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Well, only indirectly but here is my thinking: one comment by Nathan in response to my post yesterday suggested that John Bolton thinks every international interaction is the game of Chicken, not just the recent episode with North Korea. Schelling thought a lot about Chicken and here is what he said in Arms and Influence in 1966:
Is a Berlin Crisis…..mainly bilateral competition in which each side should be motivated mainly towards winning over the other? Or is it a shared danger – a case of both being pushed to the brink of war – in which statesmanlike forbearance, collaborative withdrawal and prudent negotiation should dominate?
He classifies the Cuban Missile Crisis as the second sort of game and the Hungarian Uprising as the first. He points out that it can be hard to tell which kind of crisis a country is involved in. So, we have different games and uncertainty about the game one is playing. This is level of knowledge from 1966. It disappeared in the last 40 odd years. Hopefully it can be recovered.
Developer Kalid Shaikh has been banned from the iPhone App Store. By conventional welfare measures this would seem to be a big blow to efficiency:
As the MobileCrunch article points out, a search at AppShopper.com shows 854 apps by Shaikh. The majority of Shaikh’s apps seemed to be data on a specific subject simply pulled from the web without providing any other original or unique content. Most apps were priced at $4.99 and this banishment could represent lost sales of thousands of dollars per day. Shaikh reportedly has admitted that the goal was not to produce valuable apps but to focus on monetization instead. All of Shaikh’s apps have already been removed from the App Store and can no longer be purchased.
Perhaps conventional welfare measures would need to be amended in this case. Note however, that removing one large supplier of what is essentially spam from the App Store will not affect the equilibrium quantity of spam. (And this is not Apple’s stated reason for removing him.)
This is a companion to our Prisoner’s Dilemma Everywhere series.
Bill Clinton just returned from North Korea with the two American journalists who were being held there. Kim Jong-il got his face time with Bill and the U.S. got two citizens back without sanctions or a war. Win-win as we say in business schools?
No, says John Bolton, former Ambassador to the U.N. The previous stand-off was doing no-one any good. Obviously it was bad for the U.S. but it was also bad for North Korea. Possible sanctions might have made it hard for the goodies the elite loves to make it into North Korea. So, the Clinton-Jong-il meeting dominates the previous situation. But Bolton has an even better situation in mind: Jong-il simply hands over the journalists without us even giving him a face-saving meeting. We threaten them with something (war? sanctions?) and this is enough to give them the incentive to cooperate without us having to give up anything at all. Some might argue we are pretty close to this equilibrium as a “threat of sanctions plus Clinton visit” amounts to gain for very little pain?
Whatever the empirical judgements are, the theory is clear – Bolton sees the game as Chicken:
You are out for dinner and your friend is looking at the wine list and gives you “There’s a house wine and then there’s this Aussie Shiraz that’s supposed to be good, what do you think?”
How you answer depends a lot on how long you have known the person. If it was my wife asking me that I would not give it a moment’s thought and go for the Shiraz. If it was someone I know much less about then I would have to think about the budget, I would ask what the house wine was, what the prices were, etc. Then I would give my considered opinion expecting it to be appropriately weighed alongside his.
This is a typical trend in relationships over time. As we come to know one another’s preferences we exchange less and less information on routine decisions. On the one hand this is because there is less to learn, we already know each other very well. But there is a secondary force which squelches communication even when there is valuable information to exchange.
As we learn one another’s preferences, we learn where those preferences diverge. The lines of disagreement become clearer, even when the disagreement is very minor. For example, I learn that I like good wine a little bit more than my wife. Looking at the menu, she sees the price, she sees the alternatives and I know what constellation of those variables would lead her to consider the Shiraz. Now I know that I have a stronger preference for the Shiraz, so if she is even considering it that is enough information for me to know that I want it.
Sadly, my wife can think ahead and see all this. She knows that merely suggesting it will make me pro-Shiraz. She knows, therefore, that my response contains no new information and so she doesn’t even bother asking. Instead, she makes the choice unilaterally and its house wine here we come. (Of course waiters are also shrewd game theorists. They know how to spot the wine drinker at the table and hand him the wine list.)
In every relationship there will be certain routine decisions where the two parties have come to see a predictable difference of opinion. For those, in the long run there will be one party to whom decision-making is delegated and those decisions will almost always be taken unilaterally. Typically it will be the party who cares the most about a specific dimension who will be the assigned the delegate, as this is the efficient arrangement subject to these constraints.
Some relationships have a constitution that prevents delegation and formally requires a vote. Take for example, the Supreme Court. As in recent years when the composition of the court has been relatively stable, justices learn each others’ views in areas that arise frequently.
