Author Archive

It has been noted that Kindle best sellers are often ebooks with a price of 0.00.  See for example this New York Times article:

The argument in the article is that the publishers drum up interest in an unknown author and future sales by making the book available for free.  It caught my interest that many of the publishers that follow this strategy are Christian booksellers with a mission that appears to go beyond maximizing profits.

Here are the top 10 Kindle Best Seller from February 10, 2010

The Apothecary’s Daughter, Julie Klassen, Bethany House Publishers, price 0.00
More Blood, More Sweat and Another Cup of Tea, Tom Reynolds, The Friday Project, price 0.00
The Equivoque Principle, Darren Craske, The Friday Project, price 0.00
Talk of the Town, Lisa Wingate, Bethany House, price 0.00
Daisy Chain: A Novel, Mary E. DeMuth, Zondervan, price 0.00
Icy Heat: A Heat series story, Leigh Wyndield, Samhain Publishing, price 0.00
Dear John, Nicholas Sparks, Grand Central Publishing, price 4.39
Kindle Shortcuts, Hidden Features, Kindle-Friendly Websites, Free eBooks & Email from Kindle: Concise User Guide for Kindle 2, MobileReference, price 0.25
The Help, Kathryn Stockett, Putnam Adult, price $8.55,
The Adventures of Sherlock Holmes, Sir Arthur Conan Doyle, Public Domain Books, price 0.00

Of the free (or nearly free) offerings, 3 out of 8, or 38% are published by either Bethany House or Zondervan, both Christian booksellers.  The missions of these booksellers (from their web pages) seem to go beyond profit maximizing, which made me wonder if they are providing books for free on the Kindle to drum up future sales or if the availability of free books with a Christian message is a (somewhat) subtle form of evangelism.  Judge for yourself — the books are free!

Bethany House
Mission
The purpose of Bethany House is to help Christians apply biblical truth in all areas of life—whether through a well-told story, a challenging devotional, or the message of an illustrated children’s book. We are diligently committed to offering the best in editing, design and marketing to make each book as inspiring, challenging, enjoyable and attractive as it can be

Zondervan (a division of Harper Collins):

Our Mission & Values
The Reason We’re Here
Zondervan is a mission-driven and value-based company. Our organizational culture is uniquely centered on biblical principles. All our employees—from entry-level to leadership—are focused on and passionate about upholding the mission and shared values of this company.
OUR MISSION
To be the leader in Christian communications meeting the needs of people with resources that glorify Jesus Christ and promote biblical principles.

When you look for a digital camera or LCD TV on Amazon, often you can’t see the price till you add it to the shopping cart.  This is a little bit on an inconvenience so why does Amazon do it?

It turns out the producers force Amazon to do it.  Adding the extra step to shopping  has two effects.

First, the prices do not turn up on comparison shopping sites like Pricegrabber.com so it is harder to search for a good deal.  Second, every time you search you incur an extra cost to discover the price at another internet retailer.  These small differences can make a huge difference.

The classic logic for how small search costs can have a dramatic impact on prices is offered by the Diamond search model.  Suppose stores are selling a homogenous good but you do not know the price they set till you visit the store.  Each visit costs you a few pennies in search cost.

If there is no search cost, the unique equilibrium has all stores setting price equal to cost and making no profits on sales.  But this cannot be an equilibrium with positive search costs.  Then, one store can raise its price secretly by a few cents.  Once the customer has entered and sunk his cost of search, he will buy anyway knowing that taking the cost of search into account for his visit to another store, it is not worth it to search.  It is easy to see what any equilibrium must be symmetric, otherwise all consumers will go to the store with the lowest prices and the store with the lowest prices has an incentive to raise them.  So, what is the symmetric equilibrium?  It is the monopoly price!  Only at that price does no store have the incentive to raise the price as it will choke off too much demand.

So, a small search cost leads to a dramatic change in prices from zero profit to monopoly profit.  This conclusion is too stark and it can be made less dramatic by adding product differentiation but the core idea remains the same.  Search costs give firms  some degree of market power and allow them to raise prices.  This is the strategy being attempted on Amazon.  It will be interesting to see how it plays out.

A former vice president at Microsoft writes how destructive competition within the company is destroying innovation:

“For example, early in my tenure, our group of very clever graphics experts invented a way to display text on screen called ClearType. It worked by using the color dots of liquid crystal displays to make type much more readable on the screen. Although we built it to help sell e-books, it gave Microsoft a huge potential advantage for every device with a screen. But it also annoyed other Microsoft groups that felt threatened by our success.

Engineers in the Windows group falsely claimed it made the display go haywire when certain colors were used. The head of Office products said it was fuzzy and gave him headaches. The vice president for pocket devices was blunter: he’d support ClearType and use it, but only if I transferred the program and the programmers to his control. As a result, even though it received much public praise, internal promotion and patents, a decade passed before a fully operational version of ClearType finally made it into Windows.”

