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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.

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.”

I associate the Republican Party with competition.  The Party promotes free market ideals – even in education where it promotes charter schools and vouchers so that traditional public schools will have to improve if they want to successfully compete for students.

So why doesn’t the Republican Party embrace these ideals of fully?  Republicans won reelection to the House in large part thanks to uncompetitive redistricting.

This makes the GOP weaker in the long run because it protects out of touch politicians from competition and from reality. Gerrymandering means that Republican Representatives can be oblivious to long-term demographic changes that are reshaping the electorate while Democratic Representatives in safe “districts” must disproportionately confront them.  The lack of competition makes the Republican Party weaker and less responsive to demographic change.  Only watching Fox News probably isn’t helping either.

The ramifications of this uncompetitive behavior likely influenced the outcome of the Presidential race and made it harder for Romney to win.  Mitt Romney embraced positions associated with the far right of the Republican Party in order to win the primary nomination.  Many of his opponents who forced this shift in Romney’s positions were elected to the House from uncompetitive districts. Bachmann’s district is estimated to be 8% more “Republican” than the nation.

If the Republican Party wants its next generation of leaders to be able to win state and national elections, it should embrace competition and renounce gerrymandering.  It should create House Congressional Districts that reflect demographic trends.  It should want to elect Representatives who could have a real shot at winning a state or a national election, not just those who can win in a District where the competition (and reality) have been eliminated.

From the New York Times:

In a striking last-minute shift, the Romney campaign has decided to invest its most precious resource — the candidate’s time — in a serious play to win Pennsylvania.

Mr. Romney’s appearance here on Sunday could be a crafty political move to seriously undercut President Obama, or it could be a sign of desperation. Either way, his visit represents the biggest jolt yet in a state that was until recently largely ignored in the race for the White House.

Over the last several days, with polls showing Mr. Obama’s edge in the state narrowing, Republicans have sprung into action and forced the Democrats to spend resources here that could have gone toward more competitive battleground states.

In a previous post, I discussed why it might be profitable to move ad budgets to non-battleground states if battlegrounds are saturated with coverage. Basically, if you are strong in the battleground states, by spending money in a non-battleground state, you can divert your competitor’s resources there too and, if you are weak, you have to go there out of necessity. Hence, you cannot determine whether Romney has momentum or not from his ad spending strategy. But what about his travel strategy? A candidate’s time is scarce, unlike his billion dollar ad budget, so it must be rationed carefully. So, what can we infer from the fact that Romney is campaigning in PA on Sunday?

The New York Times Electoral Map is useful to think through various scenarios. Romney needs to win NC, FL and VA to have any chance of making it to the White House. Visiting and campaigning in those states is part of his defensive strategy – he has no option but to devote attention to them. As everyone is saying, OH is the key to the door of the White House.

What should Romney do if he knows the President has a significant lead in OH? There is no point campaigning even more in VA, NC or FL because even if he wins them, he cannot win the Presidency without some other states. He has to shift campaigning to some other states to make it to 269 electoral votes so the House can give him the Presidency. Then, it might seem he should shift his time to CO, IA, NH or WI. But to make it to 269, Romney would have to win WI, CO and one of the other two (according to my manipulation of the NYT map). This is a tall order. On the other hand, if he wins PA with one of these other four states, he is through. MN does not have enough electoral votes to counterbalance a loss of OH so the choice comes down to MI versus PA. If Romney is closer in PA than MI, that breaks the tie. So, to summarize, it makes more sense to campaign in PA and try to win one other state than to try to win WI, CO and one other.

What if Romney is ahead in OH? Then, he still needs one of CO, NH, IA or WI to win. Not focussing on those states and defending OH, VA etc. exclusively could cost him the Presidency. In this scenario, Romney does not have the luxury of the time to campaign in PA.

Hence, the Romney campaign’s focus on PA only really makes sense if they know President Obama is well ahead in OH. There is no Romentum.

UPDATE (11/3):  From NBC,

On party ID
In these surveys, Democrats enjoy a nine-point party-identification advantage in Ohio and a two-point edge in Florida. Republicans have argued that a nine-point advantage is too large in this current political environment; it was eight points in the Buckeye State during Obama’s decisive 2008 victory.

If you cut that party ID advantage in half, Obama’s six-point lead in Ohio is reduced to three points.

The Romney campaign is expanding ad buys beyond the battleground states. Is there a huge swell of enthusiasm so Romney is trying for a blowout or is it a bluff?

The traditional model of political advertizing is the Blotto game.  Each candidate can divide up a budget across n states. Each candidate’s probability of winning at a location is increasing in his expenditure and decreasing in the other’s.  These models are hard to solve for explicitly. What makes this election unusual is that the usual binding constraint – money – is slack in the battleground states. Instead, full employment of TV ad time and voter exhaustion with ads makes further expenditure unnecessary.  But, you can still spend the money on improving your get-out-the-vote operation or to expand your ad buy to other states. Finally, you can send your candidate to a state.  Your strategy varies as function of how close the race is.