Justice Scalia can predict the opinion of Justice Ginsburg and Scalia is almost always to the right of Ginsburg. If, during delibaration, Justice Ginsburg reveals any leaning to the right, this is very strong information to Scalia that the rightist decision is the correct one. Knowing this, Ginsburg will be pushed farther to the left: she will express rightist views only in the most extreme cases when it is obvious that those are correct. And the equal and opposite reaction pushes Scalia to the right.
Eventually, the Court becomes so polarized that nearly every justice’s opinions can be predicted in advance. And in fact they will line up on a line. If Breyer is voting right then so will Kennedy, Alito, Roberts, Scalia, and Thomas. If Kennedy is voting left then so are Breyer, Souter, Ginsberg, and Stevens. Ultimately only the centrist judges (previously O’Connor, now Kennedy) are left with any flexibility and all cases are decided 5-4.
When a new guy rotates in, this can upset the equilibrium. There is something to learn about the new guy. There is reason to express opinion again, and this means that something new can be learned about the old guys too. We should see that the ordering of the old justices can be altered after the introduction of a new justice. (Don’t expect this from Sotomayor because she has such a long paper trail. Her place in line has already been figured out by all.)
The Palm Pre was favorably reviewed relative to the iPhone. But the iPhone has all those great Apps but the Pre does not. And your iTunes account ties you to the iPhone too unless your phone runs it too. And that was what the Pre did till Apple upgraded iTunes and it was no longer compatible with the Pre. Palm is upset and is trying to get Apple to open up iTunes.
Does Apple’s strategy make sense? Allowing Pre to use iTunes increases sales of music but reduces sales of the iPhone. Where do the two effects line up? It seems iPhone margins are almost 60% as ATT is giving Apple a huge subsidy. And the iTunes profit margin is around 10%. Not sure what the sales figures are but you’d have to see a huge number of songs to counterbalance profits from iPhone sales.
If it’s worried about iPhone sales, Apple is making the right call on making iTunes incompatible with the Pre.
A few weeks ago, Israeli warships and a nuclear submarine went through the Suez Canal. Israel is signaling that it can come within firing distance of Iran easily:
Israeli warships have passed through the [Suez] canal in the past but infrequently. The recent concentration of such sailings plainly goes beyond operational considerations into the realm of strategic signalling. To reach the proximity of Iranian waters surreptitiously, Israeli submarines based in the Mediterranean would normally sail around Africa, a voyage that takes weeks. Passage through the Suez could take about a day, albeit on the surface and therefore revealed. The Australian
There is a second signal: (Sunni) Egypt is on board with Israel’s focus on preventing the arrival of a nuclear-armed (Shia) Iran. Even Saudi Arabia is alarmed by the by the growth in the power and influence of its neighbour:
Egypt and other moderate Arab countries such as Saudi Arabia have formed an unspoken strategic alliance with Israel on the issue of Iran, whose desire for regional hegemony is as troubling to them as it is to the Jewish state. There were reports in the international media that Saudi Arabia had consented to the passage of Israeli warplanes through its air space in the event of an attack on Iran’s nuclear facilities but both Riyadh and Jerusalem have denied it. . The Australian
International politics makes for strange bedfellows.
He tottered over to the thermostat and there it was: treachery. Despite a long-fought household compromise standard of 74 degrees, someone — Adler’s suspicions instantly centered on his wife — had nudged the temperature up to 78.
For the sleepy freelance writer, it was time to set things right . . . right at 65 degrees. “I just kept pushing that down arrow,” he said of his midnight retaliation. “It was a defensive maneuver.”
The article suggests that women generally prefer higher thermostat settings than men. (It is the opposite in my household.) The focus is on air conditioning in the summer and I wonder whether this ranking reverses in the winter. (My wife prefers more moderate temperatures: cooler in the summer, warmer in the winter. )
Repeated game exam question: will this make the climate wars better or worse? Give your answers and reasons in the comments. Ushanka Shake: Knowledge Problem.
Jonah Lehrer writes an intriguing post about the primacy of tastes. He argues that the tastes we are wired to detect through our tongue are more strongly conditioned by evolution than tastes which rely more heavily on the olfactory dimension. As a result, foods that stimulate the receptors in our tongue require less elaborate preparations than foods that we appreciate for their aroma.
His leading example is ketchup vs. mustard.
So here’s my theory of why ketchup doesn’t benefit from fancy alternatives, while mustard does. Ketchup is a primal food of the tongue, relying on the essential triumvirate of sweet, sour and umami. As a result, nuance is unnecessary – I don’t want a chipotle ketchup, or a fancy organic version made with maple syrup. I just want the umami sweetness.
Mustards, in contrast, are foods of the nose, which is why we seek out more interesting versions. I like tarragon mustards, and dark beer mustards, and spicy brown mustards, because they give my sandwiches an interesting complexity. They give my nasal receptors something to sense.
This explains why the market shelves are stocked with countless varieties of mustard but all ketchups are basically the same.