He adds:

“Internal competition is common at great companies. It can be wisely encouraged to force ideas to compete. The problem comes when the competition becomes uncontrolled and destructive. At Microsoft, it has created a dysfunctional corporate culture in which the big established groups are allowed to prey upon emerging teams, belittle their efforts, compete unfairly against them for resources, and over time hector them out of existence.”

This is a classic problem sometimes known as the “not invented here” syndrome: if you did not invent it, you denigrate it.

Tomas Sjöström and I have a published paper on this topic.   There’s lots of stuff going on in it but here is one key idea:  Suppose two players are competing for promotion and one is more senior than the other. Then, the senior guy has the incentive to denigrate the work of the junior guy because the only way the junior guy can leapfrog him in the career race is if he has a successful project.  So, the senior guy tries to squash the junior guys ideas.   But the junior guy has the reverse incentives, to exaggerate the quality of his own work.  It turns out that this incentive is easier to deal with than the denigration incentive.  This is because exaggeration carries a risk: if your idea is tried out and is a huge failure, your career is in ruins.  This reduces your incentive to exaggerate bad ideas.   But denigration kills ideas so you never find out if the denigrator was lying.  So our conclusion is that well designed self-assessment is better than peer review.

If only Microsoft listened to us, they’d be more profitable. Call me Bill, Steve Ballmer, anybody….

There is still one question: Does Apple have a better system in place to manage innovation?  If so, what is it?

Toyota is undertaking a massive recall of vehicles to fix accelerator pedals.  Obviously, Toyota’s reputation has taken a huge hit.  How are their incentives aligned with consumers in terms of fixing the problem?

At a fundamental level, Toyota has a huge incentive to make sure that they solve any problems in cars on the road and in dealerships and that there are no problems in cars they make in the future.  If they put in a claimed fix to the problem and it’s not a real fix and there is an accident, their reputation takes another huge hit.  The people who worked at AIG and caused the problems can find other jobs because they are still nameless to consumers.  But Toyota’ brand name is its reputation and if that goes, suddenly G.M. has a future after all.

There are some conflicts of interest though between consumers and Toyota.  Toyota have two fixes to the pedal problem.  One is to just put in a new pedal.   The second is to add a steel bar to the bottom of the pedal to stop it sticking to the spring.

To the average consumer, a new pedal sounds better than the patched up old one.  And it also sounds more expensive suggesting that Toyota is following a quick and dirty path to a recall with the steel bar.   In an NPR interview, the Toyota CEO said both fixes cost roughly the same amount.  But this does not convince non-experts, especially when Toyota has been so slow to react to the problems.  So, it seems Toyota should go with the new pedal solution for everyone.  Why aren’t they doing that?

This is where some conflict of interest appears: the steel bars can be produced more quickly than the new pedals.  Toyota would like to get the cars on the road fixed as soon as possible to avoid another crash.  So, it has decided to go for a fix which is fast but looks suspicious.  This is the problem.

It has to try to make the solution as “above-the-board” as possible.  Perhaps announce that anyone who got the steel bar can get the new pedal later in the year if they are not happy.  If Toyota really believes the steel bar fix is as good as a new pedal, it should give away something free and valuable to make the solution credible and to say “we are sorry”.  People wanting the new pedal should not get the freebie.

Not sure what the freebie should be..how about a discount on your next Toyota purchase?  It should explicitly say that it can be added to any other discounts offered in the future so people know they are definitely getting a good deal

We got this cookbook for our eight year old for Christmas.  Till today, we had only used the pizza recipe and we mainly took the lazy route and bought pre-made pizza dough.  That did not test the quality of the book too much.  Today, we embarked on a two-hour extravaganza and made gnocchi with tomato sauce and an orange cake.  We used canned tomatoes but, apart from that shortcut, we made everything else from scratch. It was a huge success.

The gnocchi tasted totally authentic.  It was really fun to make them, much easier than fresh egg pasta.  The potato and flour combination has the same consistency as play dough.  You roll it into a thin sausage and chop it into gnocchi.  It’s perfect for all age groups.  I think we had a first all family cooking epiphany with the four-year old to the four+ year olds working together like a fairly well-oiled machine.  Gnocchi cook really quickly and you have to scoop them out as soon as they float to the top.  We made enough to freeze half of them for a future dinner.

I don’t really bake so the orange cake was a total revelation.  It’s quite sophisticated.  In fact, there is nothing “childish” about the gnocchi or the cake.  That’s the genius of this cookbook.  It’s not at all patronizing.  The gnocchi aren’t cut into dinosaur shapes to make them go down more easily!  They have chosen some of the easier recipes with less sophisticated knife skills.  They have thought of ways to explain the cutting and chopping so it can be done safely – the eight year old did all the peeling and chopping.  The food is excellent and you get to hang out with your kids and actually cook.  What could be better? This cookbook is a keeper.  We’ve marked all the recipes we’re going to try.  I’m looking forward to the hazelnut cake.

