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From a Study in Scarlet:

“I consider that a man’s brain originally is like a little empty attic, and you have to stock it with such furniture as you choose. A fool takes in all the lumber of every sort that he comes across, so that the knowledge which might be useful to him gets crowded out, or at best is jumbled up with a lot of other things so that he has a difficulty in laying his hands upon it. Now the skillful workman is very careful indeed as to what he takes into his brain-attic. He will have nothing but the tools which may help him in doing his work, but of these he has a large assortment, and all in the most perfect order. It is a mistake to think that that little room has elastic walls and can distend to any extent. Depend upon it there comes a time when for every addition of knowledge you forget something that you knew before. It is of the highest importance, therefore, not to have useless facts elbowing out the useful ones.”

Greece and the Troika are engaged in a war of attrition. The player with the higher cost to staying IN vs conceding and dropping OUT is in a stronger position in a war of attrition.

Greece has capital controls, is about to renege on a payment to the IMF, faces an offer from the Troika that is impossible for the Greek government to get through Parliament and the offer consigns the Greeks to more austerity and economic stagnation. They have little to lose from staying IN.

The IMF does not face an existential crisis if it sticks to its guns. The EC suffers from staying IN if there is contagion but they have protected themselves.

So both sides have low costs to staying IN. They have to increases costs on the other side to persuade them to concede.

For the Troika, the strategy is straightforward: they can’t accede to the Greek request to extend the bailout for the referendum, give extra money to banks etc. This is basically what they are already doing.

For the Greeks, the strategy is more surreal: To inflict maximum cost of the Troika, Greece should default on its payments but remain in the Eurozone. Greece is cut off from international lenders anyway and the default will not have any incremental effect on their ability to borrow. With Greece insolvent, the ECB will be the key decision-maker. Do they keep on lending to Greece as they are still technically in the Eurozone? The German Finance Minister says this is the case (via Bloomberg):

German Finance Minister Wolfgang Schaeuble told lawmakers in Berlin that Greece would stay in the euro for the time being if Greek voters reject austerity in a referendum scheduled this week, according to three people present.

Schaeuble also said the European Central Bank would do what’s needed to protect the euro if Greeks voted against the bailout terms in the July 5 referendum

This is ideal for Greece. They keep the Euro and get the debt restructuring they want via default. And other countries in the Eurozone are infected by Greece being in the Euro. If Greece needs anything from the EC, this is an ideal threat point for them.

What if the ECB denies Greece credit? This state of affairs may need to be maintained by the Greek government issuing GrEuros as a medium of exchange. GrEuros can be used to pay the government as if they were Euros. GrEuros will not be accepted outside Greece by wary investors but they would trade internally in Greece. The GrEuro/Euro exchange rate will float. There is less risk of contagion here as GrEuros are not the same as Euros. Eventually GrEuros will become drachmas.

All these tactics will prolong the war of attrition. They will mask the bigger problem: How sustainable is the Eurozone with a monetary union but no political union?

I found this discussion paper by Stergios Skaperdas offered a useful perspective on the crisis. Here is a passage on default:

If Greece had defaulted in early 2010 Greek debt could have become sustainable in the long run with a writeoffs imposed on bondholders of considerably below 50% of total debt. The country would have had to borrow internally, perhaps issue IOUs (as it has done already), and impose a few modest cuts. The effect of such a policy would have been mildly recessionary.

What was done in 2010 instead by the troika was to provide Greece with loans so as to cover its budget deficit without default, in exchange for increasingly draconian budget cuts, tax increases, and institutional changes of dubious value. The effect of this policy was a fast downward spiral of the economy. Since debt kept increasing and the country kept getting poorer fast, debt was becoming ever less sustainable. Thus, the second bailout in 2012 restructured Greek debt, with the main losers being Greek pension funds and Greek banks. The Greek state had to borrow 50 billion euros just to recapitalize the banking system and continues to have to cover the losses of the pension funds (in addition to cutting pensions, cutting health expenditures, and increasing retirement ages). The continued contraction of the economy, deflation, and a few additional loans from official sources have brought the debt-to-GDP ratio close to 180%, the highest it has ever been.

Now, default would be considerably more difficult both because Greek public debt is under English law and because 80 percent of it is official and owed to official sources (the IMF, the ECB, and other Eurozone member countries). Yet, that debt is unsustainable and there is virtually no chance it will be fully paid back. Default is still a taboo but it is bound to occur in one way or another, regardless of how it is named.