Now what about mayonnaise? Its primary payload is fat (mayonnaise is emulsified vegetable oil.) We are strongly conditioned to desire fat in our diet and its attraction is just as primitive as the attraction to sugar and salt. And yet mayonnaise undergoes even more transformations than mustard does.
How does this relate to the fact that the desire for fat is not wired through taste buds, but rather through mouthfeel?
After reading A.O. Scott’s review, I was itching to see In the Loop. The writer and director Armando Iannucci is a King of British Comedy. His big success is the T.V. show The Thick of It which follows the misadventures of a hapless British Cabinet Minister. In the Loop is a movie version of the the same kind of thing. It depicts British involvement in the lead-up to the Iraq war. The anti-hero of the movie is Malcolm Tucker, the Prime Minister’s spinmeister played with great aplomb by Peter Capaldi. I have always had a soft spot for Capaldi since his role in Local Hero (1983) a gentle Scottish comedy. In that movie, a Texas oil magnate and his employee are charmed by the easy and beautiful life on the Scottish coast. I am easily suggestible and, despite the weather, I wanted to retire to Scotland and own a pub after watching Local Hero.
Britain’s ability to influence its powerful ally has declined since 1983. The British poodle wags its tail at the order of its American master. Even Malcolm Tucker is forced to admit that he is subservient to a sinister Rumsfeldian warmonger, Linton Barwick. In my imagination, Barwick is a Purell-using fiend. He prefers his epithets ready-bleeped (“s-star-star-t”). In the swearing department, Tucker has no equal and I have added to my already large lexicon. His variations on the f-word would have the Cambridge Police putting him in leg irons. The swearing -and there is a lot of it- embellishes rather than detracts from the dialogue It sparkles like an effing diamond. The intricate plot and the amazing writing are the center of this movie. In the Age of Obama, we may want to draw a curtain over the build-up to the Iraq War. But it’s not the war but the politicking and manoeuvring behind it that drive the plot. British schoolboys will be reciting lines and so will I. Ending this review is “difficult, difficult, lemon-difficult” so “f-star-star-kitty bye”.
How do you cut the price of a status good?
Mr. Stuart is among the many consumers in this economy to reap the benefits of secret sales — whispered discounts and discreet price negotiations between customers and sales staff in the aisles of upscale chains. A time-worn strategy typically reserved for a store’s best customers, it has become more democratized as the recession drags on and retailers struggle to turn browsers into buyers.
Answer: you don’t, at least not publicly. Status goods have something like an upward sloping demand curve. The higher is the price, the more people are willing to pay for it. So the best way to increase sales is to maintian a high published price but secretly lower the price.
Of course, word gets out. (For example, articles are published in the New York Times and blogged about on Cheap Talk.) People are going to assign a small probability that you bought your Burberry for half the price, making you half as impressive. An alternative would be to lower the price by just a little, but to everybody. Then everybody is just a little less impressive.
So implicitly this pricing policy reveals that there is a difference in the elasticity of demand with respect to random price drops as opposed to their certainty equivalents. Somewhere some behavioral economists just found a new gig.
Millions of internet users who use Skype could be forced to find other ways to make phone calls after parent company eBay said it did not own the underlying technology that powers the service, prompting fears of a shutdown.
Why are there firms? A more flexible way to manage transactions would be through a system of specific contracts detailing what each individual should produce, to whom it should be delivered and what he should be paid. It would also be more efficient: a traditional firm makes some group of individuals the owners and a separate group of individuals the workers. The firm is saddled with the problem of motivating workers when the profits from their efforts go to the owners.
The problem of course is that most of these contracts would be far too complicated to spell out and enforce. And without an airtight contract, disputes occur. Because disputes are inefficient, the disputants almost always find some settlement which supplants the terms of the contract. Knowing all of this in advance, the contracts would usually turn out to be worthless. The strategy of bringing spurious objections to existing contracts in order to trigger renegotiation at more favorable terms is called holdup. The holdup problem is considered by some economic theorists to be the fundamental friction that shapes most of economic organization.
Case in point, Skype and eBay. eBay acquired the Skype brand and much of the software from the founders, JoltId, but did not take full ownership of the core technology, instead entering a licensing agreement which grants Skype exclusive use. Since that time, Skype has become increasingly popular and a strong source of revenue for eBay. Now eBay is being held up. JoltId claims that eBay has violated the licensing agreement, citing a few obscure and relatively minor details in the contract. Litigation is pending.
Not coincidentally, eBay has publicly stated its intention to spinoff Skype and take it public, a sale that would bring a huge infusion of capital to eBay at a time when it is reinventing its core business. That sale is in turn being heldup because Skype is worthless without the license from JoltId. This puts JoltId in an excellent bargaining position to renegotiate for a better share of those spoils. (On the other hand, had Skype not done as well as it did, JoltId would not have such a large share of the downside.)