Best restaurant I’ve been to so far in Boston.  High quality, elegant, unfussy food.  I had a “salad” with roasted potatoes and mushroom, a poached egg and truffle sauce.  Totally delicious.  For an entree I had a “epoisses capellacci”: a kind of tortellini shaped like a bishop’s hat stuffed with a stinky cheese.  They floated in a simple melted butter sauces with chopped chives, celery and apple.  Very generous portion and perfect on a cold, Boston night.  For dessert, we split a cookie plate with a salty, saffron gelato (bit like an Indian kulfi).  With the Boston Children’s Museum close by, we’ll be here again!

Senator Ben Nelson was the 60th vote in the Senate on healthcare reform.  He held out for what is now called the “Nebraska purchase,” a side-payment from the federal government to Nebraska to extend Medicaid.  He also got rid of the public option.  He compromised a bit on abortion so he did not get all his cake. In an interview, he says:

NELSON: Well, I gave a little – a half-way in between and then you ask for it all.

So, compromise was short-term stance and he was going ask for the whole cake later on. How?  Nelson planned to bargain hard for more in conference in the (now-hypothetical) scenario where the Senate and House bills were merged (my emphasis) as he preferred the House bill to his own language in the Senate bill:

NELSON: To get it there.  Right.  I know – with my language which was better than the language in the bill.  But, once it went to conference, as part of the conference, there was still another 60 vote threshold, and that is when I would have insisted and that is what Christy was talking about when I mentioned this on the phone – how we would approach this in conference to say, for my last 60th vote, it has to have Nelson/Hatch/Casey.

LSN: Why didn’t you stop it right then and there and say, “No Nelson/Hatch – nothing.”

NELSON: Because, at that point and time, the leverage wasn’t as strong – you have to play it…

LSN: You were the 60th vote, though.

NELSON: Yes, but there were some on the other side who probably wouldn’t have gone along with it at that point – they would have had no choice.  A whole bunch of people didn’t the Nelson/Hatch/Casey – you saw that.  There were a whole bunch of people who didn’t like the Nelson language – they only went along with because I could be the 60th vote.  Leverage increases, exponentially, like the difference between a number 2 earthquake, 3 earthquake, 4 earthquake – goes up exponentially like that – your leverage goes like that at the very end…..if you are going to match Stupak, you match him at the end when you have the most leverage.

If the plan failed, he was willing to accept his own (!) language:

NELSON: If everything failed, Nelson is better than the language that is in the bill…..I could live with Nelson, but it is not my preference.

The Nelson strategy contradicts simple backward induction in complete information games in two ways.  First, if a player has significant leverage at the end of the game, he should have the same leverage right now.  There is no sense in which leverage increases at the end.  Second, if it is common knowledge that Nelson will accept Nelson language in the end, then he has no leverage at the end in conference anyway.

Perhaps both issues can be rationalized with incomplete information?  I do not know of models that do this but perhaps others are.  There is an Abreu-Gul paper where players concede slowly over time in a war of attrition but there is a deadline effect here that is not in their paper.

Paul Krugman asks whyPad?  Apple has thought through this problem in pricing the iPad.  It’s main competition is Kindle, your cell(I?)phone and your laptop.

Kindle: The Kindle DX has a large screen and is the iPad’s main competitor in the e-Reader category.  It is selling for $489.  The cheapest iPad is $499 and has 16GB storage while Kindle DX has 4GB.  Apple has signed deals with publishers and it seems books are going to be more expensive on iBooks than Amazon.  Amazon seems to paying publishers to discount books.  Still, given the greater capabilities (websurfing etc.) and sheer cool factor of the iPad, I would guess new consumers are going to go for the iPad given the price point.  Existing customer like Krugman, it’s not so clear..you’d have to switch to the iPad and give up your Kindle.  The sunk cost fallacy might help to dissuade you.  But it seems a Kindle app allows your Kindle books to be read on the iPad so your books transfer.*

Cell(I?)phone: Your phone may already give you websurfing and email capability and have 3G.  Apple has signed some deal with ATT where you can sign on one month at a time for either $15 or $30 and get data service.  No yearly contract.  So now if you thinking about buying the iPad Wi-Fi vs iPad Wifi+3G which costs $130 more you might buy the more expensive one for the option value of using 3G occasionally when you’re traveling.  The price difference is actually quite hefty but since it involves no one or more year data contract with ATT, you are willing to suffer the hit on your wallet.  Presumably, there was some clever use of Verizon as a threat point to get ATT to give such a good deal.

Laptop:  This is where there is the least information.  The demonstration showed that iWork functioned on the iPad but it was not clear that Powerpoint would work, even the Mac OS version.  I Use VMWare to run Windows on my Macbook.   Can that run on the iPad?  Then, I’m sold!

*Updated: Commenter below cld pointed out Kindle app to me and I updated the post as  a result.

I went to a job talk by Josh Schwartzstein of Harvard.  He is working of Selective Attention and Learning.  Here is a leading example:  Suppose you go to the doctor because you are sick.  He says you have a food allergy and asks you what you have eaten.  If you put low probability on the theory that your sickness is caused by food allergies, you may not be able to answer him as you did not collect data on what you ate given your beliefs.  That is, selective attention leads to selective data collection.  Josh uses this point to study the long run properties of learning but I want to take up something else he said.