If the battleground states are increasingly unlikely to be in your column, then a get out the vote strategy will not be enough to tip them back in your favor.  Better to try to make some other state close by advertizing and mobilizing there.  You must maintain your ad buy though in the battleground states to keep your competitor engaged so that they cannot divert resources themselves.

If the battleground states are close, then a get out the vote operation is quite useful even if ad spending is at its maximum.  Better to do that than spend money in other locations where you are way behind.

If you are far ahead in the battleground states, you have to keep on spending there as your competitor is spending there either because he might win or to keep you spending there. But, cash you have sloshing around should be spent “expanding the map”.  This gives you more paths to victory and also exerts a negative externality on your opponent, forcing him to divert resources including perhaps the most valuable resource of all, the candidate’s time.

So, you might spend heavily in a state even when you have little chance there.  This always has the benefit of diverting your opponent’s attention.  This means there is an incentive for a player to invest even if he is far ahead in the battleground states.  But there is also an incentive to invest when you are behind as you need more paths to victory and expenditure on getting out the vote is less useful. So, we can’t infer Romentum from the fact that Romney is advertizing in MN and PA.

I think we can make stronger inferences by making a leap of faith and extrapolating this intuition to a state by state analysis.  By comparing strategies with public polls, we can try to classify them into the three categories.

NC seems to fall into the first category for President Obama. Romney is ahead according to the polls but it gives the Obama campaign more ways to win and keeps the Romney resources stretched.  Romney is roughly as far behind in MI, MN and PA as Obama is in NC. So, they play the same role for Romney as NC does for Obama.  Bill Clinton and Joe Biden are campaigning in PA and MN so the Romney strategy has succeeded in diverting resources.

The most scarce resource is candidate time so we can infer a lot from the candidate recent travel and their travel plans. If the race is close in any states it would be crazy to try a diversion strategy as a candidate visit acts like a get out the vote strategy and hence has great benefits when the race is close. The President is campaigning in WI, FL, NV, VA and CO. In fact, both candidates are frequently in FL and VA.  NC is a strong state for Romney because, as far as I can tell, he has no plans to visit there and nor does the President. Similarly, I don’t see any Romney pans to visit MI, MN or PA. Also, NV also seems to be out of Romney’s grasp as he has no plans to travel there.  It is hard to make inferences about NH as Romney lives there so it is easy to campaign.  OH has so many electoral votes that no candidate can afford not to campaign there – again no inferences can be made. Both candidates are in IA.

So, I think the state by state evidence is against Romentum. NC and NV do not seem to be in play. The rest of the battleground states are going to enjoy many candidate visits so they must be close. That’s about all I have!

Michael McDonald, a political science professor at George Mason University, constantly updates the numbers.    In the early voting, NV, IA seem to be leaning Obama, CO is leaning Romney and FL is close.  Hard to map OH counties into DEM and REP districts.

Ezra Klein has a great post about the “cheap talk” used by candidates to try to manipulate beliefs about their candidates chances of winning.  He concludes:

The bottom line is that Boston fears scared Republicans won’t vote and Chicago fears confident Democrats won’t vote. And so, in this final stretch, Boston wants Republicans confident and Chicago wants Democrats scared. Keep that in mind as you read the spin.

In an patent race, the firm that is just about to pass the point where it wins the race and gets a patent has an incentive to slack off  a bit and coast to victory.  The competitor who is almost toast has an incentive to slack off as he has little chance of winning.  But if the race is close, all firms work hard.

Elections are similar except the campaigns have the information about whether the campaign is close or not and the voters exert the costly effort of voting.  Campaigns have an incentive to lie to maximize turnout so the team that’s ahead pretends not to be far ahead and the team that’s behind pretends the race is very close.  As Klein says, no-one can believe their spin and no information can be credibly transmitted.

If they really want to influence the election, the campaigns have to take a costly action to attain credibility.  For example, they can release internal polling. This gives their statements credibility at the cost of giving their opponent their internal polling data.

Scott Adams writes on his blog:

[Obama] is putting an American citizen in jail for 10 years to life for operating medical marijuana dispensaries in California where it is legal under state law. And I assume the President – who has a well-documented history of extensive marijuana use in his youth – is clamping down on California dispensaries for political reasons, i.e. to get reelected. What other reason could there be?

One could argue that the President is just doing his job and enforcing existing Federal laws. That’s the opposite of what he said he would do before he was elected, but lying is obviously not a firing offense for politicians.

Personally, I’d prefer death to spending the final decades of my life in prison. So while President Obama didn’t technically kill a citizen, he is certainly ruining this fellow’s life, and his family’s lives, and the lives of countless other minor drug offenders. And he is doing it to advance his career. If that’s not a firing offense, what the hell is?

Lee Crawfurd emails me about events in Sudan.  North and South Sudan have agreed to a price at which the North will supply oil to the South.  On his blog, Roving Bandit, Lee writes:

So – whilst this seems like a good deal for North Sudan in the short run and a good deal for South Sudan in the long run, my main concern is the hold-up problem. What is stopping North Sudan ripping up the agreement in 3 years, demanding a higher cut, and just confiscating oil (again).

In his email he adds:

As it turns out, the South’s strategy is to resume piping oil through the North, but also to simultaneously build a pipeline through Kenya, giving them an extra option.

