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Jean Tirole has written the best theoretical analysis I have seen of the role of government intervention to revitalize frozen asset markets. The key idea in this paper is that investors need to finance their next project and are unable to do this by selling their “legacy” assets because adverse selection has frozen the market.
A government buyback of these toxic assets attracts the bottom tail. The government of course is losing money on all of the assets it buys. But the payoff is that it rejuvinates the market: private financiers will now step in and buy the assets of those who refused the government offer. It’s a surprising result but ex post its pretty easy to understand.
If the government is offering a price 
All that was required was that the government price
The paper then goes on to study the optimal intervention when the market is not restricted to simple buybacks. The optimal scheme is a mix of buybacks and partial transfers of legacy assets that keep “skin in the game” to reduce the downstream adverse selection problem. The government is trying to minimize the cost of the intervention by spurring as much activity as possible from the private finance market.
This paper is worth studying.
Is the United States the world’s dominant exporter of culture? If this were true of any area you would think that area would be pop music. But it appears not to be the case.
In this paper we provide stylized facts about the global music consumption and trade since 1960, using a unique data on popular music charts from 22 countries, corresponding to over 98% of the global music market. We find that trade volumes are higher between countries that are geographically closer and between those that share a language. Contrary to growing fears about large- country dominance, trade shares are roughly proportional to country GDP shares; and relative to GDP, the US music share is substantially below the shares of other smaller countries. We find a substantial bias toward domestic music which has, perhaps surprisingly, increased sharply in the past decade. We find no evidence that new communications channels – such as the growth of country-specific MTV channels and Internet penetration – reduce the consumption of domestic music. National policies aimed at preventing the death of local culture, such as radio airplay quotas, may explain part of the increasing consumption of local music.
Here is the paper by Ferreira and Waldfogel. And before you click on this link, guess which country is the largest exporter as a fraction of GDP.
Locavores advocate paying attention to the distance your food traveled before it reached your table. They want you to be aware of the social cost of the the tomatoes you buy. Steven Landsburg ridicules this kind of micro-mindedness as follows:
You should. You should care about all those costs. And here are some other things you should care about: How many grapes were sacrificed by growing that California tomato in a place where there might have been a vineyard? How many morning commutes are increased, and by how much, because that New York greenhouse displaces a conveniently located housing development? What useful tasks could those California workers perform if they weren’t busy growing tomatoes? What about the New York workers? What alternative uses were there for the fertilizers and the farming equipment — or better yet, the resources that went into producing those fertilizers and farming equipment — in each location?
And he helpfully points out that accounting for all of this is unnecessary because these costs are already all summarized by the price of the tomato.
But even if markets are perfectly competitive, the marginal social cost of a tomato equals the price plus the under-priced cost of the environmental damage from the fuels used in transportation. Any given locavore has his own private belief about the size of that gap. So a locavore wants to know how much energy was used in order to calculate the total gap. And locavore advocates are doing precisely the right thing by presenting that information.
On the other hand, this guy, the guy who Landsburg was actually ridiculing, is spot on when he points out they often present distorted information.
Mark Kleiman proposes making it legal to grow, share, and consume cannabis, but not to sell it.
To the consumer, developing a bad habit is bad news. To the marketing executive, it’s the whole point of the exercise. For any potentially addictive commodity or activity, the minority that gets stuck with a bad habit consumes the majority of the product. So the entire marketing effort is devoted to cultivating and maintaining the people whose use is a problem to them and a gold mine to the industry.
Take alcohol, for example. Divide the population into deciles by annual drinking volume. The top decile starts at four drinks a day, averaged year-round. That group consumes half of all the alcohol sold. The next decile does from two to four drinks a day. Those folks sop up the next thirty percent. Casual drinkers – people who have two drinks a day or less – take up only 20% of the total volume. The booze companies cannot afford to have their customers “drink in moderation.”
Some questions come to mind:
- Would it be legal to sell the seeds? If not, how could anybody get them? If so, has the problem (assuming there is one) really been solved?
- The economics of the problem boil down to which market structure minimizes the private incentive to boost demand, say via marketing. If we outlawed the sale of tobacco but allowed the sale of grow-your-own-tobacco kits would we see more or less marketing? The less competitive the market the more each individual seller gains from a boost in generic demand. Should we expect the market for growing kits to be more competitive than the market for the final product?
- If we are going to ban something, why not advertising? Seems more direct and arguably a Pareto improvement if advertising acts as rent-seeking between producers and creates “artificial” demand as the premise of the policy seems to be.
Tyler links to this paper which asks the question “Do Minimum Parking Requirements Force Developers to Provide More Parking than Privately Optimal?” and answers in the affirmative.
