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A new C.E.O. is appointed. What are the opinions of the employees and how are they going to react?
In England, where I grew up, the cliche is that people are looking for excuses to denigrate successful people and pull them down. Envy is the pertinent sin from the seven deadlies. My intuition for American norms is poor but my impression is that employees will rally around the C.E.O. Contradictory data is ignored and a big fan club develops spontaneously.
If employees diss or extol the boss whatever her true qualities, a rational observer cannot infer anything about the C.E.O. in cultural equilibrium. But if observers herd, there is an idolatry bubble. In an American bubble, the C.E.O. is a superstar. When the facts come out, the bubble bursts and the C.E.O.’s collapse is huge. In an English bubble, once the C.E.O. departs, employees will look back fondly on her tenure while complaining about the new C.E.O. (Tony Hayward straddles both cultures so it hard to classify him!)
Careful investors should short American firms and go long on English firms.
I’m revisiting old haunts to try to get back into my Chicago equilibrium. Today, I ended up at Nazareth Sweets to pick up baklava for a party tonight. An assortment of 40-50 sets you back, wait for it……..$14! The pricing is the opposite of Pasticceria Natalina.
I am worried abut the calorific content but luckily it’s far enough from Evanston that I do not end up there too often. I love the walnut baklava and the bamya. The knaffeh is repulsive in my opinion. At the risk of causing an uproar, I somewhat concur with an earlier post of Jeff’s on Asian desserts as far as his point extends to knaffeh from the Middle East. Anyway, it is always good to buy some knaffeh – have some after one piece of walnut baklava so it grosses you out and you don’t eat any more dessert.
Regional data is available on civilian deaths from insurgent activity and counterinsurgent activity in Afghanistan. There is also data on the level of insurgent attacks. In principle, this might allow an analysis of the impact of civilian deaths on insurgent and insurgent support. If civilian deaths caused by insurgents cause an increase in support for counterinsurgents, perhaps the local population will give information about insurgent location to the opposite side. Then, insurgent attacks will decline. If civilian deaths caused by caused counterinsurgent activity increase support for insurgents, perhaps insurgents find more recruits leading to more attacks in the future etc etc.
A recent paper by Condra et al attempts to study these issues. One key finding:
“Counterinsurgent-generated civilian casualties from a typical incident are responsible for 6 additional violent incidents in an average sized district in the following 6 weeks.”
Are the causal statements water-tight? I wasn’t sure but certainly the questions are apt. This account summarizes many of the study’s findings.
If Indian capitalism has left you behind, your remaining options are begging or a scam to rip off tourists. A British journalist encountered this scam:
“I was emerging from an underpass in Connaught Place when a shoeshine man came up to me, and whispered into my ear the word “shit”. He then pointed at my right shoe on which sat, to my amazement, a small slug of brownish goo. He offered to wipe it off, in return for 100 rupees – but I suspected something was, well, afoot, and I cleaned it with a few leaves. Some months later it happened again and I had a minor altercation with the shoeshine man. One day, I decided I’d photograph the person who had squirted my shoe. But I was daydreaming as I wandered through the underpass – and was squirted again. This time, I’m embarrassed to say, I became incandescent with rage. To the consternation of passers by, and to my everlasting shame, I grabbed the man and rubbed the filth off my shoe on to his trousers.”
It seems more original than the “Come into my carpet shop – I give you good price” scam but it has a rich history:
“I also heard about older versions of the scam, in Cairo during the Second World War, and most unexpectedly in a book published in 1948, The Otterbury Incident by Cecil Day-Lewis. There is one scene in which boys hidden in a cellar use flit guns to spray the shoes of passers-by with muddy water. Two other boys are waiting a little way off, next to a sign reading “SHOE-SHINE – 3d”. Flit guns were a household device for spraying insecticide – and they’re still used in India.”
FYI: A Flit gun is a hand-pumped insecticide sprayer used to dispense Flit, a brand-name insecticide widely used against flies and mosquitoes between 1928 and the mid-1950s. Although named after the well-known brand, “Flit gun” became a generic name for this type of dispenser.
