You are currently browsing the category archive for the ‘Uncategorized’ category.

The poll aggregators were wildly off as they gave Hillary Clinton an over 90% chance of winning. Nate Silver was the most pessimistic because of his theory of correlated forecasting errors:

State outcomes are highly correlated with one another, so polling errors in one state are likely to be replicated in other, similar states….If Clinton loses Pennsylvania despite having a big lead in the polls there, for instance, she might also have problems in Michigan, North Carolina and other swing states.

The correlating factor appears to be the white working class vote which abandoned Clinton in the Rust Belt States. For reasons we do not yet fully understand, this vote for Trump did not appear in polls. The polls were then all off the mark in all Rust Belt states.

The others poll aggregators assumed independence and gave less thought to a simple theory of voting that might generate independence let alone whether such a theory might be plausible. If they hand, it would have led them to a more plausible way to look at the data, like Silver, and hence better predictions.

(HT Georgy Egorov though I may not be doing justice to his point.)

Evangelical Christians knew who Trump was, had seen the videos and ads and yet still voted for Trump. Their main issue is the make-up of the Supreme Court and Trump gave them a list of potential nominees they liked . He was more likely to choose an anti-abortion justice than Hillary. So, the vast majority worked out their constrained optimal choice and went for it.

Greens could register a protest vote for Jill Stein in the election or choose between one of two electable candidates. No doubt, Jill, if elected, would have tried to implement a first-best environmental policy (and failed to get it past a Republican Congress) but realistically it was choice between Hillary getting nothing done or Trump ripping up the Obama legacy. The obvious legacy of interest to Greens is the Paris agreement and this is now the Paris disagreement. And in Michigan and Wisconsin, Hillary’s margin of loss is smaller than Jill Stein’s vote. Of course, this is not enough – Robby Mook would have to have had the foresight to get Beyonce to come to Philly not Cleveland.

So why are Evangelicals better than Greens at this kind of reasoning? Are Greens just crazier? My colleague Jorg Spenkuch found a clever way to measure the fraction of crazy Greens in Germany – I think he finds it is 60%. Not sure if he has a way to measuring crazy German Evangelicals (if they exist)! Another theory would be based on learning. Evangelicals have been around the block a while and have learned the optimal strategy but Greens have not. But a counterargument is the Gore vs Bush Florida battle where Ralph Nader played a crucial role. Surely the Greens voters could remember having screwed up the election of the person who would have been the best President on the environment ever? I parry this thrust by positing the Greens who voted for Jill Stein are so young that Bush v Gore is not part of their recalled history.

HT Krugman

 

How do you assess whether a probabilistic forecast was successful?  Put aside the question of sequential forecasts updated over time.  That’s a puzzle in itself but on Monday night each forecaster will have its final probability estimate and there remains the question of deciding, on Wednesday morning, which one was “right.”

Give no credibility to pronouncements by, say 538, that they correctly forecasted X out of 50 states.  According to 538’s own model these are not independent events.  Indeed the distinctive feature of 538’s election model is that the statewide errors are highly correlated.  That’s why they are putting Trump’s chances at 35% as of today when a forecast based on independence would put that probability closer to 1% based on the large number of states where Clinton has a significant (marginal) probability of winning.

So for 538 especially (but really for all the forecasters that assume even moderate correlation) Tuesday’s election is one data point.  If I tell you the chance of a coin coming up Armageddon Tails is 35%, you toss it once and it comes up Tails you certainly have not proven me right.

The best we can do is set up a horserace among the many forecasters.  The question is how do you decide which forecaster was “more right” based on Tuesday’s outcome?  Of course if Trump wins then 538 was more right than every other forecaster but we do have more to go on than just the binary outcome.

Each forecaster’s model defines a probability distribution over electoral maps. Indeed they produce their estimates by simulating their models to generate that distribution and then just count the fraction of maps that come out with an Electoral win for Trump.  The outcome on Tuesday will be a map.  And we can ask based on that map who was more right.

What yardstick should be used?  I propose maximum likelihood.  Each forecaster on Monday night should publish their final forecasted distribution of maps.  Then on Wednesday morning we ask which forecaster assigned the highest probability to the realized map.

That’s not the only way to do it of course, but (if you are listening 538, etc) whatever criterion they are going to use to decide whether their model was a success they should announce it in advance.