I would think that is exactly the purpose of minimum parking requirements, especially in suburbs. Take as given that residents will resist the installation of parking meters on their streets or other parking restrictions. Then parking spaces in strip malls have positive externalities for homeowners because they reduce spillover parking in the neighborhoods. The privately optimal number of parking spaces is therefore too low and mandatory minimums are aimed at correcting that. The question we are interested in is whether mandatory minimums increase parking space beyond what is socially optimal.
This guy thinks so.
There it is: Zynga’s dirty technique for making its $500 million. It ropes players into the game with the promise that absolutely anyone can play. It will even float you coins the first time you run out, not unlike the casino that gives a high-roller luxury accommodations in anticipation of making back the house’s stake. It dangles the prospect of a bigger, prettier, better farm; as the game loads, you’re faced with idyllic images of well-off farms, not unlike the glossy ads for high-end residences. But it’s nearly impossible to get some of those goods without ponying up a buck or two here and there. When Zynga’s got a user base of 61 million digital farmers, it’s easy enough to make ends meet, to say the least.
The argument seems to be: it sucks your time, it gets your friends hooked too, it’s stupid. Like TV, reading blogs, talking on the phone, etc. I do recommend reading the article though because its a fine case study in how to try and substitute a logical argument in place of “Why do people have tastes that are so different from mine?” (Full disclosure: some people very close to me play Zynga games. I think Zynga games are really stupid.)
Ten Gallon Greeting: GeekPress.
Even as parking meter technology improves to handle credit cards and flexible pricing, one relic remains: pay-in-advance. You have to commit to a period of time and pay the meter at the beginning of that time interval. You are fined if you don’t move before your pre-specified time expires.
Wouldn’t it be better if you paid only at the end and only for the amount of time you actually occupied the parking space? This is easily implemented in smart parking meters: you swipe your card when you park and you swipe it again when to pay when you are done. To prevent scofflaws, if you never swipe the second time the rest of the day’s parking is on you (sorta like the lost ticket fee in parking lots), and if you are parked in a meter that wasn’t swiped the first time you get a ticket.
Holding fixed the meter rate and demand for parking such a switch would lower your total parking bill and hence revenues. To show this you could try writing down a model where the parker has a probability distribution over waiting times and chooses optimally his parking time, but there is a simpler argument. With pay-in-advance two things can happen: either you pay for more time than you actually use or you get a ticket and pay a fine!
But switching to pay-as-you-leave parking must surely increase overall demand for parking and may even increase individual parking spells so the net effect on revenue is not so clear.
While we are on the subject I liked Tyler Cowen’s bit about free parking. But I think that there is a second-best logic that justifies mandatory free parking in the suburbs. Homeowners want their streets free of cars (but still the option to park on the street when necessary) and they don’t want parking meters on their sidewalks. This makes strip-mall parking a public good. The private incentive of commercial developers is to provide too little parking.
In San Francisco no less
San Francisco has been working on making parking “smarter” for quite a while now, and it’s just recently taken another big step in that direction by starting to replace over 5,000 older parking meters with the snazzy new model pictured above. Those will not only let you pay with a credit or debit card (and soon a special SFMTA card), but automatically adjust parking rates based on supply and demand, which means you could pay anywhere from $0.25 to $6.00 an hour depending on how many free spaces there are. Those rates are determined with the aid of some sensors that keep a constant watch on parking spaces, which also means you’ll be able to check for free spaces in an area on your phone or your computer before you even leave the house.
fedora flip: rob jefferson.
Hertz made a merger offer to Dollar, an offer that made it difficult for Dollar to approach another suitor. But Dollar is trying to wriggle out of its chastity belt and flirt with Avis. Each marriage carries the risk that the Feds step in before the relationship is fully consummated. After all the merged firms might have the market power to hike up prices. A preliminary analysis suggests given the current segmentation of the rental market into leisure and premium classes, antitrust issues are less of a threat to merger to Hertz than for Avis:
“The rental car market is segmented into two categories: premium and travel/leisure. Hertz and Avis classify themselves as premium car rental companies renting to travelers on business and those who otherwise are less sensitive to price and more attuned to service and car quality. Both companies also operate in the leisure market. Budget is Avis’s leisure market subsidiary, while Hertz has its Advantage leisure subsidiary. Hertz has offered to divest itself of this subsidiary as part of this transaction and in response to any antitrust objections.
Dollar Thrifty classifies itself as travel/leisure.
At first blush, this would appear to give Hertz a free pass, as the company does not define itself as being in Dollar Thrifty’s market segment and the Advantage subsidiary is quite small.”
But even in this scenario, market power issues arise. In the existing market structure, Dollar sets its prices ignoring the impact they have on Hertz and Avis profits and focussing on just its own profits. In particular, Dollar captures some premium customers from Hertz and Avis if its prices are sufficiently low. This kid of cutthroat competition is the essence of capitalism and is to be lauded.