He gave an interesting interpretation of Moneyball (2003) by Michael Lewis.  The book (which I have not read but will now buy!) claims that the Oakland A’s found batters who were undervalued.  They might not get runs but might be good at getting walks and this can translate into runs too.  The Oakland A’s got such prospects for cheap because other teams did not realize the potential of such batters.  They were focusing on the runs and not on the walks but the Oakland A’s worked out the value of walks.  Once Moneyball gets published though, everyone should recognize this possibility and the players should get valued correctly by the market and arbitrage opportunities should disappear.  And a paper by Hakes and Sauer confirms this: by 2004 wages reflect ability to get on base while they did not before!  Other theories might also lead to similar conclusions but it’s an interesting interpretation and story nevertheless.

Jeff and I had a look at the torture memos which attempt to delineate prosecutable offenses from acceptable interrogation techniques.  There are many interesting passages.  On “interstate stalking” (page 32):

To establish the requisite intent, the prosecution must demonstrate that the defendant undertook the travel with the specific intent to harass, or intimidate another. See Al-Zubaidy, 283 F.3d at 809 (the defendant “must have intended to harass or injure [the victim] at the time he crossed the state line”). Thus, for example, a member of the Armed Forces who traveled to a
base solely pursuant to his orders to be stationed there, and subsequently came to be involved in
the interrogation of operatives, would lack the requisite intent. He would have traveled for the purpose of complying with his orders but not for the purpose of harassment. Nevertheless, because travel within the special maritime and territorial jurisdiction is also covered, the intent to travel within that base for the purpose of intimidating or harassing another person would satisfy the intent element.

The definition of maiming:

Section 114 makes it a crime for an individual (1) ”with the intent to torture (as defined in section 2340), maim, or disfigure” to (2) “cut, bite, or slit the nose, ear, or lip, or cut out or disable the tongue, or put out or destroy an eye, -or cut  off or disable a limb or any member of another person.” 18 U.S.C. § -114. It further prohibits individuals from “throw[ing]or pour[ing] upon another person-any scalding water, corrosive acid, or caustic substance” with like intent.

This implies the following is not ruled out:

So long as the interrogation methods under contemplation do not involve the acts enumerated in section 114, the conduct of those interrogations will not fall within the purview of this statute. Because the statute requires specific intent, i.e., the intent to maim, disfigure or torture, the absence of such intent is a complete defense to a charge of maiming.

Pages 23-39 in the first memo are interesting reading of what is or is not allowed in the Bush administration interpretation of various laws.  The second memo picks up on international themes.  For instance, I believe the British practised the following techniques in Ireland (p 69):

(1) Wall Standing. The prisoner stands spread eagle against.the wall, with fingers high
above his head, and feet back so that he is standing on his toes such that his all of his ) weight falls on his fingers.
(2) Hooding. A black or navy hood is placed over the prisoner’s head and kept there .. except during the interrogation.
(3) Subjection to Noise. Pending interrogation, the prisoner is kept ina room with a loud and continuous hissing noise.
(4) Sleep Deprivation. Prisoners are deprived of sleep pending interrogation.
(5) Deprivation of Food and Drink. Prisoners receive a reduced diet during detention and pending interrogation.

These were judged not to be torture by a European court.  Similar techniques were ruled not to be torture by an Israeli court.  There are many other interesting passages.  It would be an interesting exercise to list every method discussed in the two memos and whether they constitute torture.

These two conditions are sufficient:

(1) When the race is close or

(2) When the prize is big.

Federer can afford to relax in a match with small stakes or when he is close to the winning point.  But he should work hard at Wimdledon and if the match is tied.  The same principles apply in elections.  In the Massachusetts special election, it has been known for months that the second condition is satisfied.  Because, without the Massachusetts Senate seat, the 60 vote barrier needed to fight the filibuster is gone.  The White House, the Democratic Party etc should have been focused on the Massachusetts race on this ground alone.  Belatedly, it was discovered that condition (1) also obtained.  But even you didn’t know that, you did know that the coalition you had to hold together to get stuff through the Senate was pretty fragile and one crack was enough to send the whole thing flying.

The Republican Party recognized that the second condition was key, worked like crazy and played the optimal strategy.  It’s common sense but only one party seemed to get it.

My attempt at describing a paper in words.  The paper is by Anirban Mitra and Debraj Ray and I am going to offer a simplified version of it.

Suppose an aggressor faces a victim and decides whether to attack the victim or not.  Each has wealth which can be stolen at some cost. Each  belongs to some group, e.g Hindu or Muslim. The aggressor’s group can decide how to much to invest in a “conflict infrastructure” that reduces the cost of an attack to a member of the aggressor group.  How do the number of attacks change as a function of aggressor and victim incomes?

First, suppose victim incomes increase keeping aggressor incomes fixed.  There are two effects.  Keeping investment in conflict infrastructure fixed, certainly the aggressor group has a greater incentive to attack and this effect increases attacks.  However, in principle, if investment in conflict infrastructure goes down significantly, this might reduce the number of attacks.  As the benefits of attacking have gone up and aggressor incomes are kept fixed, this effect is never going to be large enough to cancel out the first one.   The first conclusion is that as victim incomes go up so do the number of attacks.