It was great to wake up this morning and find that Oliver Hart and Bengt Holmström were awarded the Nobel Prize in Economics for 2016. Their research is the bread and butter of modern economic theory and hence is taught in all first-year PhD microeconomics courses and more applied versions are taught to MBAs in electives on organizational economics.

Let me begin with the work of Bengt Holmström. The prize announcement begins with his work on the principal-agent model with moral hazard: An agent privately chooses an action that impacts the welfare of a principal. The principal observes noisy signals of the action and rewards the agent as a function of the signals to align incentives. Holmström asks: Which variables should be included by the principal is her performance measure and which should be omitted? In the “sufficient statistic” result, he shows that variables should be included if and only if they contain information about the action. Adding more signals into a performance measure would add superfluous noise into payments which the a risk-averse agent would have to be compensated for. On the other hand, subtracting informative signals from a performance would eliminate useful information for aligning incentives.

This result poses a puzzle which Bengt turns to in later work: Real-world contracts are rarely as complex as the informativeness principle would suggest. Why is that the case? In joint work with Paul Milgrom, Holmström introduced the multi-task principal agent model. The main innovation was to allow the agent to perform multiple tasks and to substitute from one to the other. Holmström and Milgrom show that in certain circumstances it is better not to may pay responsive to performance. Suppose someone working in a fast food restaurant can look after the kitchen or sell burgers. Burger sales are measurable but time spent looking after the kitchen is not. Then making pay depend on burger sales can backfire as the agent substitutes away from looking after the kitchen. Better to have low-powered incentives which are relatively flat in burger sales.

Bengt has made at least two other seminal contributions to moral hazard models. In his work on moral hazard in teams he shows that it might be impossible achieve total value maximizing outcomes when joint output is measurable but individual output is not. In his career concerns model, he shows that an agent trying to prove he is high ability to a market might work too hard at the start of his career and then tail off at the end. All these papers are workhorses of applied theory. They show Holmström’s flair of coming up with models that serve as vehicles for others to make interesting contributions to understanding incentives.

I want to end my appreciation of Bengt Holmström by pointing out that several of these papers were written when he was an Assistant Professor in the MEDS Department at Kellogg. Roger Myerson has already won a Nobel Prize for the work he did when he was in MEDS.

Oliver Hart took contract theory in a different direction by emphasizing the role of property rights. In the principal-agent model, the principal might be an employer and the agent an employee. Or the principal might be one firm and the agent an independent subcontracter. In other words, the model cannot address the question of when trade should take place within a firm or across two firms. Building on some informal ideas of Oliver Williamson, Oliver Hart with Sandy Grossman and John Moore used the idea that contracts are incomplete to offer a unified theory of the optimal allocation of property rights. The key idea is that ownership of an asset confers residual rights of control so you can use it for production should a relationship break down. Suppose a buyer and a seller are trading a widget. They can both invest ex ante to increase the value of trade but because contracts are incomplete they must haggle over the price ex post. This means both are subject to hold-up: the benefit of any costly investment is shared with the other trading party. Hence, both will underinvest. This underinvestment is mitigated by the fact that if a player owns an asset he can use it to trade with others so at least he can capture some value from his investment. So, if one player’s investment is particularly important for value creation he should be own all the assets and employ the other – so we have an integrated firm. If both players’ investments are important, then they should both own assets and then we have trade across two independent firms.

Debt and equity confer decision rights in different ways. So, Oliver Hart’s way of looking at control rights has proved to be very fruitful in corporate finance. But there is a lot to be done. In particular, without a theory of why contracts are incomplete there is a tension between the lessons of mechanism design and the ideas in Grossman-Hart-Moore. This tension was pointed out by Maskin and Tirole. Eric Maskin was my PhD advisor at Harvard and Oliver arrived at Harvard just as I graduated. At that point, my friend, co-author and advisor Tomas Sjöström, who was sitting at the podium during the announcement as he is on the Nobel Committee, was an assistant professor at Harvard and I would visit to work with him. We became interested in Oliver’s ideas and also knew of the Maskin-Tirole critique. So, Tomas and I wrote a few papers studying optimal decision rights when agents can collude or renegotiate inefficient outcomes without falling afoul of the Maskin-Tirole critique. I continue to work on these questions still. I would never have worked on those papers without Oliver’s seminal insights to build on. So, I am particularly happy personally with this prize.