But of there is a Dollar-Hertz merger say, the competition from the leisure car rental division cannibalizes the profits of the premium car division. There is less of an incentive for Dollar-Hertz to cut prices and leisure rental from the firm will become more expensive. Now, Avis can raise the price of Budget cars. This will allow Dollar-Hertz to raise leisure car prices more and a lovely – for firms! – spiral of rising prices will ensure. And this is without any collusion between the firms- the basic forces of competition are dampened by the merger.
How big is this effect? It’s going to depend on substitution effects between premium and leisure segments. All my colleagues who do empirical I.O. will be gainfully employed and I hope I will be drinking good wine at their houses (yes, they will each have multiple houses).
How to allocate an indivisible object to one of three children, it’s a parent’s daily mechanism design problem. Today I used the first-response mechanism. “Who wants X?” And whoever says “me!” first gets it.
This dimension of screening, response time, is absent from most theoretical treatments. While in principle it can be modeled, it won’t arise in conventional models because “rational” agents take no time to decide what they want.
But the idea behind using it in practice is that the quicker you can commit yourself the more likely it is you value it a lot. Of course it doesn’t work with “who wants ice cream?” But it does make sense when its “We’ve got 3 popsicles, who wants the blue one?” We are aiming at efficiency here since fairness is either moot (because any allocation is going to leave two out in the cold) or a part of a long-run scheme whereby each child wins with equal frequency asymptotically.
It’s not without its problems.
- Free disposal is hard to prevent. Eventually the precocious child figures out to shout first and think later, reneging if she realizes she doesn’t want it.
- There’s also ex-post negotiation. You might think that this can only lead to Pareto improvements but not so fast. Child #1 can “strongly encourage” child #2 to hand over the goodies. A trade of goods for “security” is not necessarily Pareto improving when the incentives are fully accounted for.
- It prevents efficient combinatorial allocation when there are externalities and/or complementarities. Such as, “who’s going in Mommy’s car?” A too-quick “me!” invites a version of the exposure problem if child #3 follows suit.
Still, it has its place in a parent’s repertoire of mechanisms.
After a disaster happens the post-mortem investigation invariably turns up evidence of early warning signs that weren’t acted upon. There is a natural tendency for an observer to “second-guess,” to project his knowledge of what happened ex post into the information of the decision-maker ex ante. The effects are studied in this paper by Kristof Madarasz.
To illustrate the consequences of such exaggeration, consider a medical example. A radiologist recommends a treatment based on a noisy radiograph. Suppose radiologists differ in ability; the best ones hardly ever miss a tumor when its visible on the X-ray, bad ones often do. After the treatment is adopted, an evaluator reviews the case to learn about the radiologist’s competence. By observing outcomes, evaluators naturally have access to information that was not available ex-ante; in that interim medical outcomes are realized and new X-rays might have been ordered. A biased evaluator thinks as if such ex-post information had also been available ex-ante. A small tumor is typically difficult to spot on an initial X-ray, but once the location of a major tumor is known, all radiologists have a much betterchance of finding the small one on the original X-ray. In this manner, by projecting information, the evaluator becomes too surprised observing a failure and interprets success too much to be the norm. It follows that she underestimates the radiologistís competence on average.
The paper studies how a decision-maker who anticipates this effect practices “defensive” information production ex ante, for example being too quick to carry out additional tests that substitute for the evaluator’s information (a biopsy in the medical example) and too reluctant to carry out tests that magnify it.
A tip of the boss of the plains to Nageeb Ali.
Suppose you are selling your house and 10 potential buyers are lined up. For whatever reason you cannot hold an auction (in fact sellers rarely do) but what you can do is make take-it-or-leave-it price demands. To be clear: this means that you can approach buyers in sequence proposing to each a price. If a buyer accepts you are committed to sell and if he rejects you are committed to refuse sale to this buyer. All buyers are ex ante identical, meaning that you while you don’t know their maximum willingness to pay, you have the same beliefs about each of them. How do you determine the profit-maximizing price?
It is somewhat surprising that despite the symmetry, in order to maximize profits you will discriminate and charge them different prices. What you will do is randomly order them and offer a descending sequence of prices. The buyer who was randomly put first in the order (unlucky?) will be charged the highest price and this is an essential part of your optimal pricing policy.
Although it sounds surprising at first the intuition is pretty simple, it’s an application of the idea of option value. When you have only one buyer left you will charge him some price
Now the same tradeoff determines your price to the second-to-last buyer. Except now the cost of having your offer rejected is lower because you will have another chance to sell. So you are willing to take a larger chance of a rejected offer and therefore set a higher price. Now continuing up the list, at every step the option value associated with a rejected offer increases and therefore so does the price.
OK that was easy. Now consider a model where the seller posts prices and the buyers choose when to arrive. This should break the symmetry if higher value buyers arrive earlier or later than lower value buyers. And they will for two reasons. First, nobody with a willingness to pay that is below the opening price will want to be first. Second, even among buyers with a high willingness to pay, the higher it is the more you value the increased chance to buy relative to lower prices later. (There is a “single-crossing property.”) The seller adjusts to this by further steepening the price path, etc.