Cato Unbound is running a discussion with this topic.  Alex Tabarrok and Tyler Cowen kicked things off by suggesting that technological advances are ending asymmetric information as an important feature of markets.  My response, “Let’s Hope Not” was just published.  Josh Gans and Shirley Svorny are also contributing.

Suppose there are two bakeries which make wedding cakes and other baked items. The pastries from one bakery are pretty much the same as those from another so the baked goods market is quite competitive and margins and profits are thin.

The legislature passes a law allowing businesses to select which customers they will serve and which they will not.

One bakery, bakery A, decides to be selective and the other, bakery B, decides to be non-selective. The fact that bakery A has become selective becomes public knowledge either because the bakery advertises this fact or through word-of-mouth.

Does economic competition eliminate discrimination? This is the question.

Customers who abhor bakery A’s selection criterion boycott bakery A even if in other respects it would be convenient to just get a doughnut from bakery A. So, bakery B, gets additional business it did not get before.

Surely bakery A is suffering and hence should drop its ill-advised selection policy? Not so fast.

Some customers favor bakery A’s policy and they actively seek out bakery A’s products (the “Chick-fil-A” effect). So bakery A loses some customers but gains others. Moreover, the customers it gains are more loyal than the customers who enjoyed its products before it adopted its policy. Similarly, the customers bakery B gains are more loyal too.

Hence, product differentiation has increased because of bakery A’s active adoption of its policy and from bakery B’s decision not to adopt the same policy. The logic of competition now implies both bakeries will make more profits than they did before.

So, discrimination is not driven out by competition between firms. If anything it is reinforced by competition. This stands in contrast to Becker’s model where competition decreases discrimination in employment. (There is some way to make these models consistent by having workers have preferences over co-workers. Maybe someone already did this model?)

Without political or legal intervention, competition will not drive out discrimination.

Here is an article on the latest Michelin stars for Chicago Restaurants. The very nice thing about this article is that it tells you which restaurants just missed getting a star. As of yesterday you would have preferred the now-starred restaurants over the now-snubbed restaurants. But probably as of today that preference is reversed.

Any punishment designed for deterrence is based on the following calculation.  The potential criminal weighs the benefit of the crime against the cost, where the cost is equal to the probability of being caught multiplied by the punishment if caught.

Taking surveillance technology as given, the punishment is set in order to calibrate the right-hand-side of that comparison.  Optimally, the expected punishment equals the marginal social cost of the crime so that crimes whose marginal social cost outweighs the marginal benefit are deterred.

When technology allows improved surveillance, the law does not adjust automatically to keep the right-hand side constant.  Indeed there is a ratchet effect in criminal law:  penalties never go down.

So we naturally hate increased surveillance, even those of us who would welcome it in a first-best world where punishments adjust along with technology.

Norway and Liberia (somewhat) internalize externalities:

Norway will give Liberia up to a hundred and fifty million dollars in aid, in exchange for which Liberia will work to stop the rapid destruction of its trees.

Liberia has much of what remains of West Africa’s rain forest, but logging is rampant. The initiative is not an act of charity but a trade: Liberia gets income, which it needs; Norway gets to preserve biodiversity and take a small step against climate change. A similar deal that Norway struck with Brazil years ago helped slow deforestation there. Economists call arrangements of this kind “payments for ecosystem services,” and they follow a rationale known as the Coase theorem. In 1960, the economist Ronald Coase argued that bargaining between parties could, under certain conditions, produce a mutually beneficial and efficient solution to problems like pollution.

Brazil and US subvert efficiency via transfers:

When the WTO’s Appellate Body upheld Brazil’s claim that U.S. cotton subsidies were depressing world prices and hurting Brazilian cotton farmers in the process, the United States did not amend its subsidies to make them compliant. Rather, it agreed to pay Brazil $147 million a year for the privilege of continuing to subsidize its own farmers in a WTO-inconsistent way. This week, the United States reached another settlement, buying Brazil’s peace once more, this time to the tune of a $300 million lump sum payment.

Jean Tirole gave the Nancy Schwartz Lecture at Kellogg in 2012. He won the Nemmers Prize at Northwestern in 2014 and will be visiting in Spring 2015. So, there is no surprise that he won the Nobel Prize in Economics – it was just a matter of when, not if.