Whatever were the long-run total expected payments eBay was going to make to JoltId in return for exclusive use of the technology, it should have paid that much to own the technology outright, become an integrated firm, and avoided the holdup problem.
And don’t worry. You got your Skype. Holdup may change the terms of trade, but it is in neither party’s interest to destroy a valuable asset.
Marginal Revolution, a price theory blog, does “markets in everything”. Cheap Talk, a game theory blog, should do Prisoner’s Dilemma in everything.
Individual drivers do not take the “negative externality” they impose on others into account when they choose their routes from A to B. If a benevolent planner could force people down certain routes, that could reduce travel times. The planner solution is not an equilibrium: drivers have an incentive to deviate because the socially optimal solution implies different travel times on different routes.
This is the the Prisoner’s Dilemma for traffic, discovered by computer scientists. They take the ratio of the equilibrium travel times to the socially optimal times and call that the “price of anarchy”. Cool name for it but to really determine the price of anarchy, we would need utility information – if the value of time is low, no need to build a public transit system.
Via Marginal Revolution, here is a report on an experiment wherein top chess players played a textbook example of a game in which “rational” play is never matched in practice. 6000 chess players picked a number between 0 and 100. The winner was the player whose guess was closest to 2/3 of the average. The winner earns his guess in cash.
Nash equilibrium, or even iterative elimination of dominated strategies implies that no player will guess more than 1. (Nobody should guess more than 66, but then nobody should guess more than 44, but then …)However, in experimental trials, the winning guess is usually around 25.
Most experiments involve volunteers at Universities. Would professional chess players, being generally smarter and also trained to think strategically do “better?” Well, they didn’t. But let’s look at it more carefully.
Casual discussion of the predictions of game theory usually blur an important distinction: between playing rationally and knowing that others will play rationally. To be rational and make smart decisions is one thing, and no doubt the chess players are better at this than college students. But that doesn’t go very far because to make a rational guess just means starting with some hypothesis about how others will guess and then guess 2/3 of the average of that. What really drives a wedge between the theory and the experiments is that experimental subjects have good reason to doubt that the others are rational.
Even a rational player in the beauty contest experiment will not guess anything close to zero if he is not convinced that all of the other players are rational. For example, guessing 33 is rational if you think that most of the other players are not rational and on average they will guess the midpoint of 50.
And it is not enough just to know that everyone else is rational. If you know that everyone else is rational but you are not convinced that everyone else knows that everyone is rational then you would reasonably predict that everyone else will guess 33 and so you should guess 22.
As long as there is some doubt that others have some doubt that others have … that everyone is rational, then even a rational player will guess something far from 0.
To see the effect of this in action, suppose that 100 subjects are playing.
- 10 of them are not rational and will guess 100,
- 10 are rational (but don’t know that others are rational) and guess 66,
- everyone else is as sophisticated as you wish
Then the average guess cannot be less than (100 + 66 )/10 = about 17, and so the winning guess will be no smaller than 11. And since the winning guess will be no smaller than 11, the highly sophisticated players will not guess less than 10. But then this means that the average guess cannot be less than (100 + 66 + 88)/10 = about 25, yielding a winning guess of no more than 16! The iterated reasoning is going in the opposite direction now!
Ultimately, the 80 highly sophisticated players will guess the value x that solves
(100 + 66 + 8x)/10 = 3x/2
which is about 23. (The winning guess in the experiment involving chess players was 21.5)
In my neighborhood trash and recycling are collected separately, on different days, by different entities. On Tuesdays the trash collector drives his little trash shuttle all the way to my garage to empty the trash cans. On Wednesdays, I am required to wheel the recycle bin out to the curb to be collected by the recycling truck.
At first glance the economics would suggest the opposite. The recycling is valuable to the collector, the trash is not, so when bargaining over who has to carry the goods down the driveway, the recycling collector would seem to be in a worse bairgaining position.
But on second thought, it makes perfect sense. Can you see why? For a (admittedly obscure) hint, here is a related fact: another difference between the trash and recycling is that the recycling bin is too small to contain a typical week’s worth of recycling and most households usually have recycling overflowing and stacked next to the bin.
If you are following me on Twitter (and have I suggested recently that you should be following me on Twitter?) you will know the answer. For the rest, follow the jump.
Col. Timothy R. Reese widely believed to be the blogger Tim the Enchanter says
As the old saying goes, “guests, like fish, begin to smell after three days.” Since the signing of the 2009 Security Agreement, we are guests in Iraq, and after six years in Iraq, we now smell bad to the Iraqi nose. Today the Iraqi Security Forces (ISF) are good enough to keep the Government of Iraq (GOI) from being overthrown by the actions of Al Qaeda in Iraq (AQI), the Baathists, and the Shia violent extremists that might have toppled it a year or two ago. Iraq may well collapse into chaos of other causes, but we have made the ISF strong enough for the internal security mission. Perhaps it is one of those infamous paradoxes of counterinsurgency that while the ISF is not good in any objective sense, it is good enough for Iraq in 2009. Despite this foreboding disclaimer about an unstable future for Iraq, the United States has achieved our objectives in Iraq. Prime Minister (PM) Maliki hailed June 30th as a “great victory,” implying the victory was over the US. Leaving aside his childish chest pounding, he was more right than he knew. We too ought to declare victory and bring our combat forces home.