The fact that the North can hold up later makes it less likely that the North and South will invest and trade in their relationship now.  This makes both the North and South worse off.  For this difficulty to be resolved, the North has to be able to commit not to exploit the South in the future.  But the Kenyan pipeline gives them this commitment power to some extent: If the North threatens to raise prices, the South can go the Kenya route.  This means the North will not raise prices in the future and that is good for trade and the welfare of both parties.  Paraphrasing the wrods of the great philosopher Sting, “If Someone Does Not Trust You, Set Them Free“.

One issue is that the South may overinvest in the pipeline to get more bargaining power.  That could lead to inefficiency as the North then has bad incentives.

Another classic Williamsonian solution is to use hostages to support exchange.  I don’t know enough about North and South Sudan to know what they might transfer that is of little value to the recipient and high value to the donor. This sort of solution has been attempted recently in the US in the debt reduction negotiations. Automatic cuts in defense (bad for Republicans) and entitlement expenditures (bad for Democrats) go into force in January if Republicans and Democrats do not agree in debt negotiations. This has not worked so far. First, this is because there are crazy types who are willing to send the country over the “fiscal cliff”. Second, this is because there is no commitment and the automatic cuts can be delayed by Congress and so they are not real hostages.

My memory is terrible but I vaguely recall papers relating to investment in changing outside options in hold up models. These would be the most relevant to the Sudan scenario.

The Romney campaign has been telegraphing that Mitt has been practicing zingers for the last two months.  This brings to mind lessons from macro.

According to the Friedman/Lucas theory of monetary policy, money supply changes are only effective if they are unexpected.  If they are expected, then nominal wages adjust to compensate for inflation so there is no change in the real wage and hence unemployment remains at the “natural rate” or the non-accelerating inflation rate of unemployment (NAIRU).  But an unexpected increase in the money supply leads to surprise inflation, a decrease in the real wage and less unemployment.  An unexpected decrease in the money supply leads to surprise deflation, an increase in the real wage and more unemployment.  This is the expectations augmented Philips’ curve if I remember my macro correctly.  And so it goes with zingers.

If Mitt’s zingers are unexpected, the audience responds with a better opinion of Mitt.  If Mitt meets expectations, then there is no gain on net because there is no surprise.  If he delivers fewer zingers than expected, then the audience is disappointed. (I believe Jeff, Emir Kamenica and Alex Frankel are working on a model of this sort of thing.  Hopefully, the model can easily be extended to offer a theory of zingers.)

So, the campaign has deliberately set a high “natural rate” of  zingers (NRZ) for Mitt.  Then, Mitt definitely has to deliver zingers to meet the NRZ to avoid deflation and really he should deliver a huge amount so he exceeds NRZ.  The Romney campaign should have downplayed zingers and Mitt’s NRZ, so their man is under less pressure.  In fact, that is what the Obama team has been doing for their candidate.

There is the possibility that the Romney team was bluffing to scare the Obama team or to focus their attention on zinger defense rather than answers to real issues of jobs, foreign policy etc. But such a strategy is not costless because zingers are graded on an expectations augmented zinger curve.


For the casual fan such as myself, the final second of the Packers-Seahawks game had the thrill of the Roman circus – an arbitrary, conflicted decision was handed down by emperor referees.  For the real fans and the teams, it must be torture.  But is it painful for the owners? After all, they will influence the decision in the labor dispute with referees.  Steve Young thinks not:

The NFL is “inelastic for demand,” Young said, meaning that nothing — including poor officiating — can deter a significant percentage of fans and corporate sponsors away from the most popular game in the country. It’s the primary reason the NFL has held steady in its labor impasse with regular officials: There is no sign that enough of the sporting public cares to make it a priority.

“There is nothing they can do to hurt the demand of the game,” Young said in the video. “So the bottom line is they don’t care. Player safety doesn’t matter in this case. Bring Division III officials? Doesn’t matter. Because in the end you’re still going to watch the game.”

But the NFL/referee dispute is partly about “pay for performance” – the NFL wants to bench referees who botch calls (the money issues are trifling as a fraction of NFL revenue).  This suggests the NFL does actually care about good officiating.  This makes them weak in the face of the current officiating.  They should cave sooner rather than later.

What Brown can’t do for you – if you are a Democrat – is give you control of the Senate.  From the last Public Policy Polling analysis of MA:

Things have been going Elizabeth Warren’s way in the Massachusetts Senate race over the last month. She’s gained 7 points and now leads Scott Brown 48-46
after trailing him by a 49-44 margin on our last poll.  Warren’s gaining because Democratic voters are coming back into the fold. Last month
she led only 73-20 with Democrats. Now she’s up 81-13. That explains basically the entire difference between the two polls. There are plenty of Democrats who like Scott Brown- 29% approve of him- but fewer are now willing to vote for him. That’s probably because of another finding on our poll- 53% of voters want Democrats to have control of the Senate compared to only 36% who want Republicans in charge. More and more Democrats who may like Brown are shifting to Warren because they don’t like the prospect of a GOP controlled Senate.