Thanks to Toomas Hinnosaar for conversations on the topic. Here is a paper by Liad Blumrosen and Thomas Holenstein on optimal posted prices.
That’s the subject of an article in Slate that leads with:
So, a Treasury secretary, a labor union leader, a hedge-fund billionaire, and an heiress walk into a conference call.
You will recall that the estate tax was temporarily repealed and it will come back in full force in 2011 unless some new legislation is passed. I have praised estate taxes before.
Salakot Slap: gappy3000.
Despite what you have read, theory holds up just fine.
The relationship between economic theory and experimental evidence is controversial. One could easily get the impression from reading the experimental literature that economic theory has little or no significance for explaining experimental results. The point of this essay is that this is a tremendously misleading impression. Economic theory makes strong predictions about many situations, and is generally quite accurate in predicting behavior in the laboratory. Most familiar situations where the theory is thought to fail, the failure is to properly apply the theory, and not in the theory failing to explain the evidence.
Which is not to say theory doesn’t have its problems.
That said, economic theory still needs to be strengthened to deal with experimental data: the problem is that in too many applications the theory is correct only in the sense that it has little to say about what will happen. Rather than speaking of whether the theory is correct or incorrect, the relevant question turns out to be whether it is useful or not useful. In many instances it is not useful. It may not be able to predict precisely how players will play in unfamiliar situations.4 It buries too much in individual preferences without attempting to understand how individual preferences are related to particular environments. This latter failing is especially true when it comes to preferences involving risk and time, and in preferences involving interpersonal comparisons – altruism, spite and fairness.
It’s actually a really great article, you should check it out. It has this:
The fashion modeling market also has a formal mechanism in place, known as the “option,” to ensure all tastemakers get in on the action. An option is an agreement between client and agent that enables the client to place a hold on the model’s future availability. Like options trading in finance markets, an option gives the buyer the right, but not the obligation, to make a purchase. In the modeling market, it enables clients to place a hold on the model’s time, but unlike finance options trading, model options come free of cost; they are a professional courtesy to clients, and also a way for agents to manage models’ hectic schedules.
And it even has this:
In behavioral economics, Coco Rocha’s success is a case of an information cascade. Faced with imperfect information, individuals make a binary choice to act (to choose or not to choose Coco) by observing the actions of their predecessors without regard to their own information. In such situations, a few early key individuals end up having a disproportionately large effect, such that small differences in initial conditions create large differences later in the cascade.
You are a poor pleb working in a large organization. Your career has reached a stage where you are asked to join one of two divisions, division A or division B. You can’t avoid the choice even if you prefer the status quo – it would be bad for your career. Each division is controlled by a boss. Boss A is sneaky and self-serving. perhaps he is “rational” in the parlance of economics. Even better, perhaps his strategy is quite transparent to you after a brief chat with him so you can predict his every move. He is the Devil you know. Boss B might be rational or might be somewhat altruistic and have your best interests at heart. He is the Devil you don’t know. Neither boss is going anywhere soon and you have no realistic chance of further advancement. You will be interacting frequently with the boss of the division you choose.
Which division should you join?
You face a trade-off it seems. If you join division A, it is easier for you to play a best-response to boss A’s strategy – you can pretty much work out what it is. If you join division B, it is harder but the fact that you don’t know can help your strategic interaction.
For example, suppose you are playing a game where “cooperation” is not an equilibrium if it is common knowledge that both players are rational – the classical story is the Prisoner’s Dilemma. Then, the incomplete information might help you to cooperate. If you do not cooperate, you reveal you are rational and the game collapses into joint defection. If you cooperate, you might be able to sustain cooperation well into the future (this is the famous work of Kreps, Milgrom, Roberts and Wilson).
On the other hand, if you are playing a pure coordination game, this logic is less useful. All you care about is the action the other player is going to take and you want to play a best response to it. So, the division you should join depends on the structure of the later boss-pleb game.
Perhaps it is possible to frame this question in such a way that the existing reputation and game theory literature tells us if and when incomplete information should be welcomed by the pleb so you should play with the Devil you don’t know and when it is bad, so you should play with the Devil you know?
Tyler Cowen forwards an email sent by a loyal reader disputing the argument that governments should borrow and spend more when interest rates are low.
But assume that the U.S. borrows an extra trillion of dollars now, due in 10 years (the average debt duration of the U.S. debt is something like 4 years?). Sure, the interest rate is low, but the borrowing is cheap only as long as we assume that during the 10 years the U.S. repays this whole extra debt, compared to what would have happened in the baseline world.