According to the Times, “Before deploying to Iraq, Colonel Reese served as the director of the Combat Studies Institute at Fort Leavenworth, Kan., the Army’s premier intellectual center.”
The very same Tim the Enchanter is not enthusiastic on Obama’s healthcare plan going as far as to say
But the Leviathan will truly show its face when your family food purchases will be tied to your medical care. “Mrs. Brown, here is your new food voucher for the month. It has been encoded to allow the purchase of balanced combination of food items specially tailored to maintain a healthy, “low health care cost you,” based on your medical history and condition. It can be used at any government approved grocery or supermarket, just buy the correct number of each type of item as shown on the attached printout. If you try to purchase an item that doesn’t have the ObamaCare stamp on the label, the cashier will simply remove it from your basket.” Like red meat? Your allotment for the month is unlikely to satisfy your inner barbeque master. Is your kid fat? You can expect to have one government agency tell you how to feed them while another will monitor your compliance with their ukazis. Fail to comply and you’ll be required to take remedial diet and parenting classes at the local organized community center as a condition of maintaining custody of your little health care project.
It’s 1984 meets Hayek’s Road to Serfdom. So, at the very least, it is less original than the Iraq post.
How are we to take these two opinions? Reject both or accept both as they come from the same person? Or can we say he is an expert on military matters and not on health economics and pick and choose?
Not only is Amazon embarrassingly removing books you bought from your Kindle but they are accidently deleting any notes you might have taken about the books. Orwellian. But it is oddly comforting when Big Brother screws up.
My own experience with my new Kindle 2 is positive so far though some of reported problems have me worried.
The City of Oakland, Calfornia has become the first city to specifically tax the sale of medical marijuana. And The State of California is considering legislation to legalize the sale of (non-medical) marijuana an impose a tax of $50 per ounce. My sources estimate the current retail price to be about $300 per ounce. This is an early stage but that would put the tax at roughly the same rate as cigarettes in California (87 cents per pack which retails at around $7).
Other taxes are being considered:
Republican state Sen. Jack Murphy’s proposed “pole tax” would have charged patrons of strip clubs a $5 entrance fee. The bill was not approved.
1. Basque Separatist Group E.T.A.:
More crucial than its theoretical debates, however, was its commitment to a particular model of armed action, which remains dominant today. This is the “spiral of action-repression-action,” which operates along the following lines: 1) ETA carries out a provocative violent action against the political system; 2) the system responds with repression against “the masses”; 3) the masses respond with a mixture of panic and rebellion, Paddy Woodsworth, World Policy Journal.
2. Brazilian Terrorist Group, ALN:
The rebellion of the urban guerrilla and his persistance in intervening in political questions is the best way of insuring popular support for the cause which we defend. We repeat and insist on repeating–it is the way of insuring popular support. As soon as a reasonable portion of the population begins to take seriously the actions of the urban guerrilla, his success is guaranteed.
The government has no alternative except to intensify its repression. The police networks, house searches, the arrest of suspects and innocent persons, and the closing off of streets
make life in the city unbearable. The military dictatorship embarks on massive political persecution. Political assassinations and police terror become routine.In spite of all this, the police systematically fail. The armed forces, the navy and the air force are mobilized to undertake routine police functions, but even so they can find no way
to halt guerrilla operations or to wipe out the revolutionary organization, with its fragmented groups that move around and operate throughout the country. The people refuse to collaborate with the government, and the general sentiment is that this government is unjust, incapable of solving problems, and that it resorts simply to the physical liquidation of its opponents. The political situation in the country is transformed
into a military situation in which the “gorillas” appear more and more to be the ones responsible for violence, while the lives of the people grow worse, Carlos Marighella, MiniManual of the Urban Guerrilla.
3. Al Qaeda strategy:
Force America to abandon its war against Islam by proxy and force it to attack directly so that the noble ones among the masses….will see that their fear of deposing the regimes because America is their protector is misplaced and that when they depose the regimes, they are capable of opposing America if it interferes. Abu Bakr Naji, The Management of Savagery ( p. 24)
Quoting an interview with a Somali Pirate in Wired. (Tricorne tip: Snarkmarket.)
1. Bargaining Power of Pirates
Often we know about a ship’s cargo, owners and port of origin before we even board it. That way we can price our demands based on its load. For those with very valuable cargo on board then we contact the media and publicize the capture and put pressure on the companies to negotiate for its release.
