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Mutually Assured Destruction did not succeed in bringing the Democrats and the Republicans back to bargaining table to renegotiate the sequester. So, a reporter facetiously suggests locking up everyone in a room till an agreement is reached.
This is not so facetious as it seems – the sequester was meant to create agreement because the spending cuts were a hostage that no-one wanted to lose. Schelling thought about this sort of thing but the obvious reference is Oliver Williamson’s “Using Hostages to Support Exchange”. So, let’s go the whole way and think about who we would have to hold hostage to give good incentives for Congress to renegotiate the sequester. We would have to have one Democrat and one Republican to give both sides a hostage to release.
First off, John Boehner is not a good candidate for the Republican hostage. The real sequester leaves the Republicans divided – the defense hawks hate it but the deficit hawks want it. Similarly, a significant fraction of the Republican House caucus would just love to leave Boehner hostage. They are not going to negotiate a grand bargain to get him out. Extrapolating this logic to the Democrats, it is pretty clear Hillary Clinton would be a great hostage – all the Democrats would want to release her. This intuition further suggests Hillary will be great candidate in 2016, should she want to run. She would unify Democrats behind her and is a centrist so she would be a good candidate in the general election. My intuition is that Biden does not generate the same enthusiasm for hostage release.
So who is a good Republican hostage? Reagan, if he were still around, would be great. Who is today’s Reagan? Let’s face it, Jeb Bush does not inspire – Republicans would leave him hostage to get a good deal to free Hillary. Ditto Chris Christie. Rubio? Ryan? If Rubio were left hostage, the Republican Party would not lose a “thought leader” as we say in b school. They could pretty much survive without him intellectually. McCain is a leader on immigration reform, Rubio’s key issue. Sure, they lose diversity but not leadership. Ryan on the other hand is a leader when it comes to fiscal matters. No-one is the House can take his place and the Senate budget experts may have expert opinions but lack charisma (e.g. Portman).
So, Ryan should be the Republican hostage and he should be locked up with Hillary Clinton until a “grand bargain” is reached.
Stanford researchers conducted this experiment:
One at a time, 30 men and 30 women entered the simulator and strapped on a set of goggles that transported them into a digital cityscape. A woman’s voice then explained their mission: A diabetic child is stranded somewhere in the city, and you must find him and deliver an insulin injection.
With a whoosh of air, the subjects left the ground – either controlling their flight by a series of arm motions, like Superman, or as a passenger in a helicopter. As they scoured the city, wall-mounted speakers gave the impression of wind whistling by; powerful speakers in the floor produced vibrations to simulate riding in a helicopter. The experiment was set so that two minutes into the simulation, no matter what mode of transport, the subject found the sick child.
After removing the virtual reality goggles, each person then sat with an experimenter to answer a few questions about the experience. This questionnaire, however, was a ruse: During the interview, the experimenter would “accidentally” knock over a cup filled with 15 pens. She would wait five seconds to see if the subject would help her pick them up, and then begin collecting the pens, one pen per second, to give the person another opportunity to come to her aid.
The people who had just flown as Superman were quick to lend a hand, beginning to pick up the pens within three seconds. The helicopter group, however, picked up the first pen, on average, after six seconds (one second after the experimenter began picking them up herself).
The superhero group not only pitched in first, they also picked up about 15 percent more pens on average. While everyone who flew like Superman picked up some pens, six participants who rode in the helicopter failed to offer any help at all.
So, video games where you play the superhero help you behave like a superhero. I’m off to play Zelda for the next couple of hours. Then, I’ll go to work and see if I am (even) nicer to everyone than I am normally.
For decades, [the Justice Department] argue, Anheuser-Busch has been employing what game theorists call a “trigger strategy,” something like the beer equivalent of the Mutually Assured Destruction Doctrine. Anheuser-Busch signals to its competitors that if they lower their prices, it will start a vicious retail war. In 1988, Miller and Coors lowered prices on their flagship beers, which led Anheuser-Busch to slash the price of Bud and its other brands in key markets. At the time, August Busch III told Fortune, “We don’t want to start a blood bath, but whatever the competition wants to do, we’ll do.” Miller and Coors promptly abandoned their price cutting.