You and a partner are employed on a joint project. The probability of success depends on your joint effort and, if the project succeeds, you both get a payoff of one. Effort is costly. This scenario is loosely based on Holmstom’s classic Moral Hazard in Teams model. In one version of this model there is a free-rider problem.
That’s the case where you and your partner agree that both your costly efforts contribute to the success of the project. The harder you work, the more likely success is for you but also the more likely is success for your partner. You do not take the positive externality into account in your effort choice and exert too little effort from the perspective of your partnership. This is the free-rider problem. If somehow either you or your partner could be inspirational and motivate both of you to work for the “common good”, the team would get closer to the joint surplus maximizing solution and everyone would be better off. The partners share a common “vision” but have to be motivated to work towards it.
But there is another scenario. In this one, you and your partner disagree about the direction in which the organization should be going. You think his costly effort reduces the probability of success. He thinks the same about your effort. Your effort exerts a negative externality on your partner and vice-versa. Each player does not take this into account and exerts too much effort from the perspective of the partnership. In fact if both players exerted no effort what so ever, they would both be better off according to each of their payoff functions. There is no jointly shared vision in this organization.
Actually, if you are in this latter situation, doing nothing is doing good. Your costly effort is bad for both of you and it is selfish of you to work. So, slack off and go to the beach. You will be taking one for the team.
We are reliving our Riesling dinner at Oleana wine by wine. I found the Leitz Magdalenenkreuz on sale for $18 at Binnys. The great thing about Riesling is that it goes with all types of food. We had it for dessert with nuts and fruits. The fruits kill the sweetness and leave a hint of lemon and acid. The nuts accentuate the taste apple, pear and lychee. This wine would go well with Asian food. I would have liked more minerality and acid. It has only 8% alcohol so you can drink away freely.
Chicago somewhat controversially privatized its parking meters. Now you have to walk over to a machine, put in money or a credit card, get the receipt and put in on your dashboard – the meters are defunct. It’s $1.25/hour so it’s still way cheaper than parking in a private lot. And now the machines work, unlike many that were installed earlier.
And here’s the cool thing: Suppose you’ve paid for two hours, only use up an hour and drive off and park somewhere else. As long as parking costs the same in new spot where your car ends up and the parking rate is the same, your receipt is still valid and you do not have to pay for more parking. There is less chance of wasting quarters like you do now when you leave the meter with time on it.
The fact that the receipt gives you option value means you might put in extra. The company makes more money potentially because of this. Also, with a meter, the next person to park might get lucky and get some time paid for by someone else. This is a classic positive externality – each individual parker does not take into account and skimps on how much they out into the meter. This cannot happen anymore because your receipt stays in your car (or goes into the trash) and not to someone else. So, they have to pay for their time themselves. Another round of extra money for the parking company.
But, all in all, it not as bad as people thought originally. And I love my durable receipt.
An executive rises through the ranks at a large organization and becomes C.E.O. He makes terrible decisions or is a passive leader, letting the firm slide into obscurity. The firm is publicly traded and poor performance is observable. But the C.E.O. manages to get another great job, leading a “turnaround” at another large organization. He uses the same strategy that performed so badly in the first firm. His second firm also goes down the tube. This story is loosely based on an example I use in one of my M.B.A. classes. And I have another new example. How can it happen?
The first theory is pretty simple. If a project fails, it is hard to know where to lay the blame – the economic climate, the C.E.O., bad luck etc. etc. The the C.E.O. can come up with a story that helps him look like a leader not a loser. Even worse, the people he works with want to get rid of him. Perhaps they say nice things and sell a lemon to someone else. The potential recipients of the lemon should know the perverse incentives in play and avoid the winner’s curse. Perhaps the consult insiders they trust and with whom they will likely have a long future relationship.
But this theory does not accommodate cases where the C.E.O. publicly proposed and pushed a failed strategy at the first firm. Or very obviously did not do his job. Even these characters can pull off a successful exit. The rationale for this phenomenon has two parts: (a) the pool of viable potential leaders is small and (b) very few people have the experience of running a large organization. So, even if they performed poorly, perhaps they can learn from their mistakes and do better the second time around.