Mitt Romney and Paul Ryan have proposed a plan to allow private firms to compete with Medicare to provide healthcare to retirees. Beginning in 2023, all retirees would get a payment from the federal government to choose either Medicare or a private plan.  The contribution would be set at the second lowest bid made by any approved plan.

Competition has brought us cheap high definition TVs, personal computers and other electronic goods but it won’t give us cheap healthcare.  The healthcare market is complex because some individuals are more likely to require healthcare than others.  The first point is that as firms target their plans to the healthy, competition is more likely to increase costs than lower them.  David Cutler and Peter Orzag have made this argument.  But there is a second point: the same factors that lead to higher healthcare costs also work against competition between Medicare and private plans.  Unlike producers of HDTVs, private plans will not cut prices to attract more consumers so competition will not reduce the price of Medicare.  A simple example exposes the logic of these two arguments.

Suppose there are two couples, Harry and Louise and Larry and Harriet.  Harry and Louise have a healthy lifestyle and won’t need much healthcare but Larry and Harriet are unhealthy and are likely to require costly treatments in the future.  Let’s say the Medicare price is $25,000/head as this gives Medicare “zero profits”.  Harry and Louise incur much lower costs than this and Larry and Harriet much higher.  Therefore, at the federal contribution, private plans make a profit if they insure Harry and Louise and a loss if they insure Larry and Harriet.  So, private providers will insure the former and reject the latter. Or their plans deliberately exclude medical treatments that Larry and Harriet might need to discourage them from joining.  The overall effect will be to increase healthcare costs. This is because Harry and Louise get premium support of $50,00 total that is greater than the healthcare costs they incur now so they impose higher costs on the federal government than they do currently.  Larry and Harriet will be excluded by the private plans and will get coverage from Medicare.  This will cost more than $50,000 total so there will be no cost savings from them either.  Total costs will be higher than $100,00 as surplus is being handed over to Harry and Louise and their insurance companies.

To deal with this cream-skimming, we might regulate the marketplace.  It might seem to make sense to require open enrollment to all private plans and stipulate that all plans at a minimum have the same benefits as the traditional Medicare plan.  Indeed, the Romney/Ryan plan includes these two regulations.  But this just creates a new problem.

Suppose the Medicare plan and all the private plans are being sold at the same price.  The private plans target marketing at healthy individuals like Harry and Louise and include benefits such as “free” gym membership that are more likely to appeal to them. Hence, they still cream-skim to some extent and achieve a better selection of participants than the traditional public option.  (This is actually the kind of thing that happens in the current Medicare Advantage system. Sarah Kliff has an article about it and Mark Duggan et al have an academic working paper studying Medicare Advantage in some detail.)  So total healthcare costs will again be higher than in the traditional Medicare system.

But there is an additional effect.  Traditional competitive analysis would predict that one private plan or another will undercut the other plans to get more sales and make more profits. This is the process that gives us cheap HDTVs. The hope is that similar price competition should reduce the costs of healthcare. Unfortunately, competition will not work in this way in the healthcare market because of adverse selection.

Going back to our story, if one plan is cheaper than the others priced at say $20,000, it will attract huge interest, both from healthy Harry and Louise but also from unhealthy Larry and Harriet.  After all, by law, it must offer the same minimum basket of benefits as all the other plans.  So everyone will want to choose the cheaper plan because they get same minimum benefits anyway.  Also by law, the plan must accept everyone who applies including Larry and Harriet.  So, while the cheapest plan will get lots of demand, it will attract unhealthy individuals whom the insurer would prefer to exclude – this is adverse selection.  Insurers get a better shot at excluding Larry and Harriet if they keep their price high and dump them on Medicare.  This means profits of private plans might actually be higher if the price is kept high and equal to the other plans and the business strategy focused on ensuring good selection rather than low prices.  An HDTV producer doesn’t face any strange incentives like this– for them a sale is a sale and there is no threat of future costs from bad selection.

So, adverse selection prevents the kind of competition that lowers prices.  The invisible hand of the market cannot reduce costs of provision by replacing the visible hand of the government.

Romney advisor Richard Williamson says that the Middle East protests would not have happened under a President Romney:

“In Egypt and Libya and Yemen, again demonstrations — the respect for America has gone down, there’s not a sense of American resolve and we can’t even protect sovereign American property.”

The implicit logic is that the protests are caused by weakness on the part of America.  The protestors are taking advantage of us because they think we will not strike back.  If we are strong, the protestors would be deterred by the threat of American reprisals. So, as President Romney would be strong, foreign policy would be easier as there would be no events like this.

But there is an equally (more?) compelling reverse logic.  The protestors are weak.  They are extremists who have little support in the population.  But if America is aggressive even the moderates in the population will favor fighting fire with fire.  Of course the extremists attacking the embassies would be happy if we withdrew.  But their strategy would also succeed if we respond with aggression.   So, the right move is not to over-react.  Use proxies to fight this battle.  Perhaps the moderates in the local populations themselves would be willing to work with us as they have a lot to lose if tensions escalate and conditions worsen.

The situation calls for smart lateral thinking not a one-size-fits-all bellicosity.