 

Trump excites the “base” but not independents or traditional Republicans who believe in free markets etc. The temptation for Congressional Republicans up for election is to use “strategic ambiguity” and have their cake and eat it. That is, say you support the Republican Presidential nominee but not embrace his positions, e.g like Ayotte and McCain. This way, you hope ticket-splitters vote for you to check and balance Hillary.

Unfortunately, Obama moves second. He will say Trump is unfit to be President, is not a Republican and will tar supporters with the same brush. This way he will seek to slice off the base vote from the non-base. A vote for a supporter is a vote for Trump. How will they check and balance a demagogue when they are not splitting with him now? Also – and somewhat unexpectedly – Trump is helping Obama out here by refusing to endorse Congressional Republicans employing strategic ambiguity. He refuses to endorse Ayotte and McCain because of criticisms etc. Hence,he is signaling to his base not to support them (not sure if his strategy makes sense but I will take him at face value).

So, on the one hand, Obama will attack anyone on the fence by saying they support Trump (hoping to peel off independents, “real” Republicans and ticket-splitters) and Trump will attack anyone on the fence by saying they do not support him (hoping his base will not support them?!!).

So, strategic ambiguity is going to backfire so you have to pick a side. Which side? Can you win if you support him and he loses your state? If the answer is a likely Yes, you support Trump (e.g. Rubio) and if it is a No, you Dump Trump. The more likely your state is to go for Hillary, the more plausible your “I will check and balance Hillary” argument and the less costly it is to Dump Trump. Hence, Toomey and Ayotte are likely in this category. If the state is 50-50 like AZ, your choice is difficult, eg McCain, but you have to pick a side otherwise both may not vote for you.

 

 

 

  1. Suppose one forecaster says the probability Trump wins is q and the other says the probability is p>q.  If Trump in fact wins, who was “right?”
  2. Suppose one forecaster says the probability is q and the other says the probability is 100%.  If Trump in fact wins, who was right?
  3. Suppose one forecaster said q in July and then revised to p in October.  The other said q’ < q in July but then also revised to p in October.  Who was right?
  4. Suppose one forecaster continually revised their probabilistic forecast then ultimately settled on p<1.  The other forecaster steadfastly insisted the probability was 1 from beginning to end.  Trump wins.  Who was right?
  5. Suppose one forecaster’s probability estimates follow a martingale (as the laws of probability say that a true probability must do) and settles on a forecast of q.  The other forecaster‘s “probability estimates” have a predictable trend and eventually settles on a forecast of q’>q.  Trump wins.  Who was right?
  6. Suppose there are infinitely many forecasters so that for every possible sequence of events there is at least one forecaster who predicted it with certainty.  Is that forecaster right?

What I wrote yesterday:

When Fox broadcasts the Super Bowl they advertise for their shows, like American Idol. But those years in which, say, ABC has the Super Bowl you will never see an ad for American Idol during the Super Bowl broadcast.

This is that sort of puzzle whose degree of puzzliness is non-monotonic in how good your economic intuition is.

If you don’t think of it in economic terms at all it doesn’t seem at all like a puzzle. Try it: ask your grandpa if he thinks that its odd that you never see networks advertising their shows on other networks.  Of course they don’t do that.

When you apply a little economics to it that’s when it starts to look like a puzzle. There is a price for advertising. The value of the ad is either higher or lower than the price. If its higher you advertise.  If its another network that price is the cost of advertising. If its your own network that price is still a cost: the opportunity cost is the price you would earn if instead you sold the ad to a third-party.  If it was worth it to advertise American Idol when your own network has the Super Bowl then it should be worth it when some other network has it too.

But a little more economics removes the puzzle.  Networks have market power.  The way to use that market power for profit is to artificially restrict quantity and set price above marginal cost. (The marginal cost of running another 30 second ad is the cost in terms of viewership that would come from shortening, say, the halftime show by 30 seconds.)

When a network chooses whether to run an ad for its own show on its own Super Bowl broadcast it compares the value of the ad to that marginal cost.  When a network chooses whether to run an ad on another network’s Super Bowl broadcast it compares the value to the price.

Indeed even if the total time for ads is given and not under control of the network (i.e. total quantity is fixed) the profit maximizing price for ads will typically only sell a fraction of that ad time.  Then the marginal (opportunity) cost of the additional ads to pad that time is zero and even very low value ads like for American Idol will be shown when Fox has the Super Bowl and not when any other network does.