Second, suppose aggressor incomes go down keeping victim incomes fixed.  There are two effects.  The first effect is the same:  a fall in aggressor incomes increases their incentive to attack the victims, in the same way that a rise in victim incomes increases the incentive to attack, keeping investment in conflict infrastructure fixed.  But as aggressor income has gone down, this can increase the costs of investing in conflict infrastructure.  If this second effect is large enough, it can cancel out the first effect.  The second conclusion is that the impact of a change in aggressor incomes on the number of attacks is ambiguous.

Then the authors use the model to offer an interpretation of Hindu-Muslim violence in India.  They have data on violence and also data on household expenditures by ethnic group.  They show that a change in Hindu expenditures has an insignificant effect on ethnic violence but that an increase in Muslim incomes has a large, positive and significant effect on violence.

Using the model to interpret the data, we would conclude that Hindus are the aggressor group and Muslims are the victim group. The combination of the theory and the data is necessary to offer this interpretation.  I like this aspect of the paper as well as the quite surprising elicitation of the identity of the aggressor group vs. the victim group.  Why is there this asymmetry?  The authors offer some interesting speculations based on Indian Partition.  I highly recommend the paper: the theory and the empirical analysis and simple enough that a theorist or an empiricist can understand the whole paper.  The conclusions are surprising and the methodological approach is attractive.

The New York Times has another great story about the credit/debit card market.  The main idea is that Visa pushed up merchant fees (e.g. it’s charge to the grocery store, gas station etc. where you shop) and split the revenue with the issuing bank (e.g. the Bank of America Visa card).  Mastercard soon followed and prices charged to merchants increased because of competition:

“What we witnessed was truly a perverse form of competition,” said Ronald Congemi, the former chief executive of Star Systems, one of the regional PIN-based networks that has struggled to compete with Visa. “They competed on the basis of raising prices. What other industry do you know that gets away with that?”

If consumers see lower prices when Mastercard undercuts Visa on merchant fees, the traditional model of competition would apply.  There are two reasons this cannot happen (1) prices are not allowed to differ between cash and cards, let alone one network or bank to another, and (2) the merchant would have to pass on the lower cost to buyers.

The simplest way to remedy this would be to allow merchants to charge different prices for different methods of payment. If your Mastercard gets you gas for cheaper than your Visa, you’ll use your Visa and Visa will not be able to raise fees so easily.  If paying by cash gets you a better price, this disciplines both Visa and Mastercard and issuing banks.

Update:  Here is an interesting article by Josh Gans about this topic.  He seems to suggest that allowing merchants to charge surcharges for credit card rules would help to cut merchant fees and has papers on the topic.  Allowing surcharges is similar to allowing different prices for different payment methods.  And I noticed that there is some lively dialog at Marginal Revolution.

Nolan Miller, a professor at Urbana-Champaign and I wrote a prospective op-ed which we submitted to the New York Times.  It was written around the time Obama made his big speech about Afghanistan and the date he was suggesting for starting to draw down forces.  You’ll find it below.  After we submitted, there were some op-eds the Times itself published – they did not accept our’s.    Check out this one after reading our attempt:

The President’s long-awaited Afghanistan policy has been revealed: a “surge” of 30,000 more troops with an “exit ramp” beginning in July 2011.  Leading Republicans praised the surge but condemned the preordained departure date , claiming that the Taliban will lie low and reemerge when we leave.

The Obama administration says that the Republicans are missing the bigger picture: the Afghan government needs to step up, and if we give them a “blank check”, they will never do their job. Obama says that the withdrawal date is “locked in” and that our hard deadline forces Karzai to build a security force rather than rely on us to spend our own precious resources and lives on his behalf.   And the 18-month surge gives us the breathing room to help Karzai man and train his army.

However, other administration officials, most notably Secretaries Clinton and Gates and General McChrystal are singing a different, more nuanced, song.   They say that although July 2011 is the expected turning point in Afghanistan, when we can begin to leave without risking another backslide, this date is flexible.  The President’s strategy is to begin leaving only if conditions on the grounds are favorable. According to McChrystal, “We will not decrease coalition forces without the increase of Afghan national security forces capability.”  In other words, we have initiated an open-ended surge, and we will stay there for at least eighteen more months. If Karzai hears this message, he will think withdrawal is not locked in, and he would be right to interpret it as, if not a blank check, also not a last chance.

For an administration that is known for staying on message, this statement on a critical policy is remarkably muddied.  That is, of course, unless the muddied message is the message.

The Obama Afghanistan strategy needs to walk a fine line, playing to multiple constituencies both at home and abroad.  The domestic audiences are clear.  Abroad, Obama needs Karzai to believe that this is a make-or-break point for him, and that we won’t be there to back him up indefinitely.  Hence the need to be “locked in” to a firm withdrawal date.