This presumes that a known bad performer carries less risk than an unknown performer because the former has experience. I find it hard to believe. A rational choice interpretation would be nice for the conscious purchase of a known experienced lemon who might change over a potential inexperienced mango.
I am giving my paper with Jeff at the annual conference of the Society of Economic Dynamics in Montreal. And I just found 5 dollars Canadian on the floor in a conference room. At first, I thought it was a practical joke but no-one popped out of a room and snapped a photo. So, I guess it was not a setup. In present company, my experience is consistent with the following joke:
An economics professor and a grad student are walking along the sidewalk, and the grad student spots a twenty dollar bill on the sidewalk. He says, “Hey professor, look, a twenty dollar bill.” The professor says, “Nonsense. If there were a twenty dollar bill on the street, someone would have picked it up already.” They walk past, and a little kid walking behind them pockets the bill.
You are a poor pleb working in a large organization. Your career has reached a stage where you are asked to join one of two divisions, division A or division B. You can’t avoid the choice even if you prefer the status quo – it would be bad for your career. Each division is controlled by a boss. Boss A is sneaky and self-serving. perhaps he is “rational” in the parlance of economics. Even better, perhaps his strategy is quite transparent to you after a brief chat with him so you can predict his every move. He is the Devil you know. Boss B might be rational or might be somewhat altruistic and have your best interests at heart. He is the Devil you don’t know. Neither boss is going anywhere soon and you have no realistic chance of further advancement. You will be interacting frequently with the boss of the division you choose.
Which division should you join?
You face a trade-off it seems. If you join division A, it is easier for you to play a best-response to boss A’s strategy – you can pretty much work out what it is. If you join division B, it is harder but the fact that you don’t know can help your strategic interaction.
For example, suppose you are playing a game where “cooperation” is not an equilibrium if it is common knowledge that both players are rational – the classical story is the Prisoner’s Dilemma. Then, the incomplete information might help you to cooperate. If you do not cooperate, you reveal you are rational and the game collapses into joint defection. If you cooperate, you might be able to sustain cooperation well into the future (this is the famous work of Kreps, Milgrom, Roberts and Wilson).
On the other hand, if you are playing a pure coordination game, this logic is less useful. All you care about is the action the other player is going to take and you want to play a best response to it. So, the division you should join depends on the structure of the later boss-pleb game.
Perhaps it is possible to frame this question in such a way that the existing reputation and game theory literature tells us if and when incomplete information should be welcomed by the pleb so you should play with the Devil you don’t know and when it is bad, so you should play with the Devil you know?
Some organizations have clearly defined goals and many of the tactics to meet their goals come readily to mind. An economics department wants to produce the best research possible and the best grad students possible. They try to hire great professors, train students well and place them in good universities. If the organization is resource constrained, there will be conflict. A good leader for this kind of organization needs strong arbitration and mediation skills but not vision. A neutral player is the ideal leader. A leader with strong preferences one way or the other will alienate some members and escalate conflict. Only if the organization needs to radically alter course will vision be required. For example, if an economics department wants to leap up in the rankings or is in danger of decline, a visionary needs to take control.
But in most organizations and at most points in time, things are not so easy. A firm wants to maximize profits but how should it do so? For example, Microsoft has done very well for itself but how many it avoid being left behind as Apple and Google capture the imagination of new consumers? And Microsoft needed a vision when it started and when it grew. In some organizations, there is a fundamental uncertainty about what an organization should be doing and where it should be going. Almost everyone may accept that the status quo is not sustainable and that a leader with a vision for the organization should take control. In this scenario, there are common values among the members of the organization and for better or worse it will move in some direction established by the vision of the leader. If everyone does not agree, then the organization will stay at the status quo. It may slowly or even rapidly depreciate. Only a random shock can salvage it.
With many neighbors willing to help with childcare, my wife and I managed to escape for a quick meal on our own. We went to Anteprima, within easy striking distance of Evanston. At a dinner at Rialto in Boston, I’d guessed that we’d eat better and cheaper at Anteprima and our experience proved me right. The chef has the market-driven sensibility that is all the rage. I was in luck because someone must have brought squash blossoms to the market that week. So, I had lovely fried zucchini flowers stuffed with ricotta-herb mix. My wife had the Tuscan crostini and enjoyed it as well. We both settled for the spaghetti with tomato, chilis and crispy breadcrumbs – easily made at home unlike the stuffed squash blossoms! We didn’t regret it as it was executed perfectly.