2. Bargaining Power of Foreign Negotiators
Armed men are expensive as are the laborers, accountants, cooks and khat suppliers on land. During long negotiations our men get tired and we need to rotate them out three times a week. Add to that the risk from navies attacking us and we can be convinced to lower our demands.
3. Intensity of Competitive Rivavlry
The key to our success is that we are willing to die, and the crews are not.
4. The Value of Hostages
Hostages — especially Westerners — are our only assets, so we try our best to avoid killing them. It only comes to that if they refuse to contact the ship’s owners or agencies. Or if they attack us and we need to defend ourselves.
5. The Threat of the Navy
Whenever we reach an agreement for the ransom, we send out wrong information to mislead the Navy about our exact location. We don’t want them to know where our land base is so that our guys on the ship can manage a safe escape. We have to make sure that the coast is clear of any navy ships before we leave. That said, there is no guarantee that we won’t be shot or arrested, but this has only happened once when the French Navy captured some of our back up people after the pirates left the Le Ponnant.
Bears are smart and they can teach and learn. And they can eat you. Colbert is right:
Mindhacks has an interesting article about the use of robots in war. We know the U.S. is using pilotless drones to attack suspected terrorists in the mountain range between Afghanistan and Pakistan. This can save lives and presumably there are technological capabilities that are impossible for a human to replicate. But the possibility of human error is replaced by the possibility of computer error and, Mindhacks points out, even lack of robot predictability.
I went to a military operations research conference to present at a game theory session. Two things surprised me. First, game theory has disappeared from the field. They remember Schelling but are unaware that anything has happened since the 1960s. Asymmetric information models are a huge surprise to them. Second, they are aware of computer games. They just want to simulate complex games and run them again and again to see what happens. Then, you don’t get any intuition for why some strategy works or does not work or really an intuition for the game as a whole. And what you put in is what you get out: if you did not out in an insurgency movement causing chaos then it’s not going to pop out. This is also a problem for an analytical approach where you may not incorporate key strategic considerations into the game. Cliched “Out-of the-Box” thinking is necessary. Even a Mac can’t do it.
So, as long as there is war, men will go to war and think about how to win wars.
(Hat tip: Jeff for pointing out article)
At Volokh Conspiracy, Ilya Somin writes:
This week, many of my former students will be undergoing the painful experience of taking the Virginia bar exam. My general view on bar exams is that they should be abolished, or at least that you should not be required to pass one in order to practice law. If passing the exam really is an indication of superior or at least adequate legal skills, then clients will choose to hire lawyers who have passed the exam even if passage isn’t required to be a member of the bar. Even if a mandatory bar exam really is necessary, it certainly should not be administered by state bar associations, which have an obvious interest in reducing the number of people who are allowed to join the profession, so as to minimize competition for their existing members.
What changes would we see if it was no longer necessary to pass the bar in order to practice law? We can analyze this in two steps. First, hold everything else about the bar exam fixed and ask how the market will react to making it voluntary.
The first effect would be to encourage more entry into the profession. Going to law school is not as much of a risk if you know that failing the bar is not fatal. There would be massive entry into specialized law education. Rather than go to a full-fledged law school, many would take a few practical courses focused on a few services. Traditional law schools would respond by becoming even more academic and removed from practice.
Eventually the bar will be taken only by high-level lawyers who work in novel areas and whose services require more creativity and less paper pushing. But the bar will no longer be the binding entry barrier to these areas. The economic rationale for the entry barrier is to create rents for practicing lawyers so that they have something to lose. This keeps them honest and makes their clients trust them.
Now reputation will provide these rents. Law firms, even moreso than now, will consist of a few generalist partners who embody all of the reputation of the firm and then an army of worker-attorneys. All of the rents will go to the partners. The current path of associate-promoted-to-partner will be restricted to only a very small number of elites.
As a result of all this, competition actually decreases at the high end.
All of these changes will alter the economics of the bar exam itself. Since the bar is no longer the binding entry barrier, bar associations become essentially for-profit certification intermediaries. This pushes them either in the direction of becoming more selective, extracting from further increases in rents at the high end or less selective and becoming effectively a driver’s license that everyone passes (and pays a nominal fee.) Which direction is optimal depends on elasticities. Probably they will offer separate high-end and low-end exams.
My bottom line is that banning the bar increases welfare but perhaps for different reasons than Somin has in mind. Routine services will become more competitive and this is good. Increased concentration at the high end is probably also good because market power means less output and for the kinds of lawyering they do, reduced output is welfare-improving.
This question is posed but not answered by Isaiah Sheffer in song:
The governing body of international swimming competition FINA is instituting a ban on the high-tech swimsuits that have been used to set a flurry of new world records.