The first thing to note is that Tirole won this prize alone (though the way the advanced information is written, it leads you to think Jean-Jacques Laffont would have won the prize too if he were still alive). Most Nobel prizes are shared by two or more recipients. When it is given to just one person, it is a signal that they dominate a field. Jean Tirole dominates the field of Industrial Organization. Part of the reason for this is his textbook from 1988 which is still the best thing out there. Most people who do research just want to describe their own ideas. They go to the effort of saying why their ideas are original – otherwise the papers would be rejected by journals! But most of us stop there. Jean Tirole not only has many ideas but he can show how they fit within a broader framework. Moreover, he can describe how others’ ideas also fit together even when he not written on the topic. This is a special skill many of us do not have.

As an example, take one of his papers with Drew Fudenberg, The Fat-Cat Effect…..Along with a fundamental paper by Bulow, Geanakoplos and Klemperer, Multimarket Oligopoly…, it is the mainstay of many of the more advanced courses in Competitive Strategy in business schools. The Nobel write-up focuses on public policy, but Tirole has also had impact on private policy!

For example, think of a firm thinking of entering a market with an incumbent with a cost advantage. What’s to stop the incumbent from wiping the entrant out? Well, the entrant should be “soft” and enter with a low capacity and low price. Then the incumbent would have cannibalize high volume, high margin sales to regain a small market share. So why bother? Fudenberg and Tirole call this the puppy dog ploy. It is called Judo Economics by Gelman and Salop. It was later popularized for a business school audience. Of course, there are other circumstances where you want to look “tough” and the Fudenberg-Tirole papers tell you when you should do that – the optimal strategy is contingent on the underlying game. In fact, many, many ideas in IO can be synthesized in this framework and Chapter 8 of Tirole’s textbook shows you how.

This is just one of his many papers. In fact the Nemmers conference will focus on asset market bubbles because Tirole has made fundamental contributions in that area!

Finally, Tirole is one of the reasons why my letters of recommendation are so bad. He is student of my advisor, Eric Maskin. Eric’s letters must say “Sandeep is my 95th best student”. If it were not for Jean, I would be 94th.

These are my thoughts and not those of Northwestern University, Northwestern Athletics, the Northwestern football team, nor of the Northwestern football players.

  1. As usual, the emergence of a unionization movement is the symptom of a problem rather than the cause.  Also as usual, a union is likely to only make the problem worse.
  2. From a strategic point of view the NCAA has made a huge blunder in not making a few pre-emptive moves that would have removed all of the political momentum this movement might eventually have.  Few in the general public are ever going to get behind the idea of paying college athletes.  Many however will support the idea of giving college athletes long-term health insurance and guaranteeing scholarships to players who can no longer play due to injury.  Eventually the NCAA will concede on at least those two dimensions.  Waiting to be forced into it by a union or the threat of a union will only lead to a situation which is far worse for  the NCAA in the long run.
  3. The personalities of Kain Colter and Northwestern football add to the interest in the case because as Rodger Sherman points out Northwestern treats its athletes better than just about any other university and Kain Colter is on record saying he loves Northwestern and his coaches.  But these developments are bigger than the individuals involved. They stem from economic forces that were going to come to a head sooner or later anyway.
  4. Before taking sides, take the following line of thought for a spin.  If today the NCAA lifted restrictions on player compensation, tomorrow all major athletic programs and their players would mutually, voluntarily enter into agreements where players were paid in some form or another in return for their commitment to the team.  We know this because those programs are trying hard to do exactly that every single year.  We call those efforts recruiting violations.
  5. Once that is understood it is clear that to support the NCAA’s position is to support restricting trade that its member schools and student athletes reveal year after year that they want very much.  When you hear that universities oppose removing those restrictions you understand that whey they really oppose is removing those restrictions for their opponents.  In other words, the NCAA is imposing a collusive arrangement because the NCAA has a claim to a significant portion of the rents from collusion.
  6. Therefore, in order to take a principled position against these developments you must point to some externality that makes this the exceptional case where collusion is justified.
  7. For sure, “Everyone will lose interest in college athletics once the players become true professionals” is a valid argument along these lines.  Indeed it is easy to write down a model where paying players destroys the sport and yet the only equilibrium is all teams pay their players and the sport is destroyed.
  8. However, the statement in quotes above is almost surely false. Professional sports are pretty popular. And anyway this kind of argument is usually just a way to avoid thinking seriously about tradeoffs and incremental changes. For example, how many would lose interest in college athletics if tomorrow football players were given a 1% stake in total revenue from the sale of tickets to see them play?
  9. My summary of all this would be that there are clearly desirable compromises that could be found but the more entrenched the parties get the smaller will be the benefits of those compromises when they eventually, inevitably, happen.