In New York City, people might expect this kind of meal from their local Italian joint. After Boston, it seemed extraordinary to us.
For dessert, we ended up getting overpriced gelato at Pasticceria Natalina. The owner makes quite exceptional pastries but the pricing is crazy. No-one else was there and I wonder if this unique place is going to last too much longer. Someone should tell them about the trade-off between margin and volume and perhaps also how to calculate margin correctly in the first place – don’t incorporate fixed and sunk costs into your pricing decision! It makes you think that elementary economics is actually useful for business owners.
I am driving to Chicago from Boston with two kids in the back of my car. Random observations:
1. Julia Child’s My Life in France audiobook is family-friendly. It sent the five year old to sleep and the nine year enjoyed it quietly, as did I. Julia got a couple of rejections before getting her magnum opus accepted by Knopf.
2. Ithaca, Rome, Troy, Seneca Falls, Utica, Syracuse…..Why do so many towns have ancient, classical names?
3. We are staying in Geneva, faux-Switzerland, not Greece or Italy. I recommend the Ramada Inn, right on the lake.
Obama has two focal options in Afghanistan, “Stay the Course” or “Cut and Run”. Stay the Course means continuing the current counterinsurgency (COIN) strategy of “winning hearts and minds” of Afghan civilians. Cut and Run means getting out as soon as possible and leaving the Afghans to deal with their own mess. In either scenario it is optimal to sack McCrystal.
McCrystal is a strong believer in COIN so if you want to Cut and Run, it s better to replace him with someone else, a true believer in Cut and Run. If Obama wants to Stay the Course, McCrystal is a possible candidate. But there is a reputational cost, looking weak, to Obama of retaining McCrystal. Replacing him carries the risk that the COIN strategy fails. But Petraeus is the author of COIN so this risk is minimized if Petraeus replaces McCrystal. So, even if you want to Stay the Course, it is optimal to sack McCrystal.
Pretty simple?
In a must-read article in the New Yorker (subscription required), Anthony Lane breaks down strategies for singers in the Eurovision Song Contest. All the countries taking part get to vote for contestants from other countries. The main problem – anyone who does not sing in English is at a big disadvantage because voters can’t understand them. Ironically, this means that contestants have to adopt English for the lyrics. This can lead to beautiful poetry:
“Your breasts are like swallows-a-nesting” Sweden 1973
Unfortunately, strategizing only has an impact on a small batch of swing voters because most countries vote along geo-political fault lines. Cyprus votes reliably for Greece and vice-versa. Georgia cannot vote for Russia however mellifluous is the Russian entry. The Scandinavians vote for each other etc etc. The decisive votes for going to come from countries that are largely outside a current zone of conflict . And votes are going to go to “common value” candidates that have not irritated anyone. Ireland is a clear favorite, singing in English and being somewhat removed from the center of any Euro-controversies.
American has imported many entertainment phenomena from Europe (e.g. Simon Cowell). Why not an Amerivision Song Contest which each state submitting a contestant? A Presidential election with red states and blue states only gives us a shallow appreciation of what divides and unites Americans. An Amerivision Song Contest would give a deeper insight into the soul of America. Step aside American Idol.
A hot day in Boston. What could be better than a trip to the leafy sculpture garden at the DeCordova Museum? Try to help the red man climb out of the Earth. Build dams in the stream in the Rain Gates. Tap on the Two Black Hearts to see if they hollow. Try to take out the stovetop espresso maker embedded in one of the hearts.
There is a lot more to see and do in the garden. The Museum itself is in a lovely building. You can see the faux château roofs as you walk around the garden. It has interesting exhibits and a little café that serves pre-made sandwiches and salads. But the Museum is not the reason to go to the DeCordova. It is the sculpture garden that makes it worth the trip.
1. The porn, wine, Chateau Petrus nexus.
2. Pretty girlfriend of Spanish goalie distracted him and caused horrible loss? Perhaps not.
3. Pretty ex-girlfriend of English goalie distracted him and caused horrible mistake? Who knows but sources are similar to 2.