This does not affect the argument in any way. The economic argument for borrowing when interest rates are low says this. Suppose you have a plan for the future about when you will do your spending, borrowing, and repayment. This plan is predicated on your expectations of the path of interest rates. Now suppose that, as a surprise, interest rates are lower today than you expected. Then, other things equal, your original plan is no longer optimal. You should re-adjust and borrow more today.
The operative word here is “more.” I did not write “borrow a lot today.” And in fact the conclusion could be that you don’t borrow at all because if the original plan was to make re-payments, then “borrowing more” means (on net) just repaying less.
There is nothing at all deep about the economics here. And in fact, its rare that there is much deep economics involved when the economics really matters. Economics is really, really easy. What is hard is to use economics faithfully in your rhetoric. Advocates of increased borrowing and spending don’t ever refer to the default plan from which we should be adjusting. And without that (and the default plan probably doesn’t really exist) there isn’t much economics behind the rhetoric.
All sides are guilty. Tyler’s reader should be saying “the price of funds is determined by the path of interest rates, not just their value now and therefore this mutes to some degree the effect on borrowing of a drop in interest rates.” This is another very simple economic point. But it’s hard to resist the temptation to distort it from a simple comparative statement to one that is absolute.
In Asia the well-to-do avoid the sun (you’ve seen them with their parasols) because fair skin signals that you don’t spend your days outside, working. In Europe they embrace the sun because a good tan signals that you don’t spend all your time inside, working.
A primer in the New York Times.
Kit is a freegan. He maintains that our society wastes far too much. Freeganism is a bubbling stew of various ideologies, drawing on elements of communism, radical environmentalism, a zealous do-it-yourself work ethic and an old-fashioned frugality of the sock-darning sort. Freegans are not revolutionaries. Rather, they aim to challenge the status quo by their lifestyle choices. Above all, freegans are dedicated to salvaging what others waste and — when possible — living without the use of currency. “I really dislike spending money,” Kit told me. “It doesn’t feel natural.”
Its kinda like composting as a lifestyle, only with someone else’s waste and instead of making fertilizer you either eat it or live in it. An entertaining read from start to finish with cameos by roadkill, frozen toilets and even property rights.
The big news is that AT&T will be discontinuing its unlimited use data plans effective next week which happens to coincide with Steve Jobs worst-kept-secret announcement of the next-generation iPhone. People are up in arms.
Unlimited, all-you-can-eat wireless data was a beautiful thing for Apple devices on AT&T, delivering streams of Pandora, YouTube videos, a million tweets, and hundreds of webpages without worry. And now it’s dead.
AT&T’s new, completely restructured mobile data plans for both iPhones and iPads have officially launched the era of pay-per-byte data, which we’ve known was coming. We just hoped it would take a little longer. It’s the anti-Christmas.
One thing to keep in mind is that unlimited use tariffs are not part of an efficient or profit-maximizing pricing policy whether you consider monopoly or perfect competition. It is hard to imagine a model under which unlimited use makes sense unless there is zero marginal cost. (If marginal cost is positive then under unlimited use your usage will typically go beyond the point where your marginal value exceeds marginal cost. Whatever the market structure, this would be replaced by marginal cost pricing possibly with a reduced fixed fee.)
Still the specific form of the tariff– zero per-MB cost up to some limit and then a steep price after that– annoys many people. In fact, there are theories that show that this kind of pricing is the best way to exploit consumers who don’t accurately forecast their own usage.
But this brings me to the second thing to keep in mind. Those exploits take advantage of people who underestimate their usage. But here is the actual pricing menu.
I bet that you actually overestimate your usage. I use my phone a lot for browsing the web, maps, etc. and I average under 200 MB per month. Because some months I do go above 200MB, I will buy the 2GB plan for $25 (I don’t need tethering.) My wife on the other hand never goes above 200MB. So the new plan is a better deal for us.
Here’s how to check your usage.
Naming rights raise a lot of money. Think of professional sports stadiums like Chicago’s own US Cellular Field (does US Cellular still exist??) The amazing thing to me is that when Comiskey Park changed names to “The Cell,” local media played right along and gave away free advertising by parroting the name in their daily sports roundups. Somehow the stadium knew that this coordination/holdup problem would be solved in their favor.
We should seize on this. But not by selling positive associations to corporations that want to promote their brand. Instead lets brand badly-behaving corporations with negative associations.
The Exxon Valdez oil spill is a name that stuck. Every single time public media refer to that event they remind us of the association between Exxon and the mess they made. No doubt we will continue to refer to the current disaster as the BP Gulf spill or something like that. That is good.
But why stop there? (Positive) advertisers have learned that you can slip in the name of a brand before, after, and in-between just about any scripted words and call it an ad. The Tostitos Fiesta Bowl. The Bud Lite halftime show. The X brought to you by Y. These are positive associations.