But:
Budweiser’s trigger strategy has been thwarted, though, by what game theorists call a “rogue player.” When Bud and Coors raise their prices, Grupo Modelo’s Corona does not. (As an imported beer, Corona is also considered to have a higher value.) And so, according to the Justice Department, AB InBev wants to buy Grupo Modelo not because it thinks the company makes great beer, or because it covets Corona’s 7 percent U.S. market share, but because owning Corona would allow AB InBev to raise prices across all of its brands. And if the company could raise prices by, say, 3 percent, it would earn around $1 billion more in profit every year. Imagine the possibilities. The Justice Department already has.
Here is the Justice Department’s complaint. Davidson says they use game theory models to forecast the impact of the merger. But I do not see that in the complaint. Is there a publicly available document outlining their analysis?
Trade of shares is going to be taxed by some countries inside the EU. The usual counter argument is that this will simply cause trading to move outside the tax zone to, in this case, the U.K. and the U.S. To try to get around this, the countries involved require that the tax be paid wherever the trade takes place:
The tax would be owed no matter where the trade took place, as long as a European security or European institution was involved. The law has been written so broadly that if a French bank bought shares in an American company on the New York Stock Exchange, the tax would be owed.
But who is going to report the trade? The EU authorities are relying on a prisoner’s dilemma to do the monitoring for them:
There is every chance that markets from other countries will not be very cooperative, meaning that to learn if a German bank traded in New York the authorities might have to rely on the bank to report it to them. But then there would be the risk that the tax authorities would learn of it otherwise, perhaps through an audit or from a report by an Italian bank that happened to be on the other side of that trade.
Mr. Bergmann, himself an economist, compared that to “the prisoners’ dilemma,” a classic concept in economics in which two people arrested for a crime would do best if neither confessed, but either would do very badly if he did not confess while the other did. If the authorities did find out, it would be tax fraud under the proposed law.
If the Italian bank reports the trade but the German bank does not, does the Italian bank get a reward? Is the tax forgiven? This is not clear from the article. (I also had a hard time finding the actual law but perhaps I did not look hard enough.) If the Italian bank is liable for tax if it unilaterally reveals the trade, then the game is a coordination game:
If the German bank does not reveal the trade, the Italian bank avoids the tax if it does not reveal but pays the tax if it does. Hence, not revealing is a strict best response to not revealing by the opponent. On the other hand, if the German bank is expected to reveal the trade, if the Italian bank does not reveal the trade, it pays a big fine. If it also reveals the trade, it just pays the tax. Hence, reveal is a strict best response to reveal. Then, the blog post should be called Coordination Games Everywhere.
Would love to know what the facts are. Or are they ambiguous? This would introduce uncertainty and then papers can be written about this possibly…
Hat Tip: Arasan Aruliah
I just got back from a short trip. I flew United. I used my app to check our flight status. Surely enough, the incoming plane was delayed by thirty minutes. Decided to spend the extra time in Nature wallowing in the beauty she has created – a dolphin frolicking in the distance in the warm sea – rather than in the Southwest Florida International Airport in Fort Myers suffering in the sterile concrete lump Man has created. After all, I’d already printed off boarding passes and even checked in baggage before arrival.
Arrive at the counter and attempt to actually check in aforementioned bags. No such option was offered on the electronic check-in terminal. Find a wandering United clerk who repeats the procedure and encounters the same problem. She finds a higher-up United clerk who tries a third time. Then, the higher-up tells us that bags can only be checked in up to thirty minutes before the SCHEDULED departure not the ACTUAL departure. Luckily, sense is seen and baggage is checked in after some complaining.
So, United expects you to make decisions as if the flight is leaving on time even though it is common knowledge that it is not. Then, why tell you flight status? If they do not tell you, you are more likely to make the decisions they want you to make. If they give you up to date information, you are certainly going to make decisions based on the information. Yes, you can find out the information via other websites. But then if you are late, can’t check in bags etc., it’s your own problem. If United has told you flight status and you’re late, then it’s their problem too. Surely, there is some footnote somewhere on some website that says you should be on time even if the flight is late but who’s going to read that?