Just as I get ready to head back to Evanston, I find a great coffee shop for work near MIT!
I like Crema Coffee in Harvard Square for its coffee and even its food. Unfortunately, it’s too crowded and noisy for work. 1369 Coffee House is a little better for work but the products are worse. And both branches, Central and Inman Square, are a bit cramped. But a few blocks south of Central Square I found Andala Coffee House. There’s table service, so the prices are a bit higher than you might expect. The mint tea and hummus were well worth the extra few bucks. There’s an outside patio, a porch that sticks out over the street and, as you come in, a large room with lots of windows. It was a little chilly to sit outside and the porch was full so I had to settle for the large room. It was fine. The music is mellow and there is some quiet, pleasant chatter in the background. I worked for two hours at high concentration and left regretting I had not found Andala earlier. I’ll be back often over the next couple of weeks.
Vast mineral resources in Afghanistan have recently been discovered by American geologists.
Nigeria has oil, Angola has diamonds but neither has a stable political system or a booming economy spreading wealth to all its citizens. GDP fell by 1.3% per capita on average in OPEC countries from the late sixties to the late nineties. On the other hand, Norwegians are quite happily enjoying their oil revenue.
There are economic reasons for a resource curse. The price of the resource can fluctuate on world markets and so can the income of the producer. The income generated by the resource can push up the price of non-tradables and distort domestic allocation of inputs. But I would guess all of these pale into insignificance with the political implications of a resource curse.
If the force of law is weak, there is an overwhelming temptation to steal resources. Rents are dissipated by fighting or defensive expenditures. Leaders are short-termists and over-extract resources fearing they will be out of power soon.
The rule of law must precede development. A windfall can provoke contests not prevent them.
You (the sender) would like someone (the responder) to do you a favor, support some decision you propose or give you some resource you value. You email the responder, asking him for help. There is no reply. Maybe he has an overactive Junk Mail filter or missed the email. You email the responder again. No reply. The first time round, you can tell yourself that maybe the responder just missed your request. The second time, you realize the responder will not help you. Saying Nothing is the same as saying “No”.
Why not just say No to begin with? Initially, the responder hopes you do not send the second email. Then, when the responder reverses roles and asks you for help, you will not hold an explicit No against him. By the time the second email is sent and received, it is too late – at this point whether you respond or not, there is a “No” on the table and your relationship has taken a hit. The sender will eventually learn that often no response means “No”. Sending a second email, while clearing up the possibility the first non-response was an error, may lead to a worsening of the relationship between the two players. So, the sender will weigh the consequences of the second email carefully and perhaps self-censor and never send it.
Then, Saying Nothing will certainly be better than Saying No for the responder and a communication norm is born.
My male colleagues at Kellogg are a clean-shaven, short-haired bunch. The first hypothesis is that the “business casual” atmosphere at a B-School makes the a clean-cut JCrew look focal and any deviation from it socially uncomfortable (though I have no qualms about ignoring it!). But colleagues on the Econ Dept, which is outside the B-School, also largely subscribe to this norm. Even short-sporting, flip-flop wearing, oldish-wannabe-surfer-economists from Southern California seem to shave daily. I can remember this pattern from grad school: the Europeans were pretty casual about shaving and the Americans were much more likely to have the clean-cut look. There was no business casual social norm to conform to in grad school, so I don’t think that explanation carries all the water.
Another rationale for the buzz cut can be safely dismissed: if you think that having sticking with short hair saves on visits to the barber, you’re wrong. For this rationale to work, you have to be willing to have long hair too, otherwise you’re going quite often to the barber to keep it short all the time. So if you are unwilling to go long, going short keeps your barber nicely employed.
I am led then to the Jeff Van Gundy explanation:
My dad said, ‘You can’t have normal-length hair until high school.’ It was a form of discipline.
Not only is it is a form of discipline, it is a signal of discipline. You are disciplined enough to have regular haircuts and, by extension, shave regularly. On the other hand, Europeans are busy counter-signaling: you are undisciplined and do incredibly well on exams, so you must be really smart! No wonder Europeans and Americans can have such a hard time communicating with each other.