Think of all the negative events and experiences that are just waiting to be put to use as retribution by negative association. “And today I am here to announce that the BP National Debt will soon reach 15 trillon Dollars.” Or “The BP recession is entering its fifth consecutive quarter with no end in sight.”
Why are we wasting hurricane names on poor innocents like Katrina and Andrew? I say for the 2010 hurricane season we ditch the alphabetical order and line em up in order of egregiousness. “Hurricane Blackwater devastates the Florida Coast. Tropical Storm Halliburton kills hundreds in Central America.”
The nice thing about negative naming is that supply is virtually unlimited. Cities don’t go selling the names of every street in town because selling the marginal street requires lowering the price. But you can put the name of every former VP at Enron and Arthur Andersen on their own parking meter and the last one makes you want to spit just as much as the first. Hey, what about parking tickets? This parking ticket is brought to you by Washington Mutual.
Suddenly the inefficiency of city bureaucracy is a valuable social asset. Welcome to the British Petroleum DMV, please take your place in line number 8. And some otherwise low-status professions will now be able to leverage that position to provide an important public service. “There’s some stubborn tartar on that molar, Ms. Clark, I’m going to have to use the Toyota Prius heavy-duty scaler. You might feel some scraping. Rinse please.”
“Good Afternoon, Pleasant Meadow Morturary, will you be interested in Goldman Sachs cremation services today?” Or “Mr. Smith we are calling to confirm your appointment for a British Petroleum colonoscopy on Monday. Please be on time and don’t eat anything 24 hours prior.”
Just as positive name-association is a lucrative business, these ne’er-do-wells would of course pay big money to have their names removed from the negative icons and that’s all for the better. If the courts can place a cap on their legal liability this gives us a simple way to make up the difference.
And I am ready to do my part. As much as I like one-word titles Sandeep and I are going to add a subtitle to our new paper. Its going to be called “Torture: Sponsored by BP.”
Yesterday’s ruling came out of an appeal on a narrow case brought by American Needle, Inc. who complained about exclusive licensing of apparel/logos to Reebok. The league formed a single entity which centralized licensing for all teams. The Supreme Court ruled that this constituted concerted action by separate profit-maximizing entities and therefore falls under the purview of Section 1 of Sherman Act.
Here are the main points from the decision, which is an interesting read.
- The ruling suggests a broader scope than just licensing. The court notes that teams compete with one another not for just apparel sales but for gate receipts, to attract fans and managerial and player personnel.
- Rule of reason is suggested for determining which cooperative activities are permissible and which are not.
- For consideration of any activity, whether or not the teams should be considered competitors will be based not on legalistic distinctions like whatever contracts are in place. Instead the judgment is made on the basis of “a functional consideration of how they actually operate.”
Its easy to interpret these as opening the door to challenges to the systems of collective bargaining in place in all professional sports leagues.
Answer: only if it’s good economic theory.
Any theory, not just economics has this structure: I assume A, I conclude C. It’s a good theory only if A logically implies C. And if A implies C then assuming A entails assuming C. Observations:
- If someone is not assuming their conclusion then you should ask them to come up with a better theory.
- Assuming your conclusions is a necessary condition for a good theory. It is not sufficient: it is possible (typical?) to assume your conclusion but have a bad theory.
- Once we have established that C follows from A, we can do the real work of evaluating a theory: assessing whether we believe A.
- That is the beauty of economic theory and other parts of the social sciences where we assume our conclusions: you get to see exactly what to focus on in trying to evaluate the theory. A theorist’s job is to take an argument and decompose it into two parts: the rules of logic and the assumptions. You can save your time not trying to evaluate the first part because you know in advance how logic works. We put in the hard work of separating that out so that you can see what’s left to argue about.
- There is no point in trying to figure out if someone has “predetermined their conclusion and picked assumptions that imply it.” The timing of how the theory came into existence is irrelevant. If it is a good theory and the theorist assumed his conclusion then you get to see exactly what assumptions led him to it. You get to decide whether you agree with C by deciding whether you accept A. And you are given a roadmap for how to convince the theorist he is wrong.
- In fact, given that we all have predetermined conclusions I would rather argue with someone who makes up a set of assumptions that imply his predetermined conclusion than someone who doesn’t. The first is doing the honorable thing of setting out conditions under which he can be proven wrong. There is no way to get started debating with the second person.
He is the author who wrote this on his website:
Q. How can I get Neil Gaiman to make an appearance at my school/convention/event?
A. Contact Lisa Bransdorf at the Greater Talent Network. Tell her you want Neil to appear somewhere. Have her tell you how much it costs. Have her say it again in case you misheard it the first time. Tell her you could get Bill Clinton for that money. Have her tell you that you couldn’t even get ten minutes of Bill Clinton for that money but it’s true, he’s not cheap.On the other hand, I’m really busy, and I ought to be writing, so pricing appearances somewhere between ridiculously high and obscenely high helps to discourage most of the people who want me to come and talk to them.