In fact that last observation and the fact that you never ever see any network advertise its shows on another network tells us that the value of advertising television shows is very low.  Perhaps that in fact tells us that the networks themselves understand (but their paying advertisers don’t) that the value of advertising in general is very low.

When Fox broadcasts the Super Bowl they advertise for their shows, like American Idol. But those years in which, say, ABC has the Super Bowl you will never see an ad for American Idol during the Super Bowl broadcast.

More generally, networks advertise their own shows on their own network but never pay to advertise their shows on other networks.  I never understood this.  But I think I finally figured it out, there’s some very simple economics behind this.

Right now at Primary.guide, you can read the current betting market odds for a “contested convention” and a “brokered convention.”  The definitions are as follows.  A contested convention means that no candidate has 1237 delegates by the end of the last primary.  A brokered convention means that no candidate wins on the first ballot at the convention.

Right now the odds of a brokered convention are 50%.  Note also that the odds of a Trump nomination are 50% as well.  And Trump is the only candidate with any chance of winning a majority on the first ballot (even if he doesn’t get 1237 bound delegates he will be close and no other candidate could combine their bound delegates with unbound delegates to get to a majority.)

Thus, if there is no brokered convention Trump is the nominee.  The probability of no brokered convention is 50%.  Thus the entire 50% probability of a Trump nomination is accounted for by the event that he wins on the first ballot.

In other words there is zero probability, according to betting markets, that Trump wins a brokered convention.

The odds of a contested convention are 80%. That means that betting markets think there is a 30% chance Trump fails to get 1237 bound delegates but still wins on the first round.  I.e. according to betting markets we have the following three mutually exclusive events:

  1. Trump gets to 1237 by June 7.  20% odds
  2. Trump fails to get 1237 bound delegates but wins on the first ballot.  30%
  3. Nobody wins on the first ballot and Trump is not the nominee.  50%

Donald Trump:

You are a lifelong Republican and think Trump is not a conservative. You would never vote for him. You go into the voting both and see Clinton’s name and Trump’s name. What do you do? Either you bite the bullet and vote for Clinton or you abstain. Either way you have increased the probability that Hillary wins – OK not by much but since you are in the voting booth in the first place, you’re not a fully rational voter and so you care about the infinitesimal impact you have. So, you decide to make sure she’s hamstrung by a Republican Congress. You vote for the Republican Congressional candidates.

You would vote for Cruz but suspect he is a bit nuts. You vote for the Democratic Congressional candidates to make sure Cruz is ineffective.

(Kasich would actually be best all round but has no chance of making it.)

 

 

 

Suppose politician C goes negative on politician M. Politician’s M’s support declines..where do his supporters go? If there are just two candidates, they either go to politician C or stay at home. But if there are three or more candidates, they might go to politician A, B, or K etc etc. So, to a first order, it is less profitable to go negative the greater the number of candidates.

This resembles the Holmstrom teams model but with unproductive effort.

 

 

 

From Buzzfeed:

HENNIKER, New Hampshire — In town halls, pizzerias, and high school auditoriums, hundreds of voters are carefully evaluating the three governors who have pinned their presidential hopes on Tuesday’s primary in the Granite State — Jeb Bush, Chris Christie, and John Kasich.

Some have made their choice of the three; others are still undecided. But they all agree on one big thing: The Republican Party needs a strong contender coming out of New Hampshire to take down Donald Trump.

With the stakes so high, these “non-angry voters,” as described by some, are wrestling with whether to ultimately vote for their personal favorite — one of the three governors, or go by the polls in favor of a more practical favorite, Sen. Marco Rubio.

Perhaps the GOP should adopt approval voting as suggested by my colleague Bob Weber where each voter can “approve” as many candidates as he likes.

Of course, Ted Cruz and Donald Trump would disapprove or approval voting.

My colleagues are multi-talented:

Screenshot 2015-11-03 09.04.21

Robert McDonald, Associate Dean for Faculty, and Jeff Cohen performing “Here comes the weekend” by Dave Edmunds and Nick Lowe and “What’s so funny about peace, love and understanding?” by Nick Lowe.

HT: Bob McDonald for telling me first song is also by Dave Edmunds.