Hmmn. After all this analysis, I guess I still have to work out what look to adopt. After all, some scruffy people are hirsute because they truly are undisciplined. Gotta make sure I’m not in that group.
The lead article in the June 2010 edition of the Journal of Political Economy is
| Does Professor Quality Matter? Evidence from Random Assignment of Students to Professors | ||
| Scott E. Carrell and James E West | ||
Student evaluations may not be a good signal of teaching quality because
“Professors can inflate grades or reduce academic content to elevate student evaluations.”
The authors argue that if a student takes Calculus I, say, their performance in Calculus II is a good signal of how well they learned the material in Calculus I. So their study:
“uses a unique panel data set from the United States Air Force Academy (USAFA) in which students
are randomly assigned to professors over a wide variety of standardized core courses. The random assignment of students to professors, along with a vast amount of data on both professors and students, allows us to
examine how professor quality affects student achievement free from the usual problems of self-selection. Furthermore, performance in USAFA core courses is a consistent measure of student achievement
because faculty members teaching the same course use an identical syllabus and give the same exams during a common testing period. Finally, USAFA students are required to take and are randomly assigned
to numerous follow-on courses in mathematics, humanities, basic sciences, and engineering. Performance in these mandatory follow-on courses is arguably a more persistent measurement of student learning.
Thus, a distinct advantage of our data is that even if a student has a particularly poor introductory course professor, he or she still is required to take the follow-on related curriculum.”
Their methodology:
“We start by estimating professor quality using teacher value-added in the contemporaneous course. We then estimate value-added for subsequent classes that require the introductory course
as a prerequisite and examine how these two measures covary. That is, we estimate whether high- (low-) value-added professors in the introductory course are high- (low-) value-added professors for student
achievement in follow-on related curriculum. Finally, we examine how these two measures of professor value-added (contemporaneous and follow-on achievement) correlate with professor observable attributes
and student evaluations of professors. These analyses give us a unique opportunity to compare the relationship between value-added models (currently used to measure primary and secondary teacher quality) and
student evaluations (currently used to measure postsecondary teacher quality).
Their findings:
Results show that there are statistically significant and sizable differences in student achievement across introductory course professors in both contemporaneous and follow-on course achievement. However,
our results indicate that professors who excel at promoting contemporaneous student achievement, on average, harm the subsequent performance of their students in more advanced classes. Academic rank,
teaching experience, and terminal degree status of professors are negatively correlated with contemporaneous value-added but positively correlated with follow-on course value-added. Hence, students of less
experienced instructors who do not possess a doctorate perform significantly better in the contemporaneous course but perform worse in the follow-on related curriculum.
For example:
As an illustration, the introductory calculus professor in our sample who ranks dead last in deep learning ranks sixth and seventh best in student evaluations and contemporaneous value-added, respectively.
Required reading for all serious teachers and students and Deans. Ungated version
My first post on this topic was prompted by reading newspaper stories about Afghanistan and having lunch with Jim Robinson shortly afterwards. (For example, Karzai is sacking trusty lieutenants and moving to form a coalition with the Taliban and perhaps Pakistan.) But who has thought deeply about this issue and come up with some interesting insights? The answer is of course: Roger Myerson. He has an informal overview of his thoughts on state-building. To understand his ideas fully, you have to read the overview. Here are a few insights I pulled out that are most related to my earlier post.
One issue I raised was: How do you ensure political competition is constructive not destructive? Myerson says the key is that the losers in any political competition feel they have the opportunity to win a future competition. Otherwise, what choice to they have but to compete from outside the political system and trigger conflict?
An alternative might be to install a puppet dictator who faces no competition. But here I repeat my earlier point: this dictator will be rapacious and steal from his citizens. To keep him in line, constructive political competition is necessary.
Myerson’s overview has his thoughts on how to build constructive national and local competition. Again, I recommend you take a look.
With news of a shaky, insecure Hamid Karzai and bad news coming out of Afghanistan every day, it may be too late to ask how a new system of goverment should be created. But it’s an interesting question nevertheless! Here are some possibilities.