He’s busy, for sure. Too busy to agree to every appearance request. And so he does need to discourage people who want him to come and talk to them. But does he have to use high prices to discourage them? He could always just decide how many appearances he is able to fit into his busy schedule and agree to that many, saying no to everybody else. No need for prices if he is just rationing his time.
But maybe he wants to make sure that his scarce time is allocated to the audiences that value it the most. That’s not greed, that’s efficiency. Then instead of rationing by saying no, he should hold an auction. He chooses the same number of appearances as in the rationing mechanism (just based on the cost of his time), but now those appearances go to the highest bidders.
But maybe his optimal quantity of appearances cannot be determined independently of demand. If the auction fetches a very high price then he knows that the marginal willingness to pay is much higher than his marginal opportunity cost and he should increase supply. As a result his marginal opportunity cost increases until it rises above willingness to pay and he stops there. Now he is even more busy. But that’s efficient. And the price is lower.
But opportunity cost is a slippery concept. Agreeing to additional appearances means lower prices. The lower price is therefore an opportunity cost of the marginal appearance. When Neil Gaiman takes this into account, equating his marginal opportunity costs to marginal willingness to pay means raising prices. Now that’s greedy. But on the other hand any way of increasing consumer surplus necessarily lowers Neil Gaiman’s profits, so its also (Pareto) efficient.
If doctors were to fine tune their prescriptions to take maximal advantage of the placebo effect, what would they do? It’s hard to answer this question even with existing data on the strength of the placebo effect because beliefs, presumably the key to the placebo effect, would adjust if placebo prescription were widespread.
Indeed, over the weekend I saw a paper presented by Emir Kamenica which strongly suggests that equilibrium beliefs matter for placebos. In an experiment on the effectiveness of anti-histamines, some subjects were shown drug ads at the same time they took the drug. The ads had an impact on the effectiveness of the drug but only for subjects with less prior experience with the same drug. The suggestion is that those with prior experience have already reached their equilibrium placebo effect. (It appears that the paper is not yet available for download.)
So we need a model of the placebo effect in equilibrium. Suppose that patients get a placebo a fraction 
This equilibrium condition implicitly defines a function
The benefit of the model is that it allows us to notice something that may not have been obvious before. If instead of using placebos by varying 
as the equilibrium condition which defines effectiveness 
The something to notice is that, if the function 
Now this is just a statement about the feasible set. The benefit of placebo may come from the ability to implement the same outcome but with lower cost. In terms of the model this would occur if the 
Local surfers jealously guard the best breaks by intimidating non-local interlopers. Here is a paper by Daniel Kaffine that analyzes “localism” as a solution to a commons problem.
I use a unique cross-sectional data set covering 86 surf breaks along the California coast from San Diego to Big Sur to estimate the impact of exogenous wave quality on the strength of informal property rights. In the surfing context, groups of users known as “locals” enforce informal property rights, or localism, in order to reduce congestion from potential entrants, who are denoted “non- locals.” While not recognized legally, user-enforced informal property rights such as localism have features similar to those of formal property rights, such as rules on who may and may not have access to the resource. (“Localism” and “property rights” are used interchangeably throughout this paper.) Surfers in many loca- tions (including California) will tell visitors which breaks are open to anyone and which ones to steer clear of because of localism.
In theory, property rights raise the value of a common resource. But how can this theory be verified in data? The question is confounded by a reverse causality: property rights are more likely to emerge when the resource was already of high value. This data set solves the identification problem.
Unlike frequently studied resources such as fisheries, surf breaks (locations where waves are particularly conducive to surfing) have the feature that wave quality is exogenous with respect to property rights.4 The complex combination of tides, geology, and climatology that lead to high-quality waves would remain unchanged, even under private ownership. Waves do not care if they are ridden or not, which removes the feedback effects between the biophysical and social systems that are present in fisheries, for example. This natural exogeneity isolates the effect of quality in the estimation of its impact on property rights.
The finding is that higher-quality breaks are more likely to give rise to localism. The conclusion:
Thus, studies that attempt to infer the impact of property rights on quality must exercise caution in empirically attributing high resource quality to stronger prop- erty rights. The impact of property rights on resource quality may be overstated if the underlying differences in quality are not controlled for.
Panama pass: orgtheory.net
Affirmative action in hiring is more controversial than it has to be because of the way it is typically framed. People who agree with the general motivation object to specific implementations like racial preferences and quotas because of their blunt nature.
Any affirmative action hiring policy entails a compromise because it mandates a distortion away from the employer’s unconstrained optimal practice. We should look for ways that achieve the goals of affirmative action but with minimal distortions.
One simple idea is turn away from policies that incentivize hiring and instead incentivize search. Suppose that the employer believes that 10% of all candidates are qualified for the job but that only 5% of all minorities are qualified. Imposing a quota on the number of minority hires is less flexible than a quota on the number of minorities interviewed.