I just saw Malcolm Gladwell on The Daily Show.  Apparently his book David and Goliath is about how it can actually be an advantage to have some kind of disadvantage.  He mentioned that a lot of really successful people are dyslexic for example.

But its either an absurdity or just a redefinition of terms to say that disadvantages can be advantageous.  The evidence appears to be a case of sample selection bias. Here’s a simple model. Everyone chooses between two activities/technologies. There is a safe technology, think of it as wage labor, that pays a certain return to everybody except those the disadvantaged. The disadvantaged would earn a significantly lower return from the safe technology because of their disadvantage

Then there is another technology which is highly risky. Think of it as entrepreneurship. There is free entry but only a randomly selected tiny fraction of entrants succeed and earn returns exceeding the safe technology. Everyone else fails and earns nothing. Free entry means that the expected return (or utility thereof) must be lower than the safe technology else all the advantaged would abandon the latter.

The disadvantaged take risks because of their disadvantage and a small fraction of them succeed.  All of the highly successful people have “advantageous” disadvantages.

My friend and Berkeley grad school classmate Gary Charness posted this on Facebook:

It has finally happened. This could be a world record. I now have 63 published and accepted papers at the age of 63. I doubt that there is anyone who *first* matched their (positive) age at a higher age. Not bad given that my first accepted paper was in 1999. I am very pleased !!

Note that Gary is setting a very strict test here.  Draw a graph with age on the horizontal axis and publications on the vertical.  Take any economist and plot publications by age.  It’s already a major accomplishment for this plot to cross the 45 degree line at some point.  Its yet another for it to still be above the 45 degree line at age 63.  But its absolutely astounding that Gary’s plot first crossed the 45 degree line at age 63.

(Yes Gary was my classmate at Berkeley when I was 20-something and he was 40-something.)

If you are like me and you believe that thinking is better path to success than not thinking, its hard not to take it personally when an athlete or other performer who is choking is said to be “overthinking it.” He needs to get “untracked.” And if he does and reaches peak performance he is said to be “unconscious.”

There are experiments that seem to confirm the idea that too much thinking harms performance.  But here’s a model in which thinking always improves performance and which is still consistent with the empirical observation that thinking is negatively correlated with performance.

In any activity we rely on two systems:  one which is conscious, deliberative and requires “thinking.”  The other is instinctive.  Using the deliberative system always gives better results but the deliberation requires the scarce resource of our moment-to-moment attention.  So for any sufficiently complex activity we have to ration the limited capacity of the deliberative system and offload many aspects of performance to pre-programmed instincts.

But for most activities we are not born with an instinctive knowledge how to do it.  What we call “training” is endless rehearsal of an activity which establishes that instinct.  With enough training, when circumstances demand we can offload the activity to the instinctive system in order to conserve precious deliberation for whatever novelties we are facing which truly require original thinking.

An athlete or performer who has been unsettled, unnerved, or otherwise knocked out of his rhythm finds that his instinctive system is failing him.  The wind is playing tricks with his toss and so his serve is falling apart.  Fortunately for him he can start focusing his attention on his toss and his serve and this will help.  He will serve better as a result of overthinking his serve.

But there is no free lunch.  The shock to his performance has required him to allocate more than usual of his deliberative resources to his serve and therefore he has less available for other things.  He is overthinking his serve and as a result his overall performance must suffer.

(Conversation with Scott Ogawa.)

Grocery chain Trader Joe’s has opened up a legal can of whup ass on its self-professed “best customer,” Pirate Joe’s.

Vancouver, British Columbia shopkeeperMichael Hallatt, claims to have spent more than $350,000 at Trader Joe’s in the past two years. Trader Joe’s would like him to stop shopping there. What gives?

Hallatt, makes frequent drives across the border to shop the U.S. stores, then resells popular Trader Joe’s branded products in his own store, cannily called Pirate Joe’s.