A state must at the very least protect property rights. Citizens must be protected from each other and contracts must be enforced to facilitate trade. More subtly, citizens must be protected from the state itself. Otherwise, the fruits of their labor can simply be confiscated by the state and they will have little incentive to engage in productive economic activity.
This kind of state exists in many Western democracies. A judicial system enforces contracts. A politician who interferes in lawful activity faces checks and balances to limit his ability to be rapacious. The checks and balances can come from other branches of government or through political competition. This is about the best system found so far. If it could be established in Afghanistan and Iraq, it would be great!
Another kind of state has an elite (or a dictator) which enforces property rights. They tax their citizens for the enforcement. The elite is tempted to steal from the citizens: there are no checks and balances. What potentially restrains the elite is that any expropriation will lead to a loss of reputation. The citizens know they stand of being ripped off tomorrow if they work hard today. A patient, far-sighted elite which is secure in power might then have the right incentives not to steal from its citizens.
The third scenario is a little like the first. The state/government does not have monopoly power, it faces competition. But the competition instead of leading to better behavior leads to worse behavior. To stay in power, the government has to kill off other warlords. The threat of being thrown out of power generates short-sighted rational strategies. Exploitation and theft are widespread. This most resembles present-day Afghanistan.
How do we go from one kind of state to another? Which is the best system to set up from an outsider’s perspective?
Afghan security firms provide armed escorts for NATO convoys. Some firms lost their employment because of violent incidents where they killed civilians. But NATO Convoys them suffered greater attacks and the security firms were re-employed. There is an obvious incentive problem:
“The officials suspect that the security companies may also engage in fake fighting to increase the sense of risk on the roads, and that they may sometimes stage attacks against competitors.
The suspicions raise fundamental questions about the conduct of operations here, since the convoys, and the supplies they deliver, are the lifeblood of the war effort.
“We’re funding both sides of the war,” a NATO official in Kabul said. The official, who spoke on the condition of anonymity because the investigation was incomplete, said he believed millions of dollars were making their way to the Taliban.”
This is a Mafia tactic: To get people to pay from protection, you have to create the demand for protection. Supply creates its own demand. There is also a reverse effect: The security firms sometimes bribe the Taliban to keep away from the convoys. With this source of steady income, the Taliban have no incentive to disband and may even have an incentive to expand. Demand creates its own supply.
The second circle seems less pathological than the first. If we cannot find the Taliban ourselves and kill them or bribe them then to stay away from the convoys, we have to use a local security firm. The security firm is an intermediary, adding value and generating surplus. The first circle is destroying surplus, like the Mafia. It is creating a public bad, a security problem, to generate a transfer.
Beyond punishing anyone who is caught planning a deliberate attack, it is hard to see any simple solution. Fewer and fewer countries want to be involved in Afghanistan and so using our own troops is difficult. The Taliban might prefer to be employed in the real economy. But the main alternative to attacking NATO convoys is growing opium. Is that any better than attack and theft?
The entire episode signals that Afghanistan is a Mafia state with leaders acting an profit maximizers, destroying surplus to capture a bigger slice of what’s left of the economic pie. A depressing state of affairs after eight years of war.
Neil is a great businessman as well as a popular songwriter (though he’s unlucky in love and that cost him). In an earlier post, I wondered why artists do not simply price discriminate and not let scalpers get the rents. If they do not want to look exploitative, then can try to use some other instruments (e.g. a refund to loyal fans) to avoid just letting scalpers exploit the fans.
Another answer is that artists actually do perform price discrimination using the scalper as the intermediary:
Less than a minute after tickets for last August’s Neil Diamond concerts at New York’s Madison Square Garden went on sale, more than 100 seats were available for hundreds of dollars more than their normal face value on premium-ticket site TicketExchange.com. The seller? Neil Diamond.
Ticket reselling — also known as scalping — is an estimated $3 billion-a-year business in which professional brokers buy seats with the hope of flipping them to the public at a hefty markup.
In the case of the Neil Diamond concerts, however, the source of the higher-priced tickets was the singer, working with Ticketmaster Entertainment Inc., which owns TicketExchange, and concert promoter AEG Live. Ticketmaster’s former and current chief executives, one of whom is Mr. Diamond’s personal manager, have acknowledged the arrangement, as has a person familiar with AEG Live, which is owned by Denver-based Anschutz Corp.