Dani Rodrik has an interesting article about the pernicious effect of political economy research on policy making:
Frustrated by the reality that much of our advice went unheeded (so many free-market solutions still waiting to be taken up!), we turned our analytical toolkit on the behavior of politicians and bureaucrats themselves. We began to examine political behavior using the same conceptual framework that we use for consumer and producer decisions in a market economy. Politicians became income-maximizing suppliers of policy favors; citizens became rent-seeking lobbies and special interests; and political systems became marketplaces in which votes and political influence are traded for economic benefits.
In order to change the world, we need to understand it. And this mode of analysis seemed to transport us to a higher level of understanding of economic and political outcomes.
But there was a deep paradox in all of this. The more we claimed to be explaining, the less room was left for improving matters. If politicians’ behavior is determined by the vested interests to which they are beholden, economists’ advocacy of policy reforms is bound to fall on deaf ears. The more complete our social science, the more irrelevant our policy analysis.
But then he becomes more positive and extols the impact of “ideas” on politics:
Ideas determine the strategies that political actors believe they can pursue. For example, one way for elites to remain in power is to suppress all economic activity. But another is to encourage economic development while diversifying their own economic base, establishing coalitions, fostering state-directed industrialization, or pursuing a variety of other strategies limited only by the elites’ imagination. Expand the range of feasible strategies (which is what good policy design and leadership do), and you radically change behavior and outcomes.
Indeed, this is what explains some of the most astounding turnarounds in economic performance in recent decades, such as South Korea’s and China’s breakout growth (in the 1960’s and the late 1970’s, respectively). In both cases, the biggest winners were “vested interests” (Korea’s business establishment and the Chinese Communist Party). What enabled reform was not a reconfiguration of political power, but the emergence of new strategies. Economic change often happens not when vested interests are defeated, but when different strategies are used to pursue those interests.
I agree ideas matter but they too can be used to in political discourse to maximize the benefits to powerful vested interests. Deliberate misapplication of ideas is the age old strategy
First, take the “markets work” idea. Yes, free markets are great is some circumstances, when competition is perfect. But some kind of regulation is ideally warranted when they are imperfect. But the firms in imperfectly competitive markets would love to be deregulated. They can argue that their market is actually perfect. They can hire lobbyists to persuade politicians and perhaps succeed. In this case, ideas lead to deregulation when it is not warranted.
Second, take the “markets fail” idea. Yes, markets fail is some circumstances, when there are externalities. But there should be no regulation if they are perfect. But the firms in perfectly competitive markets would love price supports, tariffs against foreign competition, entry barriers etc. They can argue that their market is actually imperfect. They can hire lobbyists to persuade politicians and perhaps succeed. In this case, ideas lead to regulation when it is not warranted. We economists are enamoured on the “invisible hand” and have many examples of this scenario. We have fewer examples of the first partly because we do not look for them. But such examples are a favorite of liberals.
So, Rodrik has an interesting perspective of the pernicious effects of positive political economy and the nihilism is generates towards policy. But he is too optimistic about the power of ideas. Ideas can be misused deliberately by vested interests
Interesting article about the Cameron government’s use of Thaler tricks to improve government servies and save money:
Take the job centre in Loughton, where he describes – step by step – the minutiae of how his team has encouraged advisers to be forward-looking, specific and to give their clients a sense of progress; all of which, studies have shown, have a big impact on people reaching their goals, he says.
“So instead of jobseekers having to show they’ve looked for at least three jobs in the last two weeks, advisers will now say, ‘OK, let’s talk about what you are going to do in the next two weeks’. They will ask what their client needs to work on. ‘So, you said you needed to work on your CV. So when will you do that. OK, Wednesday morning after breakfast.’ The client is then encouraged to write it down in a little booklet they get. And all the things you need to do before you get your job have been compressed on to one side of paper and designed in such a way that when you go through it with the adviser, you’ve done a third of it straight away. That in itself gives you a strong, immediate sense of progress.”