In the 17 months since the LZR Racer hit the market and spawned a host of imitators, more than 130 world records have fallen, including seven (in eight events) by Michael Phelps during the Beijing Olympics.
Phelps, a 14-time Olympic gold medalist, applauded FINA’s proposal that racing suits be made of permeable materials and that there be limits to how much of a swimmer’s body could be covered. The motion must be approved by the FINA Bureau when it convenes Tuesday.
I see two considerations at play here. First, they may intend to put asterisks on all of the recent records in order to effectively reinstate older records by swimmers who never had the advantage of the new suits. For example,
Ian Thorpe’s 2002 world best in the men’s 400 meters freestyle final was thought to be as good as sacred but Germany’s Paul Biedermann swam 3 minutes 40.07 to beat the mark by one hundredth of a second and take gold.
Its hard to argue with this motivation, but it necessitates a quick return to the old suits in order to give current swimmers a chance to set un-asterisked records while still at their peak. However the ban does not go into effect until 2010.
Don’t confuse this with the second likely motivation which is to put a halt to a technological arms race. That is also the motivation behind banning performance-enhancing drugs. The problem with an arms race is that every competitor will be required to arm in order to be competitive and then the ultimate result is the same level playing field but with the extra cost of the arms race.
On the other hand, allowing the arms race avoids having to legislate and litigate detailed regulations. If we just gave in and allowed performance-enhancers then we would have no drug tests, no doping boards, no scandals. If we ban the new swimsuits we still have to decide exactly which swimsuits are legal. And we go back to chest- and leg-hair shaving. Plastic surgery to streamline the skin?
Swimsuits don’t cause harm like drugs do. Since the costs are relatively low, there is a legitimate argument for allowing this arms race and avoiding having to navigate a new thicket of rules.
The world is divided into creators and collectors. Creators have the ability to conjure up inspiration and bring something new into the world. There are not many creators. The rest of us can be collectors.
Fortunately for us the world creates things for us and we get to experience them. That’s a beautiful life by itself, but for those of us who want to be creative, it also provides us with a diverse supply of themes, ideas, examples, scenarios, characters… that we can put into our collections. Then we can categorize, analyze, and recombine them into something that is just as uniquely our own as the brand new things that creators create.
Pharmaceutical research is a great analogy. There are two ways to create a new physical substance for some purpose. The first is to focus on the purpose and devote resources to try to synthesize something new. The second is to gather articles existing in nature and see what they do and how they work and try to utilize them in a new way.
The second approach is easier because you are just collecting stuff that already exists. Plus, the stuff in nature is certain to be better than what can be created now because it has been under development for eternity. On the other hand, collecting is less focused on any one purpose. What you wind up with is just what you find. The best you can do is direct your search.
(Incidentally, arguments for enviornmental conservation based on genetic diversity translate to arguments for cultural conservation to preserve memetic diversity.)
To be a good collector you decide on themes you are interested in and have some feel for. Then you keep these themes in your mind and you go around your life always looking for specimens that fit your themes. And you write them down. (I email myself.) It is a life of constant awareness, of intense passivity.
How many of us could write great novels? Almost none of us could sit down now and create a novel. But all of us have many years left to collect that novel and write it when the collection is complete. Decide today what your novel is about.
I already mentioned this book in an earlier post related to the Prisoner’s Dilemma. But that is just one of the techniques suggested by the author who was an interrogator in Iraq. Here are some others:
(1) We Know All: “We have all the information and we can get you.” Tell the subject some bit of information that proves you know something. Entice him to reveal more to cross-check what you claim you already know.
(2) The Threat: “If you do not tell me something, I’m going to send you to Abu Gharib.” Self-explanatory.
(3) You’re Totally Screwed: “We control him. If he does not talk, he’s going to swing.” Self-explanatory too.
(4) Fear Down: “Show him the true consequences and then give him an out and become his savior.” e.g. Explain death penalty obtains for organizing terrorist attacks. Then say that if subject works with friendly interrogator to give information, all will be well.
(5) Love of Family: Reunite subject with loved family member and then use the (huge) favor you have granted to obtain information
(6) More broadly, Alexander suggests creating empathy and a cycle of mutual cooperation to get information.
Apart from (5), all are basically incentive based schemes used to either reward a subject for information (carrot) or punish him if he does not give information (stick).
What is not crystal clear in the book is whether the rewards promised (e.g. a lighter sentence) are actually ever granted. There is one case described in detail where one prisoner wants a divorce from young wife number two as she is too expensive. The interrogator draws up fake documents and pretends to start the divorce proceedings. He then gets information but sends the prisoner off to Abu Gharib anyway. This strongly suggests that the rewards offered are not ever given out. It’s not like a Mafia informant program where you go into witness protection after giving up the gang.