Selling premium-priced tickets on TicketExchange, priced and presented as resales by fans, is a practice used by many other top performers, according to people in the industry. Joseph Freeman, Ticketmaster’s senior vice president for legal affairs, says that the company’s “Marketplace” pages only rarely list tickets offered by fans.
According to the lead singer of Nine Inch Nails:
the true market value of some tickets for some concerts is much higher than what the act wants to be perceived as charging. For example, there are some people who would be willing to pay $1,000 and up to be in the best seats for various shows, but MOST acts in the rock / pop world don’t want to come off as greedy pricks asking that much, even though the market says its value is that high. The acts know this, the venue knows this, the promoters know this, the ticketing company knows this and the scalpers really know this. So…
The venue, the promoter, the ticketing agency and often the artist camp (artist, management and agent) take tickets from the pool of available seats and feed them directly to the re-seller (which from this point on will be referred to by their true name: SCALPER). I am not saying every one of the above entities all do this, nor am I saying they do it for all shows but this is a very common practice that happens more often than not. There is money to be made and they feel they should participate in it. There are a number of scams they employ to pull this off which is beyond the scope of this note.
StubHub.com is an example of a re-seller / scalper. So is TicketsNow.com.
Of course, the danger is that the fans find out what the artist is doing – e.g. Neil Diamond’s strategy has been fully revealed thanks to the WSJ. Either this leads to a counter-reaction or fans just get used to it and accept the new norms. Hard to say what is happening but the Bon Jovi VIP pricing without using a scalper as a middleman suggests more fans are accepting direct price discrimination by the artist.
(Hat Tip: Troy Kravitz and Mallesh Pai)
David Leonhardt had an interesting column on underestimation of risk. BP’s possible underinvestment in protecting against a gross accident is exhibit one.:
The people running BP did a dreadful job of estimating the true chances of events that seemed unlikely — and may even have been unlikely — but that would bring enormous costs.
Perhaps the easiest way to see this is to consider what BP executives must be thinking today. Surely, given the expense of the clean-up and the hit to BP’s reputation, the executives wish they could go back and spend the extra money to make Deepwater Horizon safer. That they did not suggests that they figured the rig would be fine as it was.
But this does not prove the case. You may buy a stock given the odds of it going up or down. If it goes down you will regret your investment. This does not prove it was wrong to invest in the first place. It might have been right given your initial assessment. The same logic applies to BP.
This is a simple point: regret does not imply that the ex ante decision was bad. Leonhardt is a great economics commentator and journalist. The fact that he makes this elementary mistake shows how easy it is to make.
But there is another factor at work. It is impossible to determine BP’s probability assessment after the fact. They can always claim the chance of a disaster was low. There is no historical data against which to measure their assessment. All we are left with is the option to blame them even if their decision was perfect from an ex ante perspective. Blame involves saying them made a bad decision and holding them to account. This was the key element in Jeff’s earlier post on the Blame Game.
John F Kennedy was born in Brookline and attended Devotion School. Our kids are attending Devotion this year and our third-grader took part in a lovely event at JFK’s birthplace last week. There were some nice speeches, including one by the head of the JFK Presidential Library . It involved this story:
When Jack was quite young but old enough to ride a bike, he played a game of Chicken with his older brother Joe, perhaps on the very street of his birthplace. In classic fashion, they raced towards each other on their bikes. Joe expected some respect from his younger brother. Joe thought Jack would swerve and let him win the game. No such luck. They slammed into each other and had to go to hospital.
I had never heard this story before. I mentioned it to several Americans but they had never heard it either. Everyone knows the famous Chicken story: Khrushchev vs Kennedy during the Cuban Missile Crisis.
Schelling could always take commonplace strategic interactions and draw fundamental lessons from them. Similarly, it would be nice to think that JFK’s childhood experience gave him some insight into how to play Chicken when the stakes were high.
So good that it’s worth the hypocrisy:
2. Best Salami (downside – somewhat complicated to order and hard to slice unless you invest in your own salami slicer)
3. Best Bacon Products (especially the Speck)
Cheap Talk 