Requiring the employer to interview twice as many minority candidates equalizes the probability that the most qualified candidate is a minority or non-minority. Across all employers using this policy, the fraction of minority employees will hit the target. But each individual employer is free to hire the most qualified candidate among the candidates identified so the allocation of workers is more efficient than would be achieved with a straight hiring quota.
Hertz is making an offer for Dollar-Thrifty. Consolidation of this sort helps all players in the industry by reducing capacity and allowing all firms, including those outside the merger, to raise prices. (I already talked about this in a post about the United-Continental-US Airways merger dance.) There is an incentive then to stay outside the merger and gain from it. There has to be a countervailing force to overcome the positive externality of a merger. In the rental car case, it seems Dollar has access to a leisure-traveller market that Hertz would like to get their hands on. And there is an interesting twist to the merger deal they signed with Dollar. The Avis CEO would like to bid for Dollar (or so he says) and writes to Dollar:
“[W]e are astonished that.. you have compounded these shortcomings by agreeing to aggressive lock-up provisions, such as unlimited recurring matching rights plus an unusually high break-up fee (more than 5.25% of the true transaction value, as described by your own financial advisor), as a deterrent to competing bids that could only serve to increase the value being offered to your shareholders.”
Hertz has built in a nifty-seeming “match the competition” clause into its agreement with Dollar, If other bidders emerge, Hertz gets to match their bids and there is a break-up fee that deters Dollar from accepting another suitor.
There are several strategic effects. If Avis truly wants the Dollar leisure market access, this clause clearly makes it hard for them to acquire it. But it leaves Hertz vulnerable to a spoiling strategy by Avis: Avis can start bidding up the price Hertz pays for Dollar by make high bids for Dollar. Avis won’t win Dollar but will leave Hertz stuck with a big payment.
Spoiling may backfire if its triggers a future price war if Hertz is forced to take a short-run perspective and slash prices to survive . We will see what happens in the next few days.
About twice a year the Chicago “classic rock” station does something strange. Instead of its regular programming sequence, it sets aside about a week to play through all the greatest songs in alphabetical order. And this is advertised as a big event, a restoration of order out of chaos that the audience has apparently been desperate for since the last time they did it. They are at it again this week and in between “Boys of Summer” and “Brain Damage/Eclipse” I started to wonder why this was thought to be a good marketing strategy.
- There is the possibility of coordination failure between audience and programmer at certain time slots. If everybody tuning in at noon is expecting late 70’s prog rock then they better play that or lose their audience. The A to Z is a way to break the trap.
- It works as a commitment not to repeat a song for a whole week.
- It’s really just a negotiation tactic with the program director. The station proves publicly that the program director’s choice of playlist on a daily basis is completely irrelevant to the listeners.
- The station is just pruning its library and it takes a week to do that every 6 months. While they are at it, they might as well play the songs that made the cut.
- It gets the listeners into the game of predicting the next song. (They just played “Back Door Man” by the doors. We know “Back in the USSR” is coming soon. Is there anything in between that we are forgetting? Let’s stay tuned and find out!)
If it is any one of the demand-side explanations (like 2 and 5) there is a residual puzzle. Presumably listeners have some given satiation point for classic rock and this trick is just getting them to inter-temporally substitute their listening. They listen more now, less later. Why is that good for the station?
I think the answer has to do with the convex value of advertising. Advertisers’ willingness to pay increases more than proportionally with the size of the audience. This is due to “bandwagon” and “water cooler” effects. (Michael Chwe has a paper about this.) With that in mind the station would prefer everyone listen this week and nobody listen next week rather than half and half.
You can see the whole list (up to now) here.
From Barking Up The Wrong Tree:
What determines reciprocity in employment relations? We conducted a controlled field experiment and tested the extent to which cash and non-monetary gifts affect workers’ productivity. Our main finding is that the nature of the gift, not its monetary value, determines the prevalence of reciprocal reactions. A gift in-kind results in a signicant and substantial increase in workers’ productivity. An equivalent cash gift, on the other hand, is largely ineffective or even though an additional experiment showed that workers would strongly favor the gift’s cash equivalent.
It probably has nothing to do with reciprocity. If I pay you money you have to share it with your family and then buy a car out of your share. If I give you a car it is all yours.
This logic also often provides a psychology-free explanation of the endowment effect. You are willing to pay at most $10,000 for a car. But if I give you that car for free and offer to buy it back from you, you require $20,000, because you will get to keep only half of that money.
(inspired by discussions with my Behavioral Economics class.)
Update: See Ben’s comment below for another variation on the theme which also came up in class. If you have present-biased preferences you have an endowment effect because cash will be shared with future selves, whereas instantaneous consumption is all for your present self.
Cheap Talk 