The results speak for themselves. On the top floor of the job centre where it was trialled for three months, about a fifth more jobseekers were off their books in 13 weeks compared with the floor below where processes remained unchanged.
I still need a nudge to buy the book though.
According to this video by Tim Hartford, this includes: Designing wargames for Kissinger et al., helping Kubrick with Dr Strangelove, suggesting the red telephone be installed between USA and Soviet Union and trying but failing to dissuade a bombing campaign in Vietnam. On the intellectual plane (as well as game theory), decades ahead of his time in thinking about behavioral economics (because he was trying to give up smoking), doing the first agent-based model (of discrimination) and thinking about climate change. Near-fatal flaw for Nobel Committee: Not enough math.
Great for teaching. Part on mutually assured destruction vs common interest games could easily be folded into discussion of Nash vs subgame perfect equilibrium and hence credibility.
[T]he Jets have invested an enormous amount of energy and money in Sanchez, and, assuming that no one will trade for him, they are contracted to pay him $8.25 million next year, whether he plays or not….
In a purely rational world, Sanchez’s guaranteed salary would be irrelevant to the decision of whether or not to start him (since the Jets have to pay it either way). But in the real world sunk costs are hard to ignore. Hal Arkes, a psychologist at Ohio State University who has spent much of his career studying the subject, explains, “Abandoning a project that you’ve invested a lot in feels like you’ve wasted everything, and waste is something we’re told to avoid.” This means that we often end up sticking with something when we’d be better off cutting our losses—sitting through a bad movie, say, just because we’ve paid for the ticket. In business and government, the effect pushes people to throw good money after bad.
Jeff and I have a paper, Mnemonomics: The Sunk Cost Fallacy As A Memory Kludge, that offers a primitive theory of this “Concorde effect” as a response to limited memory. Mark Sanchez was hired years ago. At that time there was a rationale for why he would be a great QB for the Jets and hence he was paid a high salary. This rationale for his hiring has been lost in the mists of time but his salary is recalled perfectly. His salary encodes the rationale for his hiring – the higher the salary the better must have been the rationale for his hiring. Even if we have forgotten the details, the rationale must have been good if Sanchez was paid a high salary. Therefore the higher the salary, the greater the chances of retention even when future events creates costs of retention. This is the Concorde effect. As far as Mark Sanchez goes, mnemonomics does not do too bad a job.
But an obvious alternate theory rests on reputation:
“Taking the original decision-maker out of the picture and letting a fresh pair of eyes look at the pros and cons can help,” Arkes says. He points to a…study of a bank that found that loan officers were reluctant to acknowledge that loans they’d made had gone bad, whereas new executives were far more likely to take the loss and move on. Whoever becomes the Jets’ new general manager will have no personal or reputational investment in Sanchez, which should make it easier for him to be more objective, though he’ll still have to persuade the head coach and the owner.
There’s surely a lot of truth to this theory. But there is a countervailing effect too. Managerial turnover generates limited memory – who knows why the previous CEO made the decisions he did? If he was smart, it would be good to accord his decisions some respect and see them through before trying out new ideas. Perhaps the best CEOs understand this. From our paper:
For example, when John Akers stepped down and Lou Gerstner became C.E.O. of IBM in 1993, he was determined to “carry out a set of policies put in place by none other than the much-maligned Akers.” He was not “rushing to make significant changes in vision” but was “still following through on Akers’ two-year-old restructuring.” He believed that “IBM has yet to test fully many if the changes Akers put in place” and said, “I want to make sure the current system is implemented before we try any alternatives.” We interpret Gerstner’s decision-making as follows: Akers’ old plans were initiated using information known to him at the time. By the time Gerstner arrived, the direct information was lost but was manifested indirectly in the strategic plan he inherited. Hence, this generated a bias to implement the old plan.