Netanyahu is aggressively trying to persuade President Obama to draw a “red line” on Iran – if Iran crosses the line, presumably drawn on the level of uranium enrichment, they would face a US attack.  Such an attack would set back the Iranian nuclear program but it would likely unify the Iranian population behind the regime and make them redouble their efforts to go nuclear.  So, we should also evaluate what might happen if Iran does go nuclear before we commit to a strategy of a preemptive strike.  It turns out that Jim Fearon thought this through a while ago and did a little empirical work to flesh out the historical record.  He finds:

China, France, India, Israel, Pakistan, and the UK all saw declines in their total militarized dispute involvement in the years after they got nuclear weapons.  A number of these are big declines. USSR/Russia and South Africa have higher rates in their nuclear versus non-nuclear periods, though it should be kept in mind that for the USSR we only have four years in the sample with no nukes, just as the Cold War is starting.

The whole article is an interesting read.

Romney and Ryan’s weekend performances on TV generated much right wing angst.  They looked shady trying to dodge questions asking them to spell out which tax loopholes they would close.  There are similar issues with their healthcare plan: they would “repeal and replace” Obamacare, but replace it with what exactly?

There is an obvious advantage to policy ambiguity: if you are clear, the other side knows what to attack but if you are opaque, it is harder.  The disadvantage is that you opponent can then make something up as being our policy and hang you with that.  Your counter-argument is to claim that your policy is not what your opponent says it is etc etc.

The balance is weighed towards disadvantage when there is an obvious policy to use to fill in the blanks.  This is the issue Romney faced as soon as he picked Ryan.  Ryan has lots of plans for the budget, Medicare, privatizing Social Security etc.  These are obvious and credible policy options for a Romney-Ryan White House.  The fact that the VP candidate has embraced these policies undercuts your counter-argument to your opponent’s argument.  Policy ambiguity loses its strategic advantage.  If Romney had picked Pawlenty, it might have worked.  But with Ryan on board, Romney has to spell out his policies in greater detail and Ryan has to own them.  He has done this already with abortion and he has to start doing the same with his economic policies.

The difficulty is that Romney has not embraced ambiguity enough to make it easy to embrace clarity.  He has promised various tax cuts (e.g. estate tax), and these tie him down.  Can he identify loopholes to raise revenue that covers the tax cuts he has promised without raising taxes on the middle class? If he can’t, he’s stuck using an outsider’s strategy but with an insider as his partner.

Mitt said that Israeli and Palestinian and Mexican and US economic outcomes differ because of cultural differences. This immediately brought to mind the recent book by Daron and Jim, “Why Nations Fail” because they begin by comparing Nogales Arizona and Nogales Mexico. These have quite similar geography, quite similar culture and yet very different GDPs. Daron and Jim argue this is because of vastly different political and economic institutions. Now Daron and Jim have addressed the issue themselves on their blog. They offer a couple of more examples:

But as we show in Why Nations Fail, cultural differences cannot explain differing levels of prosperity. Deng Xaioping didn´t change Chinese culture after 1978 to make the economy grow, but he did change economic institutions a lot. Indeed, many cultural differences we see are the outcomes of different institutional choices. This is surely the case between North and South Korea, for example. After all, does Mitt and David think that there were huge cultural differences between the north and the south of the 38th parallel before the separation of Korea into two?

I guess we need a convincing example of a situation where two countries have the same geography, the same institutions, but different cultures and vastly different economic outcomes.

Crown should get a copy of Acemoglu and Robinson’s “Why Nations Fail” over to the Romney campaign a.s.a.p. Speaking about the difference in income between Israelis and Palestinians, Romney suggested:

that cultural differences between the Israelis and the Palestinians were the reason the Israelis were so much more economically successful than the Palestinians. He also vastly understated the income disparities between the two groups.

Hin inspiration for the theory? Two books:

In his speech, Mr. Romney mentioned two books that had influenced his thinking about nations — “Guns, Germs and Steel,” by Jared Diamond, and “The Wealth and Poverty of Nations,” by David S. Landes. Mr. Diamond’s book, Mr. Romney said, argues that the physical characteristics of the land account for the success of the people living there, while Mr. Landes’s book, he continued, argues that culture is the defining factor.

“Culture makes all the difference,” Mr. Romney said. “And as I come here and I look out over this city and consider the accomplishments of the people of this nation, I recognize the power of at least culture and a few other things.”

After this caused some backlash:

[H]is campaign said that the Associated Press had “grossly mischaracterized” the remarks by not providing the full context. For instance, the campaign said, after mentioning the per capita G.D.P. of Israel and Palestine, Mr. Romney also said: “And that is also between other countries that are near or next to each other. Chile and Ecuador, Mexico and the United States.”

The Acemoglu and Robinson book begins with Nogales AZ (USA) vs Nogales Mexico and puts institutions at the center of an explanation of income disparities not culture or geography.

Things are not going smoothly for Romney’s London trip. First, he criticizes secuirty and attendance at the London Olympics only to draw a rebuke from Prime Mister David Cameron. The Telegraph reports:

Mitt Romney is perhaps the only politician who could start a trip that was supposed to be a charm offensive by being utterly devoid of charm and mildly offensive.