The target of the other half of the mixed message is not the Afghan government, or even the Taliban, but the third and most difficult player facing the Americans: Pakistan.  Once the U.S. ramps up its efforts in Afghanistan, the Taliban will undoubtedly run to the mountains of Pakistan, where they will join their old friend Osama bin Laden.  So, we will have to rely on Pakistan to perform the second part of the pincer movement that cuts off our enemies.

Pakistan has always had a complex relationship with the Taliban and Al Qaeda.  Fanatics provide a ready supply of volunteers for attacks on India, and Pakistan is reluctant to turn on its former allies.  And if Karzai falls, their old allies the Taliban will be back in power and they can go back to living in relative harmony.  To persuade Pakistan to turn on its allies who are our enemies, they have to think we are in Afghanistan until the Taliban threat is eliminated. The quickest way to get us out of the region is to give us what we want, and what we want is a stable Afghanistan and the elimination of the Taliban and Al Qaeda.

So, Obama is trying to send one message to Karzai (“Our departure is locked in”) and another to Pakistan (“We are here as long as it takes, so help us or else”).  Muddling these two messages together is as confusing to them as it is to us.  Worse, there is a danger that each hears the wrong message.  If Karzai hears we are flexible and Pakistan hears that departure is locked in, neither will help us.  And the Taliban can run across the border and wait and see which of these two strategies Obama will actually employ in 2011.

At best, Obama’s strategy is to send two quite contradictory messages at the same time and have each side hear the message he wants them to hear. At worst, it is a compromise of different views within his administration.  In the confusion, the wrong message may get through to each side and American soldiers will have to pick up the slack left by a confusing policy.  Then, Obama will regret not choosing one clear transparent strategy where at least one side, either Karzai or Pakistan, would have been forced to step up.

The Huffington Post has an interesting article about Long Beach Mortgage.  In interviews:

[F]ormer employees say the company encouraged the sales force to churn out as many loans as possible with lavish commissions and bonuses. And it didn’t matter if the loans went bad because Long Beach Mortgage bundled them and sold most of them quickly to investors.

There are two preliminary moral hazard problems.  First, obviously the sales force does not have the incentive to screen out “bad loans” given the incentive contract offered.  Second, as mortgages can be bundled and traded, the managers do not have the incentive to give the sales force the incentive to screen our bad loans.  They want to maximize raw volume rather than quality-adjusted sales.

This leaves “the market” as the potential monitor.   A large group of owners of securities faces a free-rider problem in monitoring so no-one monitors.  The price of the bundled security reflects the mix of good and bad loans in the market.  An individual issuer of mortgages has the incentive to screen out bad loans if this is reflected in the price of the security they sell.  But if no-one is monitoring, no-one will notice the extra benefits from screening, the price will not improve and there is no incentive to invest in making just good loans.

Finally when everything does tank, if banks sell mortgages and the banks are too big to fail, they get bailed out by taxpayers.  One final bit of moral hazard to make sure there is no incentive to monitor the monitor to monitor the mortgage sale.

If the grand coalition of lenders, borrowers and taxpayers can form, they can design a better mechanism.  In fact, a system with less liquidity gives better incentives to monitor – if the owners of Long Beach Mortgage cannot sell mortgages they have better incentives to design good incentives for their salesmen.  It doesn’t seem impossible to make things a bit better.  But without the taxpayers in the coalition, there is no reason for the remaining sub-coalition to design the socially optimal mechanism.  If a bunch of people are playing poker but they can dump their losses on an innocent bystander, why will they ever stop playing?

So, what do Olympia Snowe and Ben Nelson think about financial reform?  The median Senator responds to the median voter in their state.  Wise people of Maine and Nebraska over to you, again.   And people of Connecticut, if you can get Joe Lieberman to be a bit more predictable, that would be great.

Loosely based on a meal we had at Rendezvous in Central Square, Cambridge.  Everyone loved it and I’ll definitely make it again.

Brocoletti are less bitter than Broccoli Rabe and I bought them on whim at Whole Foods because they were on sale.  Stir fry them with a little garlic.  Stir in cannellini beans when the broccoletti are crisp and green.  Make a garlic broth by boiling up bruised garlic in salted water.  I made too little – next time I’ll make four cups.

Cook the orecchiete till they are al dente – take a minute off the cooking time.  Meanwhile, toast panko breadcrumbs in a frying pan (no oil needed).   Put the breadcrumbs aside and lightly grease the same pan.  Stir fry the drained orecchiete in the pan.  They should get crispy at the edges.  I didn’t grease the pan enough and we ended up with a thin layer of toasted pasta that stuck to the bottom  – it was delicious!  Mix up everything, grate on the parmesan and you’re done.  Chewy pasta, coated with breadcrumbs in a garlicky broth with crisp broccoletti and beans.  Yummy.

Needs around four pans but it’s actually pretty easy and can be done in 30 minutes.  Guilt someone else into doing the washing up because you did all the cooking.