You dig your car out of the snow, run an errand or two and come back home to discover…someone else has parked in “your” spot! This free rider problem reduces your incentive to dig your car out in the first place. If only property rights could be enforced, your incentives would be good. It turns out that Bostonians have solved this problem:
Cold-weather cities like Boston, however, have gone so far as to enact laws on the subject. The Post reports that in Boston, “a city law says that if you dig out your car in a snow emergency, a lawn chair or trash can renders the spot yours for at least two days while you’re away at work.”
The Windy City is relying on social norms instead:
In Chicago, the article adds, citizens cannot legally block a parking spot but even city officials acknowledge an “informal rule of dibs” in favor of the person who has dug out the spot.
Hat Tip: Andrew Ellis, job candidate from B.U.
Via Tim Hartford’s Twitter feed.
The Observer‘s panel of stock-picking professionals has been undone in our 2012 investment challenge by a ginger feline called Orlando who spent time paw-ing over the FT.
The Observer portfolio challenge pitted professionals Justin Urquhart Stewart of wealth managers Seven Investment Management, Paul Kavanagh of stockbrokers Killick & Co, and Schroders fund manager Andy Brough against students from John Warner School in Hoddesdon, Hertfordshire – and Orlando.
Each team invested a notional £5,000 in five companies from the FTSE All-Share index at the start of the year. After every three months, they could exchange any stocks, replacing them with others from the index.
By the end of September the professionals had generated £497 of profit compared with £292 managed by Orlando. But an unexpected turnaround in the final quarter has resulted in the cat’s portfolio increasing by an average of 4.2% to end the year at £5,542.60, compared with the professionals’ £5,176.60.
While the professionals used their decades of investment knowledge and traditional stock-picking methods, the cat selected stocks by throwing his favourite toy mouse on a grid of numbers allocated to different companies.
From Ian Millhiser at ThinkProgress:
As of this writing, every single state except Hawai’i has finalized its vote totals for the 2012 House elections, andDemocrats currently lead Republicans by 1,362,351 votesin the overall popular vote total. Democratic House candidates earned 49.15 percent of the popular vote, while Republicans earned only 48.03 percent — meaning that the American people preferred a unified Democratic Congress over the divided Congress it actually got by more than a full percentage point. Nevertheless, thanks largely to partisan gerrymandering, Republicans have a solid House majority in the incoming 113th Congress.
A deeper dive into the vote totals reveals just how firmly gerrymandering entrenched Republican control of the House. If all House members are ranked in order from the Republican members who won by the widest margin down to the Democratic members who won by the widest margins, the 218th member on this list is Congressman-elect Robert Pittenger (R-NC). Thus, Pittenger was the “turning point” member of the incoming House. If every Republican who performed as well or worse than Pittenger had lost their race, Democrats would hold a one vote majority in the incoming House.
Hence, the Democrats need a +7% swing to regain the House given the current structure of House districts.
From a Politico article about the fiscal cliff:
“For many Republicans, a cliff dive means blaming President Barack Obama for a big tax hike in the short term and then voting to cut taxes for most Americans next month. That’s an easier sell back home in Republican-heavy districts than a pre-cliff deal that raises taxes on folks making over $250,000 or $400,000, extends unemployment benefits and does little if anything to curb entitlement spending. If they back a bad deal now, they run the risk of facing primary challenges in two years.
For Democrats, the cliff is better than setting a rich man’s cutoff in the million-dollar range — or worse yet, extending the Bush tax cuts for all earners — and slashing Medicare and Social Security to appease Republicans. They, too, see an advantage in negotiating with Republicans who will feel freed from their promise not to vote to raise taxes once the rates have already gone up….
Another analogy: It’s a Nash equilibrium. John Nash, subject of “A Beautiful Mind,” the Oscar-winning film that revolved around game theory, explained how players act in a multiplayer game. Put simply, if each player understands his adversaries’ strategies, no one will alter their own course. Right now, Obama, Boehner and Reid are locked in on a course for the cliff, and there’s no obvious solution that would make any of them switch directions.”
In the next story, they will superimpose electoral incentives on the Nash demand game!
“JPMorgan Chase & Co. (JPM) asked more than 2,000 current and former employees to contribute to a settlement with the U.K.’s tax authority over their use of an offshore trust for bonus payments, according to a person briefed on the situation…..