12049560_1639842076275234_7933151579960732577_n

Uber Drivers tried to organize a strike to demand higher pay.

Uber drivers are competing with each for fares. The smaller the number of other drivers on the road, the greater the chance a driver get business. Also, when demand for rides outstrips supply of drivers, Uber might activate surge pricing to increase supply. Not only does a driver stand to get more business, he gets a higher fare/mile. The incentives to deviate from the strike are huge.

So, in Chicago, during the supposed strike, the number of Uber Drivers on the road was huge. Surge pricing was not activated because it was not necessary.

HT: An Uber driver.

I was on Chicago Tonight very briefly discussing Purple Pricing (see around 4 minute mark).

http://video.wttw.com/viralplayer/2365587170

Good for teaching:

In 2008, the New South Wales government announced plans to build a coal mine here, promising jobs and cheap power. The coal business was booming because of demand from China. The government bought up 177 square miles of land for the mine project, boarding up 114 farms and homes.

Since then, coal prices have plummeted to their lowest level in years and the government has not been able to find a mining company willing to open a mine here. In 2013, the government abandoned its plans to develop the mine and last December appointed Goldman Sachs to sell the land.

By then, the district had lost 95 families, about 10 percent of its population. A sense of loss pervades the town, and residents feel blindsided by forces beyond their control.

Party A steals something of value to Party B and demands a ransom for its return. But once the ransom has been paid, what is to stop Party A from coming back and demanding more?

One mechanism that purchases commitment is reputation. Party A has more ransoms to extract in the future and seeks to be seen as a fair player despite being an extortionist. An interesting example is provided by Cryptowall. This “company” sends an email with a devious attachment, a virus that encrypts your harddrive if you click on it. They demand a ransom in Bitcoin to send the decryption key. The price changes over time.

The fact that they do not take your data means that they cannot come back and demand another ransom for the same data if you pay.

Because the price changes, there can be errors – you pay a ransom of 500 and by that time the price has gone up to 550 and you do not get the decryption key. What to do? A good credit card company would waive a late fee to keep a good reputation and so does Cryptowall. From the New York Times:

Use the CryptoWall message interface to tell the criminals exactly what happened. Be honest, in other words.

So she did. She explained that the virus had struck the same week that a major snowstorm hit Massachusetts and the Thanksgiving holiday shut down the banks. She told them about the unexpected Bitcoin shortfall and about dispatching her daughter to the Coin Cafe A.T.M. at the 11th hour. She swore she had really, really tried not to miss their deadline. And then a weird thing happened: Her decryption key arrived.

(HT: Alex Wearn)

You are debating a point with a colleague. Your colleague is wrong but to prove they are wrong you have to use information you know but cannot share. So, you leave things unsaid. Of course, someone who does not know the facts would also leave things unsaid by definition.

The listener knows that silence either conveys the fact that something is known but cannot be said or that nothing is known. Their inference takes the fact that you might know something but cannot say it into account. They should give you the benefit of the doubt. The benefit depends on how likely you are to know things that cannot be said. Hence, if the person leaving things unsaid is senior to the listener, the listener might defer to the speaker. Hence, seniority leads to authority via the inference content from leaving things unsaid.

From a Study in Scarlet:

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

A GrAgreement has been semi-signed. Originally, the Eurozone/Germany has offered two debt relief plans for Greece.

Under Plan A, Greece votes on a number of structural reforms and puts E50blln of assets in a privatization fund in return for more bailout money and possible debt relief. Assets are sold off to recapitalize the banks.

Under Plan B, they get a time-out from the Euro and debt relief. Plan B is unpopular with the majority of voters in Greece as they want to stay in the Euro but may actually be better economically depending on the terms. (Will the EC, ECB and IMF actively help to create the new currency and give humanitarian aid? What are the terms of the debt relief?)

But both plans have significant risk: Plan A involves more austerity, declining GDP, Greek Groundhog Day and probably eventual Grexit; Plan B causes the banks to collapse unless the Troika comes up with some active help.

A better plan is variation on Plan B, if you will a Plan G: Germany should leave the Euro. Deutschit will not cause a bank run in Germany as the mark will be strong and no depositors are at risk from a haircut. The Euro will devalue helping not only Greece but Portugal, Spain, Italy, Ireland and Finland. The New Eurozone can bail out Greece and give debt relief. Germany will not have to participate in any of this and this avoids one of the main political problems domestically. There is an economic downside for Germany: the mark will appreciate so exports will be more expensive. But imports will be cheaper so there is less inflationary pressure. Plus Grexit would cause some appreciation of the Euro anyway so even Plan B has that implication.