Various commentators are at a loss to explain why Trader Joe’s would cut off its best customer.  But isn’t it obvious?  Trader Joe’s always had the option of opening a store in Vancouver. Because it never did, it must be that it would not be profitable. Now the joint profits between Trader Joe’s and Pirate Joe’s cannot be higher than the profit that Trader Joe’s would have earned if it opened its own store.  At worst Trader Joe’s could just replicate what Pirate Joe’s is doing, but probably it could do it more efficiently.  So Trader Joe’s which earns only a share of the joint TJ/PJ profit must be less profitable than it would be if it opened its own store in Vancouver which it has already calculated to be unprofitable.

The upcoming Northwestern home game versus Ohio State has now sold out. Danny Ecker at Crain’s Chicago Business has the post-mortem:

Sales so far show the school was effective in its experimental“Purple Pricing” offer for about 5,000 single-game seats for the game.

The modified Dutch auction system, which guarantees that buyers don’t pay any more for tickets than anyone else in their section, ended up selling out at $195, $151 and $126 for seats on the sideline, corner and end zones, respectively.

On the secondary market, sideline seats have sold for an average of $190, corner seats for $135 and end-zone seats for $127. That suggests that fans haven’t been able to flip them for a profit — at least, not yet.

I haven’t decided yet and I can’t figure out which side this is evidence for:

Me:  Oh I have to remember to set up your desk today because I promised that I would and that if I didn’t I would give you $2.

7 year old:  I was hoping you would forget.

Me:  Are you saying you would rather have $2 than your desk?

7yo:  No, I am saying I would rather have $2 today and my desk tomorrow.

Me:  Hold on, what would you rather have:  $2 today and your desk tomorrow or $2 today, another $2 tomorrow and then your desk the next day?

7yo:   $2 today, another $2 tomorrow and then my desk the next day.

Me:  $2 today, $2 tomorrow, $2 the next day, and then your desk the day after that?

7yo:  Yep.

Me:  And what is the number of days you would like to have $2 before you finally get your desk?

7yo:  Infinity.

Here’s the preview:

Students all over are starting college this month, and some of them still have a nagging question: what, exactly, got me in? An admissions officer tells us the most wrongheaded things applicants try. And Michael Lewis has the incredible story of how a stolen library book got one man — Emir Kamenica — into his dream school. (Photo: Emir as a Harvard undergrad. Credit Terri Wang.)

Buy tickets starting at 10AM at NUSports.com for the games against Ohio State on Oct 5 and Michigan on Nov 16.  We have added bidding this season:  you may submit a bid below the current auction price and you will receive tickets if and when the price falls to your bid level.  Here is an older post about Purple Pricing with some more information.

One form of mental accounting is where you give yourself separate budgets for things like food, entertainment, gas, etc.  It’s suboptimal because these separate budgets make you less flexible in your consumption plans.  For example in a month where there are many attractive entertainment offerings, you are unable to reallocate spending away from other goods in favor of entertainment.

But it could be understood as a second-best solution when you have memory limitations.  Suppose that when you decide how much to spend on groceries, you often forget or even fail to think of how much you have been spending on gas this month.  If so, then its not really possible to be as flexible as you would be in the first-best because there’s no way to reduce your grocery expenditures in tandem with the increased spending on gas.

That means that you should not increase your spending on gas.  In other words you should stick to a fixed gas budget.

Now memory is associative, i.e. current experiences stimulate memories of related experiences.  This can give some structure to the theory.  It makes sense to have a budget for entertainment overall rather than separate budgets for movies and concerts because when you are thinking of one you are likely to recall your spending on the other.  So the boundaries of budget categories should be determined by an optimal grouping of expenditures based on how closely associated they are in memory.

(Discussion with Asher Wolinsky and Simone Galperti)

The NRA successfully lobbied to stop gun control legislation.  Several Democrats sided with Republicans to defeat it.  But the NRA seems to have spent more than necessary to defeat the measures because they failed by more than a one-vote margin.  It would have been enough to buy exactly the number of Senators necessary to prevent the bill from progressing through the Senate, no more than that.

But in fact the cost of defeating legislation is decreasing in the number of excess votes purchased.  If the NRA has already secured enough votes to win, the next vote cannot be pivotal and so the Senator casting that vote takes less blame for the defeat.  Indeed if enough Senators are bought so that the bill goes down by at least two votes, no Senator is pivotal.