And now it seems tickets are not selling for his fundraiser so he has been forced to cut prices. According to the Guardian:

The Mitt Romney Summer 2012 World Tour to Three Countries is apparently having trouble moving tickets.
The London blogger Guido Fawkes reports that organizers of a Romney fundraising reception in the city this evening have slashed the original $2,500 ticket price to $1,000 for “a few last minute guests,” in an effort to drum up participation.

Your manager is a pain in the neck. He takes credit for your ideas, orders you around, second guesses himself and is horribly indecisive. His subordinates can’t stand him. But you are all too scared to complain to the Big Boss – who knows what the repercussions will be? But the Big Boss does get some sense that things are not going well. Some projects don’t work out because they are badly conceived and poorly executed. At one point, she just takes away some of the responsibilities of your manager. At the same time she heaps him with effusive praise. Why?

She and he know that her praise is insincere and that the manager has been demoted. What effect could her insincere praise have?

Even though you know the Big Boss’s statements are empty, does everyone else? You don’t know. Maybe some of them think she means every word she said. They will treat your former manager with respect. You could enlighten them. But that would ruin the workplace atmosphere and make you seem churlish. So you keep your mouth shut. So does everyone else. So you all act as if the Big Bos’s words were true. As you all live the big lie, so can your former manager. He does his work diligently and the Big Boss is happy.

CNN got the call wrong on the Supreme Court and the individual mandate. They then tweeted it, put it up on their website, put in as a banner onscreen etc etc. Then news began filtering in that the mandate had been upheld as a tax. What should they do now? There is an interesting blow by blow account of what happened by Tom Goldstein on SCOTUSblog. He adds:

Ironically, CNN reacted too slowly in part to avoid a second error.  The network did not want to be in the position of reporting that the mandate had been struck down, then reporting that it was upheld, then reverting to its initial report.  (That had happened to the media in the 2000 presidential election, and it had been a debacle.)  CNN gravitated to an intermediate position of uncertainty on the air, which of course was not decisive enough to correct viewers’ initial impressions.

CNN had also converted itself into an integrated circuit in which its electronic media teams were tied directly into the broadcast operation.  But not anticipating the possibility of an error or confusion, its first web, electronic, and Twitter reports did not hedge.  And the network did not have a clear plan to reverse the circuit on the electronic-media side and tell readers that its initial reports may have been wrong.

Once CNN made one mistake, it was hard to admit it because they were operating in an open environment with other players judging their actions. If CNN were operating in isolation – like an individual deciding whether to invest in a healthcare company – they would have reacted rapidly to correct their action given their latest information. But in an environment where others are watching them, they have to make future decisions which are consistent with their earlier error.

Chief Justice Roberts and four others found that the individual mandate could not be justified via the Commerce Clause (CC) in the Constitution. The CC allows the federal government to “regulate” interstate commerce. Roberts found that precedent allows the government to regulate activity via the CC but the individual mandate regulates inactivity and is hence unconstitutional (p. 20 of Roberts’ opinion):

The individual mandate, however, does not regulate existing commercial activity. It instead compels individuals to become active in commerce by purchasing a product, on the ground that their failure to do so affects interstate commerce. Construing the Commerce Clause to permit Congress to regulate individuals precisely because they are doing nothing would open a new and potentially vast domain to congressional authority.

Moreover (p. 22-23),

Indeed, the Government’s logic would justify a mandatory purchase to solve almost any problem…To consider a different example in the health care market, many Americans do not eat a balanced diet. That group makes up a larger percentage of the total population than those without health insurance…..The failure of that group to have a healthy diet increases health care costs, to a greater extent than the failure of the uninsured to purchase insurance….Those increased costs are borne in part by other Americans who must pay more, just as the uninsured shift costs to the insured….Congress addressed the insurance problem by ordering everyone to buy insurance. Under the Government’s theory, Congress could address the diet problem by ordering everyone to buy vegetables.

Let’s take a quick look at the broccoli market. At the prevailing price, absent regulation, some consumers are active in the market and buy broccoli and other are inactive and don’t buy broccoli. Similarly, there are some  producers who sell broccoli and other potential sellers who, given the prevailing price, produce chilis. Domestic broccoli growers are mainly in California but many broccoli consumers live in the Acela corridor so there is interstate commerce.

Then, the government enters the broccoli market. Some say this is because of the health benefits of broccoli, others say this is because the broccoli growers have formed an effective lobby, much like the sugar producers. The government intervention comes in the form of a subsidy to broccoli consumers. Consumers who consume 1 lb of broccoli/week get a $300 deduction on their taxes (Whole Foods immediately starts selling an annual contract which can easily be appended to your IRS form to get the broccoli deduction.)

Consumers who were active before still continue to buy: after all they are getting an extra incentive to buy. But also consumers who were inactive before now start to buy: after all the broccoli vs arugula margin now favors broccoli. In fact there is a new annual demand curve for broccoli D'(p) where D'(p)=D(p-300) where D was the original demand curve. There is higher demand at every price and the price of broccoli goes up. This changes the broccoli-chili margin for producers and inactive broccoli producers now switch to activity. (Also, profits go up for broccoli producers giving them the incentive to lobby for a consumer subsidy.)