People who used JPMorgan’s trust told the FT they were asked to participate in a so-called blind auction, in which they would volunteer to pay a tax rate of their choosing.
If the auction fails to generate enough money to fund the settlement, people who submitted less than the average bid would be excluded from the deal and face a 52 percent tax rate when the trust’s assets are liquidated, the newspaper said.
People who don’t wish to participate can try to fight the government’s demand, the person briefed on the situation said.”
The rules of the auction are not 100% clear from the article. Taken at face value, there is the possibility of multiple coordination equilibria. If I expect everyone else to contribute a lot but not enough to pay off the tax debt, then I will contribute a lot too to avoid the 52% tax. If I expect everyone to contribute a little, so will I hoping people who decided not to participate or contributed less than the average bid will bear the punishment. Finally, if I expect total contributions to exceed the tax debt, I will contribute zero. Uncertainty about everyone’s willingness to pay, deep pockets etc will generate randomness and perhaps refine equilibria but leave open the possibility of multiplicity. Also, there will be positive probability that the auction does not fully recompense the tax authorities. This is also true in mixed strategy equilibria of the complete information game.
To increase contributions and guarantee success, the auction should specify that everyone who contributes more than the average bid will escape the 52% tax if total contributions are lacking. Then, people will submit more than the average just to be safe. Then, the average expected bid will go up. Then, they’ll submit even more etc.
In any negotiation, you first want to prepare the ground so that failing to make an agreement creates a situation that your counterparty absolutely hates–that even what is from their perspective a bad deal is better from their standpoint than no deal–and so that failing to make an agreement creates a situation that you rather like–so that only what is from your perspective a very good deal is better than no deal…
With respect to the debt ceiling, however, no effort has been made to prepare the ground at all: no steps have been taken to signal what actions the administration will take after the debt ceiling has been reached that will make the situation one that Republican politicians will hate and that Democratic politicians can live with. And without such a strategy in place, the Obama administration has no bargaining power on the debt ceiling.
Here’s my rationale: There are two negotiations going on. The Obama administration would like to resolve the fiscal cliff deal in their favor as soon as possible. The Republicans are worried that the tax increases that will ensue if negotiations fail will rebound to their disadvantage. They know that they will have more leverage in the debt limit negotiations that will soon follow. Hence, they are more likely to concede in the fiscal cliff negotiations if they think they will be in strong position in the debt limit negotiations. If Obama explores constitutional solutions to the debt limit increase that sidelines the House, this will impact the fiscal cliff negotiations. Then, the Republicans will be less likely to concede the middle class tax cut now and bargain about entitlements later because they will believe they have less leverage later.
Therefore, Obama should not bring up any exit option from the debt limit negotiations. No trillion dollar platinum coin should be invoked right now. Of course, when the debt limit does come up, the coin comes out. Ha ha.
But we can take this one step further in the usual hall-of-mirrors style of game theory. The Republicans know all the analysis above and have done it themselves. Hence, they know they will have no leverage in the debt limit negotiations as Obama will then pull out the platinum coin from his pocket. Hence, the only leverage they have is via holding up the middle class tax cut. Hence, Obama is in a weak position in the fiscal cliff negotiations and in a strong position in the debt limit negotiations. Of course, his threat point is the fiscal cliff taxes, sequesters etc. but at the risk of causing a recession next year. So, really, in superrational backward induction world, everyone has the analysis backwards – Obama weak now, strong later.
But hold on, this is not only assuming a lot of backward induction but also certainty that the platinum coin or some other constitutional fix works. We cannot be sure. Hence, the Republicans do have some leverage in the debt limit negotiations. Their wiggle rom comes from this uncertainty. But then we are back at square one!
Or we can throw up our hands, say this is all too complicated, and stick with my simpler rationale…..
Next week Drew, Oliver and Eric do it “Gangnam Style”.