Here’s a simple model.  Suppose that the political cost of failing to pass gun control is c.  If the NRA buys the minimum number of votes needed to halt the legislation it must pay c to each Senator it buys.  That’s because each of those Senators could refuse to vote for the NRA and avoid the cost c.  But if the NRA buys one extra vote, each Senator incurs the cost c whether or not he goes along with the NRA and his vote has just become cheaper by the amount c.

For the Vapor Mill:  What is the voting rule that maximizes the cost of defeating popular legislation?

"On Committees" by Itty and Bitty

 

How much did I add to the cost of the student edition when I disposed of it into a randomly chosen grad student’s mailbox?  Should I have recycled it instead?  (Textbook authors’ names hidden to protect their reputations.)

Coonskin coil:  Scott Ogawa.

Non-peer reviewed, inaccessible data, and punditry that can’t tell the difference between P&P and a regular AER article can’t be good for the reputation of the journal, the AEA, or the profession.

Steve Tadelis, Distinguished Economist at eBay and his colleagues have done an experiment and seem to have concluded that its a waste of money to pay for sponsored links on Google when Google’s regular search algorithm shows links to eBay for free.

Before you read the rest of this post, go to Google and try searching for “Amazon.” You’ll probably notice that the top two listings are both for Amazon’s website, with the first appearing on a light beige background. If you click on the first — a paid search ad — Amazon will pay Google for attracting your business. If you click on the second, Amazon gets your business but Google gets nothing. Try “Macys,” “Walgreens,” and “Sports Authority” — you’ll see the same thing.

If you search for eBay, though, you’ll find only a single listing — an unpaid one. Odds are, after marketers at Amazon, Walgreens and elsewhere catch wind of a preliminary study released on Friday, their search listings will start to look a lot more like eBay’s. The study — by eBay Research Labs economists Thomas Blake, Chris Nosko, and Steve Tadelis — analyzed eBay sales after shutting down purchases of search ads on Google and elsewhere, while maintaining a control set of regions where search ads continued unchanged. Their findings suggest that many paid ads generate virtually no increase in sales, and even for ones that do, the sales benefits are far eclipsed by the cost of the ads themselves.

This is a dilemma for Google.  Because it suggests that the way to capitalize on the popularity of their search algorithm is to discriminate against those who don’t pay for ads.  But unless Google reinvents itself as a full-blown paid advertising site, such discrimination is likely to raise legal issues.

Here I am on the podcast Hang Up And Listen with hosts Stefan Fatsis, Mike Pesca and Josh Levin.  Its a sports oriented podcast and I am talking about Purple Pricing. They had some very good questions.  I come in at about the 25 minute mark.

Professional soccer leagues tend to be dominated year after year by a small number of top teams.  Major League Baseball on the other hand, has seen World Series appearances by the Detroit Tigers, the Texas Rangers, the Philadelphia Phillies, the Tampa Bay Rays, etc.  It seems like any team can assemble a champion.

These two sports have very different production functions.  A baseball team is basically a collection of individuals.  Among team sports its the closest thing to an individual sport. A team’s output is basically the sum of individual outputs with very little complementarity.  In baseball there is very little talk of one player making his teammates better.  The production function is additive and, offensively, players are perfectly substitutable.

Soccer is at the other extreme where players are highly complementary.  Scoring a goal is a total team effort.  Even the best striker needs good chances.  In soccer, the best players are more productive when there are other good players on the team.  The production function is closer to Leontif.

These differences in production explain the differences in market structure.  Consider competitive bidding for a top player in the two sports.  In baseball that player’s marginal product is the same on any team he would play for so many teams will compete and any team could land him.  In soccer that player’s marginal value is highest for the team that is already the best.  The competition is going to be very weak and he is likely to sign with the best team.

In baseball competition levels the playing field.  In soccer it tilts it even further.

Many laws that restrict freedoms are effectively substitutes for private contracts. In a frictionless world we wouldn’t need those laws because every subset of individuals could sign private contracts to decide efficiently what the laws decide bluntly and uniformly.  But given transaction costs and bargaining inefficiencies those blunt laws are the best we can do.

Some people might want to sign contracts that constrain themselves.  For example I might know that I am tempted to drink too many Big Gulps and I might want to contract with every potential supplier of large sugary drinks, getting them to agree never to sell them to me even if I ask for it.  But this kind of contract is plagued not only by the transaction costs and bargaining inefficiencies that justify many existing planks in the social contract, but in addition a new friction:  these contracts are simply not enforceable.