1. Documents have been found suggesting that Iran is or was working on a neutron initiator for an atom bomb.

2. Iterated deletion of dominated strategies in Star Wars Game Theory from Dan Hamermesh via Freakonomics blog.

3. The British have the best teeth in the world, contrary to the conventional wisdom!

The health plan being considered in the Senate includes an individual mandate: everyone has to get health insurance.  There is a good reason to include this if the insurance market is competitive.  Otherwise, low risk types opt out and go to the emergency room if they get sick and impose a negative externality on the rest of the population who end up paying for them in their health insurance premiums, taxes etc.  An individual mandate eliminates this cross subsidy and allows prices to fall for the people getting health insurance at the current status quo.

But if the health insurance market is not competitive, the insurers will make yet more profits by charging the low risk types a high price.  Moreover, they will not cut prices for the high risk types and there will be no benefits to health reform except to insurance companies.  This is the nightmare scenario.  And in fact my Kellogg colleague Leemore Dafny has a nice paper (Are Health Insurance Markets Competitive?) showing that in concentrated markets with a few health insurers, a firm that enjoys a positive income shock sees a greater increase in health premiums for its employees.  So, there is evidence of market power and hence some basis for the nightmare scenario that Howard Dean etc. are concerned about.

To prevent this from arising, there has to be more competition.  Then, an insurer that keeps prices high is undercut by another who is going for profitable volume.  The public option was meant to provide competition. It was going to be run as a non-profit so it might have had lower costs by avoiding the costs of marketing and advertising and creidbly played the role of the undercutting competition.

What’s left now that the public option is no longer an option?  The best answer I have found is in a blog by Ezra Klein at the Washington Post.  His answer is:

Under health-care reform, there are at least three bulwarks against the monopoly-profits scenario: Inter-insurer competition, regulators, and the tax on excessive premiums. Two of these mechanisms don’t exist in the current market. One — the market itself — is much weaker and more opaque, and individuals have a far harder time navigating it.

Even if the insurance market is competitive, it’s not clear what’s happening to the costs of inputs, drugs, doctors’ fees, hospitals, administration etc.

Secret deals with Pharma, the AMA, death panels and tea partiers, the random movements of Lieberman, Ben Nelson’s signaling to the voters in Nebraska….not as exciting as the primaries and the general election but pretty close.  That rollercoaster had to end November 4.  Will this one end December 24?

Everyone can do it thanks to the friendly Secret Service:

Harvey and Paula Darden, from Hogansville, Georgia, had mistakenly arrived a day early for a White House tour arranged through their Republican Congresswoman.

They presented themselves at a White House security booth on the south side of Lafayette Square on the morning of November 11 and were asked to wait while their names were checked by Secret Service staff.

After a few minutes the Dardens were told: “You are cleared to come in.” They were then escorted to the East Room where 200 veterans and their families were helping themselves to a breakfast buffet. Minutes later they were having breakfast with the President.

Here’s a useful historical guide:

How to gatecrash

Look the part In her glittering sari, Michaele Salahi looked like a glamorous guest at a state event for the visiting Indian Prime Minister. At the other end of the scale, in 1987 Christian K. Hughes drove straight in because an officer assumed that he was a deliveryman

Play the religious card George C. Weaver, a Californian clergyman, met six presidents. He gatecrashed a prayer breakfast in 1991 attended by George Bush Sr, and Bill Clinton’s inaugural luncheon in 1997

Bring the family In 1982 James Douglas Imes, his wife and two sons drove to the White House in a minivan, hooted their horn and were let through. They got as far as the Oval Office entrance

Tag on to an unsuspecting group In 1994, Stephan O. Winick, a celebrity-chaser, joined the entourage of the actor Harrison Ford in a lift as the group was escorted to meet Clinton at a hotel in Los Angeles

Do your research and don’t give up One third of presidential gatecrashers had checked the lie of the land. Four in ten were known to the authorities

OK, so far I managed to resist writing a post about Tiger but I can’t help leaping into an analysis of the future strategy of Joe Lieberman.  Let me begin by collecting some quotes and thoughts.  My favorite post is “Toward a Unified Theory of Lieberman” (the title alone takes this into home run territory) by Jonathan Chait at TNR.  It begins with this pithy paragraph:

It has been a banner day for the field of Lieberman Psychology. My own contribution is that Lieberman is not as smart as people think he is, and certainly not detail-oriented or well-versed in public policy.

Chait has an even more prescient analysis in an earlier post:

Lieberman thinks about politics in terms of broad ideological labels. He’s the heroic centrist voice pushing legislation to the center. No, Lieberman doesn’t have any particular sense of what the Medicare buy-in option would do to the national debt. If the liberals like it, then he figures it’s big government and he should oppose it. I think it’s basically that simple.

Chait’s theory now has huge support as Lieberman says he changed his mind on the Medicare buy-in policy because:

he was particularly troubled by the overly enthusiastic reaction to the proposal by some liberals, including Representative Anthony Weiner, Democrat of New York, who champions a fully government-run health care system.