According to multiple Fox sources, Ailes has issued a new directive to his staff: He wants the faces associated with the election off the air — for now. For Karl Rove and Dick Morris — a pair of pundits perhaps most closely aligned with Fox’s anti-Obama campaign — Ailes’s orders mean new rules. Ailes’s deputy, Fox News programming chief Bill Shine, has sent out orders mandating that producers must get permission before booking Rove or Morris…Inside Fox News, Morris’s Romney boosterism and reality-denying predictions became a punch line. At a rehearsal on the Saturday before the election, according to a source, anchor Megyn Kelly chuckled when she relayed to colleagues what someone had told her: “I really like Dick Morris. He’s always wrong but he makes me feel good.”
Last summer, archaeologists working in the central courtyard of Estonia’s Karksi Castle uncovered a 50-centimeter-thick layer of rich black dirt. As the researchers dug deeper, they realized they had discovered the remains of the castle’s first garbage pit. Preserved inside was a snapshot of what the first inhabitants of Karksi Castle—dozens of German knights and their servants—had eaten and discarded more than 800 years before.
The pit’s wet soil had preserved a wide variety of objects, such as hazelnuts, fish scales, animal bones, and hemp seeds, says archaeologist Heiki Valk of the University of Tartu in Estonia. But what surprised Valk most was what wasn’t in the garbage. “The early material is very strange—there’s absolutely no local pottery,” he says. “The colonists came with a lifestyle that didn’t fit the local environment at all. They were a little island, with everyday life just like it was in Germany.”
Via Matt Yglesias:
Here is an email I got from the Romney campaign:
You’ve stepped up
Sandeep,This week, supporters from all over the country heeded our call to raise $7 million in 7 days to bring our message into new states. Because of you we have reached our goal in just 5 days and are now on air, sharing our plan to create 12 million new jobs.
Thank you for believing it’s time for real change, and that America can do better than the last four years.
Now, with 3 days left we are asking you to dig a little deeper to support our effort to raise $2 million by tonight.
Here is one from the Obama campaign:
Hey
Sandeep —
This is in your hands now.
Chip in $141, and let’s go win.
Turns out the Hey worked better in randomized trials and so they went with it.
From Schelling’s seminal Essay on Bargaining:
A potent means of commitment, and some-times the only means, is the pledge of one’s reputation. If national representatives can arrange to be charged with appeasement for every small concession, they place concession visibly beyond their own reach. If a union with other plants to deal with can arrange to make any retreat dramatically visible, it places its bargaining reputation in jeopardy and thereby becomes visibly incapable of serious compromise. (The same convenient jeopardy is the basis for the universally exploited defense, “If I did it for you I’d have to do it for everyone else.”) But to commit in this fashion publicity is required. Both the initial offer and the final outcome would have to be known; and if secrecy surrounds either point, or if the outcome is inherently not observable, the device is unavailable.
Grover’s Pledge has been signed by 219 members of the House and 39 Senators.
From NYT, a proposed tax on beer has French imbibers, producers and intermediaries upset. E.g., from a bar owner:
“The increase is brutal; 160 percent is a lot,” said Mr. Thillou, 36, who prides himself on promoting French microbreweries. On a barrel near the entrance, a pile of fliers that say “+160% taxes on beer: Who is going to pay the price?” shows what he thinks of the government’s latest plan for raising revenue.
But the goverment may be rasing revenue the right way, by taxing goods with inelastic demand:
Philippe Lessevre, 26, who had come for a beer, said higher prices would not change his drinking. “It will affect my wallet,” Mr. Lessevre allowed, “but not my consumption.”
But Mr. Charvier was still skeptical about the government’s professed concerns for public health. “It’s the same as for cigarettes: If a percentage of the price goes into their pocket, they still need people to continue buying,” he said. “It’s hypocritical.”
But, of course, there are always lobbyists:
Many opponents of the bill suggested that wine was exempted because the industry has greater political clout, given that it is one of the country’s top three exporters and employs 250,000 people. Wine is currently taxed around the same rate as beer, per hectoliter, but unlike the rates for beer, its rates do not increase with the degrees of alcohol.