Because even with such a contract in place, when I actually am tempted to buy a Slurpee, it will be in the interest of both me and my Slurpee supplier to nullify the contract.  (It doesn’t solve the problem to structure the contract so that I have to pay 7-11 if I buy a Slurpee from them.  If that contract works then I don’t buy the Slurpee and 7-11 would be willing to agree to sign a second contract that nullifies the first one in order to sell me a Slurpee.)

These considerations alone don’t imply that it would be socially efficient to substitute a blanket ban on large sugary drinks for the unenforceable contracts. But what they do imply is that it would be efficient for the courts to recognize such a ban if a large enough segment of the population wants it. (And this is no way intended to suggest that one Michael Bloomberg by himself constitutes a large enough segment of the population.)

The Magic Kingdom of Data:

The Walt Disney Co. recently announced its intention to “evolve” the experience of its theme park guests with the ultimate goal of giving everyone an RFID-enabled bracelet to transform their every move through the company’s parks and hotels into a steady stream of information for the company’s databases.

…Tracking the flow through the parks will come next. Right now, the park prints out pieces of paper called “FastPasses” to let people get reservations to ride. The wristbands and golden orbs will replace these slips of paper and most of everything else. Every reservation, every purchase, every ride on Dumbo, and maybe every step is waiting to be noticed, recorded, and stored away in a vast database. If you add up the movements and actions, it’s easy to imagine leaving a trail of hundreds of thousands of bytes of data after just one day in the park. That’s a rack of terabyte drives just to record this.

Theory question:  Suppose Disney develops a more efficient rationing system than the current one with queues and then adjusts the price to enter the park optimally.  In the end will your waiting time go up or down?

Eartip:  Drew Conway

Congratulations to our colleague Aviv Nevo on his appointment to this position which Thomson-Reuters says will make him the top non-lawyer at the Department of Justice (there’s a joke in there somewhere).

Aviv joined our department the same year I rejoined and we both wanted the same office.  Highest seniority in our department determines priority for choosing offices and to break the tie there was a coin toss.  I was in Boston and couldn’t actually witness the coin toss but they tell me I lost.

So Aviv got the office, but he also got seniority which means he is in line to be chairman before me.  I am sure he will be back with us in time to take his turn.

Imagine a genie which randomly imposes across-the-board budget cuts unless Congress votes to stop them before they happen.  This would be a good genie.

Its easy to blame the other side for not coming to an agreement.  The genie’s cuts will happen because both sides will blame the other for not reaching an agreement to stop them.  This is different than proposing and approving of cuts yourself because you would get the blame for that.

And of course a random genie is blameless.

It’s not a first-best genie.  The cuts are random and across the board.  But because of the asymmetry of blame they wouldn’t happen otherwise.

Sadly its not even a real genie so the cuts never happen.  But Congress and President Obama have now learned how to replicate the genie:  impose the cuts on a future congress.  From the point of view of the future congress the previous congress is essentially a random genie.

The previous congress, not being an actual genie, nevertheless avoids blame because everyone expects the next Congress to do the sane thing and replace the sequester with something sensible.

All we can hope now is that the current Congress looks at this sequester “debacle” and concludes that in order to make it work as intended the next time the threatened cuts have to be even bigger.

Consider a team selling tickets for its upcoming baseball season. Before the season begins it offers a bundle of tickets for every game. Some of these games however are certain to have very low attendance (games on a Tuesday, games against poor opponents, etc.) The tickets for these games will be placed on the secondary market at very low prices. Indeed one of the biggest problems for teams is the inability to prevent those secondary market prices from falling so low that they cannibalize single-game box office sales. The problem is so severe that many baseball teams are making arrangements with StubHub to enforce a price floor on that exchange.

The problem has a much simpler solution: stop selling season tickets. The team should instead offer the following type of bundle:  you may purchase tickets for all of the predictably high-demand games at the usual season ticket discount.Then you may add to that bundle any subset of the low-demand games you desire but each at a price equal to the face value of the ticket.

This arrangement will make both season ticket holders and the team better off. Season ticket holders will opt not to add the low demand games (unless the opponent is a team they really like for example) and since they weren’t going to those games anyway they are saving money.

The team will increase revenue: supply of tickets to low demand games will be controlled. Secondary market tickets will be priced at or near face value because nobody will buy a ticket at face value for a lousy game unless they actually plan to use the tickets. This enables the team to hold prices at their desired (i.e. revenue maximizing) level without cannibalism.

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