The prisoners are confused and tired so maybe this leads them to believe the interrogator’s promises. But can it really work on the truly committed senior terrorists? It’s pretty obvious where it’s all heading. Why give information, whether the interrogator uses empathy or fear, when you know your fate does not depend on what you say?
At Marginal Revolution Alex Tabarrok takes an interesting perspective on the minimum wage increase. Consider an employer who pays more than the minimum wage. How would that employer be affected?
Indeed, these employers will benefit from an increase in the minimum wage because it will raise the costs of their rivals.
(Based on this conclusion, he looks suspiciously on claims by some employers that they are cheering the minimum wage for moral reasons.)
While it is true that a rise in the minimum wage will raise the costs of their rivals, this is not the end of the story, and looking one step further can reverse the conclusion. Firms have to compete for workers and if my rival must pays a higher wage, then my own workers now find her to be a more attractive employer at the margin. To restore the balance, I will typically have to raise my own wage.
For example, this would be true if I have to compete with my rival for workers but workers have a higher disutility of working for me.
Now this assumes that the minimum wage does not create a shortage of jobs for my rival, i.e. excess supply of labor. There is good empirical evidence that the minimum wage does not have this effect.
However, if the rival has elastic demand for labor, then the conclusion can be reversed yet again. Increasing the minimum wage cuases the rival to employ fewer workers which increases labor supply for me and allows me to lower my wage. So in addition to raising my rival’s costs, the minimum wage lowers my own costs.
Note however that in the equilibrium of this last model there is a shortage of minimum wage jobs. This means that the marginal high-wage worker would prefer to quit and go work for the minimum-wage firm but is unable to because there are no vacancies there. That doesn’t sound very realistic.
One of the simplest and yet most central insights of information economics is that, independent of the classical technological constraints, transactions costs, trading frictions, etc., standing in the way of efficient employment of resources is an informational constraint. How do you find out what the efficient allocation is and implement it when the answer depends on the preferences of individuals? Any institution, whether or not it is a market, is implicitly a channel for individuals to communicate their preferences and a rule which determines an allocation based on those preferences. Understanding this connection, individuals cannot be expected to faithfully communicate their true preferences unless the rule gives them adequate incentive.
As we saw last time there typically does not exist any rule which does this and at the same time produces an efficient allocation. This result is deeper than “market failure” because it has nothing to do with markets per se. It applies to markets as well as any other idealized institution we could dream up.
So how are we to judge the efficiency of markets when we know that they didnt have any chance of being efficient in the first place? That is the topic of this lecture.
Let’s refer to the efficient allocation rule as the first-best. In the language of mechanism design the first-best is typically not feasible because it is not incentive-compatible. Given this, we can ask what is the closest we can get to the first best using a mechanism that is incentive compatible (and budget-balanced.) That is a well-posed constrained optimization problem and the solution to that problem we call the second best.
Information economics tells us we should measure existing institutions relative to the second best. In this lecture I demonstrate how to use the properties of incentive-compatibility and budget balance to characterize the second-best mechanism in the public goods problem we have been looking at. (Previously the espresso machine problem.)
I am particularly proud of these notes because as you will see this is a complete characterization of second-best mechanisms (remember: dominant strategies)for public goods entirely based on a graphical argument. And the characterization is especially nice: any second-best mechanism reduces to a simple rule where the contributors are assigned ex ante a share of the cost and asked whether they are willing to contribute their share. Production of the public good requires unanimity.
For example, the very simple mechanism we started with, in which two roomates share the cost of an espresso machine equally, is the unique symmetric second-best mechanism. We argued at the beginning that this mechanism is inefficient and now we see that the inefficiency is inevitable and there is no way to improve upon it.
Here are the notes.
Why won’t Obama clarify what he wants in terms of health care reform? He identifies principles (e.g. no tax on the middle class) rather than details. And Congress seems to be confused about what to do. Why is he not stepping in to fill the gap? This is all I can think of:
(1) History: Clinton spelled out what he wanted and it was killed by the so-called “Harry and Louise” ads and Congress. If you define your plan clearly, it is easier for other players to coordinate against it. If you keep it vague, they do not what to shoot at. Obama is using vagueness strategically to keep his opponents guessing – a kind of a “mixed strategy” in an informal sense.
(2) Buy-in: By allowing Congress to make up the health care plan, he hopes to get them to buy into it and pass it.
(3) Guaranteed win: If you define your objective, it is easier for your opponents to show you lost. If you keep your objective vague, you can claim a larger set of outputs as a “win”.
The drawback is obvious: maybe what comes out of Congress is going to a big mess with lots of pork and horrible inefficiencies. A little direction could prevent that.
But the biggest mystery is the trivial one: Why the hell, if you’re so good at using intentional vagueness, did you answer the question about racial profiling so clearly? You know the Foxosphere and ANBCBSNBCNN channels are going to focus on that..or is that what you wanted you devious, devious guy…?
Cheap Talk 