Thanksgiving is over and everyone is back in D.C. talking about the fiscal cliff – the automatic tax increases and spending cuts to defense and entitlement programs that go into effect if no agreement is reached before January 1. These measures might put the fragile economic recovery at risk so a more nuanced deficit reduction plan would be good to have in place. Will such a plan come out of negotiations in the remaining month?
The Coase Theorem says “yes” in at least two contexts.
In the simplest version, there are deals that both sides prefer to the outside option and we should agree to one of them. For example, neither side wants tax increases for people on incomes below $250k as the consequences are bad in primaries and general elections. So they could agree to replace the fiscal cliff contract with one that simply deletes the tax increases on those earning less that $250k.
This simple version assumes that the fiscal cliff measures are enforced if there is no agreement but this is surely not the case. The measures would be the starting point for renegotiation and hence the endpoint of the renegotiation is the benchmark with which to compare proposed current deals. As in Jeff’s earlier post, the negotiations would take the form of a “war of attrition” and we could end up in an equilibrium that destroys surplus. But as long as we play an equilibrium of the war of attrition, again the Coase Theorem goes through with the expected payoffs in the concession game as the outside option.
In a similar vein, many commentators suggest that Obama would be in a stronger bargaining position once we go over the fiscall cliff. Hence, he should go over it rather than come to a deal ex ante. But this argument does not completely make sense: Republicans also know that Obama would be in a stonger position if we go over the cliff. They also know that going over the cliff has dangerous consequences for them electorally. Hence, there are agreements both sides can come to now that take into account the President’s stronger bargaining position after Jan 1 – as long as they have common expectations.
So, there are two reasons why we might go over the fiscal cliff.
First, many strategies can be rationalized in the concession game after we go over the fiscal cliff. There is no reason why Democrats and Republicans should have common knowledge of strategies. If they hold out for inconsistent deals, we will go over the fiscal cliff. Thus is the “non-equilibrium” interpretation.
Alternatively, the two sides each have private information. How confident does the President feel after winning re-election? How much pressure is he under from the liberal wing of the Democratic party? On the other hand, how much pressure is Boehner under from the Tea Party wing? What is the Chamber of Commerce saying to him about willingness to accept a higher probability of recession to avoid higher tax rates? What is each side’s willingness to bear the electoral consequences of going ovet the cliff? Each side has private information. This is the Myerson-Satterthwaite version of the problem. If there is no mutually acceptable bargain for the most confident type of Obama and the most confident type of Boehner, we will go over the fiscal cliff with positive probability.
The last two theories seem quite realistic so there is positive probability of going over the fiscal cliff.
According to Jean-Jacques Dethier, a development economist at the World Bank:
Goldeneye
Plot: Alec Trevelyan (Sean Bean) wants to use an electromagnetic pulse from a nuclear weapon to bring London to its knees and destroy the Bank of England, but not before electronically stealing millions of pounds from the Bank’s systems.
Plausibility: First of all, wouldn’t destroying London and the Bank of England render the pounds you’ve stolen largely worthless? “Not exactly worthless, but close,” says Dethier. Would you be able to convert it? “It’s actually very hard to convert huge amounts of something, which is a problem the Chinese now know well with all their American dollar holdings,” he says. So Trevelyan would have to spend all those pounds in the one country that’d take them: Britain. Whose economy he’s just destroyed.
Tired of talking about nerdy poll aggregators? Time to turn to the Tech team of the Obama campaign. An interesting story by Alexis Madrigal at the Atlantic:
The team had elite and, for tech, senior talent — by which I mean that most of them were in their 30s — from Twitter, Google, Facebook, Craigslist, Quora, and some of Chicago’s own software companies such as Orbitz and Threadless, where Reed had been CTO. But even these people, maybe *especially* these people, knew enough about technology not to trust it. “I think the Republicans fucked up in the hubris department,” Reed told me. “I know we had the best technology team I’ve ever worked with, but we didn’t know if it would work. I was incredibly confident it would work. I was betting a lot on it. We had time. We had resources. We had done what we thought would work, and it still could have broken. Something could have happened.”
Cheap Talk 