Therefore, intervention in the “active” market changes the active-inactive decision and influences inactivity. An equivalent policy is to use to stick rather than a carrot and impose a penalty of $300 on consumers who are consuming less that 52 pounds of broccoli/year.  Appropriately chosen carrots and sticks are equivalent in terms of broccoli trade. (More broadly, a tax or subsidy to broccoli production could also implement the same output of broccoli.) This simple analysis has some implications for Democrats and Republicans.

First, many instruments can implement the same output so the fact that one kind of intervention has been deemed unconstitutional is not important. A carrot can replace a stick.

But, second, the instruments differ in their revenue implications. Carrots are expensive to the government and sticks raise revenue. More use of carrots means bigger deficits or distortionary taxes.

And, third, since penalizing inactivity is equivalent to incentivizing activity, we appear to have conflicting precedents. It is legal to regulate activity but not to regulate inactivity. But regulating activity impacts inactivity and if regulating inactivity is unconstitutional, in a roundabout way, the Roberts et al applies. On the other hand, there are plenty of precedents for regulating activity even if they influence inactivity. In the (in)famous Wickard case, quotas on farmers reduced activity and increased inactivity. I am not a lawyer so I can not sure what happens in this circumstance. I guess the Supremes get to vote and they can rationalize votes one way or the other based on conflicting precedents. All bets are off – will Roberts switch his vote at the last minute etc.?

Plenty of stuff for us citizens to contemplate on July 4. I’ll be grilling broccoli.

At an all-you-can-buffet lunch, the incentives are clear: go back again and again, refill your plate and guzzle away. You would eat less if each new plate came with another price tag. Add to that a lack of self control and you get overconsumption and a desperate desire for a nap in the afternoon.

A CEO has a salaried employee. The employee gets paid much the same however much work he does. So, the CEO asks him to sit on this committee or investigate that new market or run recruiting etc. etc. Add to that moral suasion so it is a duty to work hard for the firm and you get overwork and a desperate desire to avoid the CEO. There will be many task forces and layers of bureaucracy as the cost of each initiative is so small. Better to pay for performance and internalize some of the costs of each extra foray into administration and work.

What is the difference between the Bowles-Simpson plan for deficit reduction vs President Obama’s plan? Ever wondered? I have. It seems the President’s plan calls for less cuts in Defense and Social Security but has more cuts in annual domestic spending. An Obama for America document summarizes the differences and of course does a comparison with the Romney plan. Romney’s plan is short on details so there is a lot of extrapolation. Is there an equivalent document put out by the Romney campaign?

So, we have found by Chris Bosh’s absence and then his presence that he is a significant part of the Miami Heat. But who is the fourth most important man on the team? An argument can be made that it is Shane Battier. A New Yorker story espouses the same theory. It led me to an old article by Michael Lewis. But just why is Battier so good? Lewis makes a telling point:

There is a tension, peculiar to basketball, between the interests of the team and the interests of the individual. The game continually tempts the people who play it to do things that are not in the interest of the group. On the baseball field, it would be hard for a player to sacrifice his team’s interest for his own. Baseball is an individual sport masquerading as a team one: by doing what’s best for himself, the player nearly always also does what is best for his team….It is in basketball where the problems are most likely to be in the game — where the player, in his play, faces choices between maximizing his own perceived self-interest and winning. The choices are sufficiently complex that there is a fair chance he doesn’t fully grasp that he is making them.

Taking a bad shot when you don’t need to is only the most obvious example. A point guard might selfishly give up an open shot for an assist. You can see it happen every night, when he’s racing down court for an open layup, and instead of taking it, he passes it back to a trailing teammate. The teammate usually finishes with some sensational dunk, but the likelihood of scoring nevertheless declined. “The marginal assist is worth more money to the point guard than the marginal point,” Morey says. Blocked shots — they look great, but unless you secure the ball afterward, you haven’t helped your team all that much. Players love the spectacle of a ball being swatted into the fifth row, and it becomes a matter of personal indifference that the other team still gets the ball back…

Having watched Battier play for the past two and a half years, Morey has come to think of him as an exception: the most abnormally unselfish basketball player he has ever seen. Or rather, the player who seems one step ahead of the analysts, helping the team in all sorts of subtle, hard-to-measure ways that appear to violate his own personal interests.

This has two Holmstrom and Milgrom ideas: tension between individual incentives and team incentives; use of easily identifiable measures of output distorting incentives to invest is less identifiable costly tasks. And in the absence of monetary incentives and market efficiency, the only solution to the moral hazard problem is in ethical behavior (Arrow made similar points many years ago).

Cogent analysis by James Surowiecki at New Yorker:

[P]olicymakers are seriously discussing a so-called Grexit—in which Greece would default on its debts and abandon the euro.