The main problem with Plan G is it appears to signal the end of the Eurozone. This is a blow to Merkel’s record as Chancellor. But Deutschit makes the rest of the Eurozone stronger as they can deal with the the overvaluation of their common currency. Plan A, Plan B and European economic performance post-2008 already demonstrate that monetary union without political and fiscal union does not work. In fact, Deutschit signals that Germany will take a somewhat costly action to help fellow EC members. It is more likely to stabilize the Eurozone than the other options. It is success for Europe if Deutschit occurs not a failure. Once the New Eurozone has stabilized, Germany can rejoin. Of course, it will have to meet fiscal targets to be accepted by the New Eurozone including Greece. If Germany can’t return because they carry too much debt, that would both be eironikos and cause for epichairekakia (schadenfreude).

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Does economic competition eliminate discrimination? This is the question.

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

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

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

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

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

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

From NYT:

You recently did a tour with $20 tickets and $4 beers. Is it your goal going forward to keep it affordable? Yeah. Even if you’re not a big fan, you’re like: “Let’s find something to do tonight. It’s $20 to see Kid Rock. I like one of his songs, whatever!” The scary part is, you’re going to find out who your audience is, very fast. If nobody comes for $20, it’s about time to hang the hat up.

Another reason why companies do not cut prices when demand tanks? They are worried about what they will find out about themselves. If you keep the price high and no-one buys, you can console yourself that sales would have been high if you had cut the price. If your price is low and no-one shows up, it is harder to rationalize that your product is popular.

According to the NYT, the Saudi’s (the principal) are thinking of using the oil price to incentivize Russia (the agent) to stop supporting Iran:

Saudi Arabia has been trying to pressure PresidentVladimir V. Putin of Russia to abandon his support for President Bashar al-Assad of Syria, using its dominance of the global oil markets at a time when the Russian government is reeling from the effects of plummeting oil prices…Saudi officials say — and they have told the United States — that they think they have some leverage over Mr. Putin because of their ability to reduce the supply of oil and possibly drive up prices.

There is one countervailing effect that has been foreseen and dismisssed:

American and Arab officials said that even if Russia were to abandon Mr. Assad, the Syrian president would still have his most generous benefactor, Iran. Iranian aid to the Syrian government has been one of the principal reasons that Mr. Assad has been able to hold power as other autocrats in the Middle East have been deposed.

And as a major oil producer, Iran would benefit if Saudi Arabia helped push up oil prices as part of a bargain with Russia…..

But the military aid that Russia provides to Syria is different enough from what Damascus receives from Iran, its other major supplier, that if “Russia withdrew all military support, I don’t think the Syrian Army could function,” a senior Obama administration official said.

But there is a bigger one: Iran has a nuclear program that the US (and Saudi Arabia?) would like to undermine. Low oil prices and sanctions are the stick that the US has been using to get Iran to the negotiating table. An increase in the price of oil price takes away the stick etc etc. Hope the absence of any mention of this in article does not imply someone is not thinking it through.

Here are the prices you see if you access the Kiwi Rail website from Chrome in the US:

Screenshot 2014-11-26 14.45.28

Note the blank space between the trip name and the prices. What could be there? Google “Kiwi Rail discounts” and find information that suggests accessing the Kiwi Rail website via a browser with a New Zealand IP address. When you do that, you find:

Screenshot 2014-11-26 16.10.43

Why are people physically in New Zealand getting better deals? You can tell a demand elasticity story: New Zealanders have cars and access the website from browsers with NZ IP addresses. Their demand is more elastic than that of foreign tourists. So, price lower to people buying from NZ. You can tell the reverse story: Many tourists in NZ buy when there. Their outside option is flying and buying flights late is expensive. Tourists make up the vast majority of train travellers in NZ. People buying from abroad are also tourists but they are buying early and can find cheaper domestic flights. So their demand is elastic.So price high for people buying from NZ IP addresses but low for people buying from foreign IP addresses.

Whatever the truth of the matter, it is quite interesting to see this kind of price discrimination by Kiwi Rail. God knows what Amazon is doing in comparison!