“Congressman Weiner made a comment that Medicare-buy in is better than a public option, it’s the beginning of a road to single-payer,” Mr. Lieberman said. “Jacob Hacker, who’s a Yale professor who is actually the man who created the public option, said, ‘This is a dream. This is better than a public option. This is a giant step.’”

So, if liberals want it, it must be wrong.

Whatever the heroic narrative he is repeating to himself, Lieberman will eventually realize his position.  He is an anathema to Democrats,  having supported McCain in the general election and now randomly wandering between positions to counteract the left.  He cannot run as a Democrat in 2012 as he will not make it through the primary.  If he runs as an independent, he will face a three way race splitting the vote with the Republican.  So, he will run as a Republican.

Lieberman will move further and further right of center as he realizes he has tp woo Republicans in his home state.  He has his finger in many legislative pies in Congress (same sex marriage, climate change).  He will take the Republican perspective on these and screw them up deliberately.

Obama should get the Senators from Maine into every conversation he can.  They are more secure than Lieberman and their own heroic narrative is more patrician: rich people must look after the common man.   They are to the left of Lieberman and have the most potential for Obama to achieve his agenda.

Or, of course, maybe Joe just wants to become an insurance company lobbyist.   That would explain everything.

I happened to pick up Samuelson’s Foundations a couple of years ago in the Northwestern University Library.  We do not read it anymore and get our PhD training from Mas-Colell, Whinston and Green.  So, I’d never picked it up and I was shocked by how much of modern microeconomics was already in Foundations.  Everything from the revealed preference paradigm to consumer theory, producer theory etc etc….and he continued to make huge contributions throughout his life.

On top of all that, I’m visiting MIT Economics this year.  Paul Samuelson built the department and its culture:

“Despite his celebrated accomplishments, Mr. Samuelson preached and practiced humility. The M.I.T. economics department became famous for collegiality, in no small part because no one else could play prima donna if Mr. Samuelson refused the role, and, of course, he did. Economists, he told his students, as Churchill said of political colleagues, “have much to be humble about.” “

It is all true.  Just looking around the lunchroom on Wednesdays you are awed by the company.  And then you are charmed by the friendliness and collegiality.  Also, there is a laser-like focus on training the next generation of great economists and this shared mission creates the atmosphere of collegiality.  Paul Samuelson studied the free-rider problem in public good production but he knew how to solve it.  His work will live not only in his papers but also in the institution that he built.

1. Profile of Joe Stiglitz

2. I loved Trio Atelier in Evanston, the restaurant started in the former Trio space when Grant Achatz left to start Alinea.   The chef at Atelier was Dale Lewitsky and he turned up later on Top Chef.  He came in second but then what happened to Dale Lewitsky?  Seems he had some up and downs but now he has a new restaurant, Sprout.  Looking forward to going there.

The GOP is stipulating that candidates sign a statement of beliefs in certain key principles (eg “no gun control”) to prove they are really committed to the cause.  Of course, there is nothing to stop moderates from signing it and them reneging.  Candidates must therefore credibly reveal their true beliefs through a real choice – the principle of revealed preference.  Stephen Colbert has designed just the right way to do this.

There are now going to be ten nominees for the best picture category.  This poses a danger with  choosing the film that gets the most votes as the “best picture”: what if it is the worst film according to people who put other movies at the top?  Maybe they all agree on the second-best movie and if you take this into account, you’d have a quite different “best picture” winner.  To take this kind of thing into account, the Academy of Motion Pictures has come up with a new scheme:

Voters will be asked to rank the 10 best picture nominees in order of preference, one through 10. Davis says that the category will be listed on a special section of the Oscar ballot, detachable from the rest so that a separate team of PricewaterhouseCoopers staffers can undertake the more complicated tabulation process.

Initially, PwC will separate the ballots into 10 stacks, based on the top choice on each voter’s ballot. If one nominee has more than 50 percent of the vote (unlikely, but conceivable some years), we have a winner.

But if no film has a majority, then the film ranked first on the fewest number of ballots will be eliminated.  Its ballots will then be redistributed into the remaining piles, based on whichever film is ranked second on those ballots.

If those second-place votes are enough to push one of the other nominees over the 50 percent threshold, the count ends. If not, the smallest of the nine remaining piles is likewise redistributed. Then the smallest of the eight piles, then the smallest of the seven…

Eventually, one film will wind up with more than 50 percent.

Which is the voting system that is more manipulable via strategic voting, the original one or the new one?  How is it manipulable?  Harvey Weinstein will be willing to pay for advice.

Update: As Mallesh says below and David Austen-Smith pointed out to me in an email, this voting system is the Single Transferable Vote system.   It violates Arrow’s independence of irrelevant alternatives and is manipulable as the Gibbard-Satterthwaite Theorem applies when IIA fails.  I guess manipulability per se is not the right criterion.   One should study the (Bayesian?) Nash equilibria of the voting system in question and compare them via some notion of welfare to the equilibria of the original system.  The original system (as far as I can tell – I am not an Oscar voter), was simply one man-one vote with the movie getting the most votes picked as the winner.  The new system is much more complicated as you have to report a whole ranking.