This isn’t an outcome that anyone wants. Even though a devalued currency would make Greece’s exports cheaper and attract tourists, it would do so at a terrible price, destroying huge amounts of wealth and seriously harming the country’s G.D.P. It would be costly for the rest of Europe, too. Greece owes almost half a trillion euros, and containing the damage would likely require the recapitalization of banks, continent-wide deposit insurance (to prevent bank runs), and more aid to Portugal, Spain, and Italy, which seem to be the next countries in line to default. That’s a very high price to pay for getting rid of Greece, and much more expensive than letting it stay……

But the catch is that Europe isn’t arguing just about what the most sensible economic policy is. It’s arguing about what is fair. German voters and politicians think it’s unfair to ask Germany to continue to foot the bill for countries that lived beyond their means and piled up huge debts they can’t repay. They think it’s unfair to expect Germany to make an open-ended commitment to support these countries in the absence of meaningful reform. But Greek voters are equally certain that it’s unfair for them to suffer years of slim government budgets and high unemployment in order to repay foreign banks and richer northern neighbors, which have reaped outsized benefits from closer European integration……

The basic problem is that we care so much about fairness that we are often willing to sacrifice economic well-being to enforce it…. a famous experiment known as the ultimatum game—one person offers another a cut of a sum of money and the second person decides whether or not to accept—shows that people will walk away from free money if they feel that an offer is unfair. Thus, even when there’s a solution that would leave everyone better off, a fixation on fairness can make agreement impossible.

Hart and Moore and Hart and Holmstrom have offered theories of centralization based on behavioral issues. I’m not familiar with the other work on behavioral contract theory. But my guess is there is plenty of room for interesting research in the area along lines implicit in this article.

Jean Tirole gave a paper on “Laws and Norms” as his Schwartz Lecture last week. He has been working on psychology and economics for many years with Roland Benabou. The presentation was an extension of that work. Consider a game where a costly action generates a positive externality. Agents are motivated to take such an action by a monetary reward and a private value from the action. However, they also care what others think of them. How can we think about this formally and what implications does it have for contributions to the public good?

Tirole’s (and Benabou’s) first contribution is to provide a simple, tractable model of this psychological effect. Each agent’s payoff is a function of others’ expectation of his private value given his action and monetary reward. Hence if you contributed to the public good but received no monetary reward, the expectation is different that if you contributed and got paid. From this simple formulation much can be deduced. If a contribution is elicited via a monetary reward, it carries less positive information about the contributor than one when there was no monetary reward. There might be a bigger contribution if there is no monetary reward. The less observable the contribution, the smaller is the incentive to make it etc.

The contribution was twofold. First, the mathematical modeling of the psychological effect requires some art and effort. Second, the model is intuitive and simple enough that others can use it to express their own ideas. One of my colleagues is thinking about two papers based on the basic Tirole model.

The American Economic Review publishes an unrefereed conference volume, Papers and Proceedings, in May of every year.  Of course, the AER also a publishes a refereed journal which rejects more than 95% of submissions. Someone with an AER P&P might be tempted to pass it off as an AER on their CV. There is a possible gain in prestige at the cost of being found out and facing a social sanction. Snyder and Zidar call this the obfuscation theory. Alternatively, perhaps these AER P&Ps have real academic value and those who describe their own such papers as real publications should also cite other such papers more. Different conventions of citation may develop among different subgroups. This is the convention model. Snyder and Zidar find support for the convention model in the data. They mention that AER P&Ps had more citations that AERs in the past and hence older economists tend to see P&Ps as real publications while younger economists do not. This should imply that younger economists should be more careful about distinguishing P&Ps from AERs on their CVs.

I have two questions/comments.

An economist who lists a P&P as a refereed publication faces dissonance. On the one hand, they would like to see themselves as good people, on the other they know they are doing something shady. One way to resolve the dissonance is to cite other researchers P&Ps more. This helps propagate the self-deception that P&Ps are legitimate pieces of refereed research and hence listing them as such is justified.

Second, another possible paper: Do P&Ps have more errors than refereed publications? One job of a referee is to catch errors after all. If so, how many cites come from people pointing out mistakes?

(Hat Tip: MR)

Michael Ostrovsky (Stanford GSB) and Michael Schwarz (Yahoo! Research) helped Yahoo! to improve its click price per ad. Yahoo! was charging 10c/click. Ostrovsky and Schwarz ran some field experiments:

Reserve prices in the randomly selected “treatment” group were set
based on the guidance provided by the theory of optimal auctions, while in the “control” group
they were left at the old level of 10 cents per click. The revenues in the treatment group have
increased substantially relative to the control group, showing that reserve prices in auctions can in
fact play an important role and that theory provides a useful guide for setting them.

It seems they made money for Yahoo!:

We conclude with a quote from a Yahoo! executive, describing the overall impact of
improved reserve prices on company revenues.
On the [revenue per search] front I mentioned we grew 11% year-over-year in the quarter
[. . . ], so thats north of a 20% gap search growth rate in the US and that is a factor of,
attributed to rolling out a number of the product upgrades we’ve been doing. [Market
Reserve Pricing] was probably the most signi cant in terms of its impact in the quarter.
We had a full quarter impact of that in Q3, but we still have the bene t of rolling that
around the world.
Sue Decker, President, Yahoo! Inc. Q3 2008 Earnings Call.

But it seems Yahoo! is eliminating the entire research group in its downsizing, including I suppose Michael Schwarz. Preston McAfee had already left for Google Research. I hope others also have a soft landing.

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