn’t see anything on the IAS webpage announcing it as yet.


Hot off the presses at NYT:

A prominent and well-connected economist who has openly supported opposition figures has resigned from several posts and abruptly left Russia under mounting pressure from investigators, officials of the university he leads said on Wednesday.

The economist, Sergei Guriev, has been questioned repeatedly in a case that stems from a report that he co-wrote that harshly criticized the treatment of Mikhail B. Khodorkovsky, the imprisoned oil tycoon and one-time political rival to President Vladimir V. Putin.

A centrist figure who is at home among Russia’s power brokers, Mr. Guriev drew attention a year ago for publicly declaring his support for the anti-corruption blogger Aleksei Navalny.

I’ve read Guriev’s papers in the past but his name seemed particularly familiar. I realized the Mikhail Golosov has presented a joint paper with Guriev and others at the Nemmers Conference just last week. Some people think Stalin’s policies were necessary to push labor from the countryside to industry and hence the hardship they caused, while cruel, had some long term positive economic impact. Chermukin, Golosov, Guriev and Tysvinki argue, using data they collected and a two sector growth model, that Stalin’s policies reduced welfare significantly in the long run.

This guy is hardly a radical.

Via the FT:

Airlines that offer this either send travellers an email inviting them to upgrade or travellers can go direct to the airline’s website.Once you’re on their site, rather than them saying, ‘you can pay £400 to upgrade’, you can now say, ‘I’ll pay £300’,” explains Ken Harris chief executive of Plusgrade, the technology company behind the platform. “There may be a minimum upgrade price and there will be an indicator which shows the strength of your offer.” The airline will then email you at least 72 hours before your flight to tell you if your bid has been successful; if not, you retain your original reservation.

Taking things to another comfort level:

Along with upgrades, you can also pay a nominal fee to ensure the seat next to you is not occupied.

To extract surplus and reduce information rents from high types, “low” types must be punished with inefficient allocations. Expect to be seated en masse if you do not purchase an upgrade even if the plane is half empty.

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