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One of the highly touted features of the iPhone is the abundance of applications available for near-instantaneous download and seamless installation. In traditional Apple fashion, in order to keep full control of the software environmnet and maintain this seamless experience, Apple exercises strict control over which apps are made available through the app store. Short of jailbreaking your phone, there is no other way to install third-party software.
The process by which apps are submitted and reviewed strikes many as highly inefficient. (It also strikes many as anti-competitive, but that is not the subject of this post. There are legitimate economic arguments supporting Apple’s control of the platform and for my purposes here I will take those as given, although for now I remain agnostic on the question.) Developers sink significant investment producing launch-ready versions of their software and only then learn definitively whether the app can be sold. There is no recourse if the submission is denied.
(Just recently, we witnessed an extreme example of the kind of deadweight loss that can result. A fully licensed, full-featured Commodore64 Operating System emulator, 1 year in the making, was just rejected from the app store. )
Unfortunately, this is an inevitable inefficiency due to the ubiquitous problem of incomplete contracting. In a first-best world, Apple would publicize an all-encompassing set of rules outlining exactly what software would be accepted and what would be rejected. In this imaginary world of complete contracts, any developer would know in advance whether his software would be accepted and no effort would be wasted.
In reality it is impossible to conceive of all of the possibilities, let alone describe them in a contract. Therefore, in this second-best world, at best Apple can publish a broad set of guidelines and then decide on a case-by-case basis when the final product is submitted. This introduces inefficiencies at two levels. First, the direct effect is that developers face uncertainty whether their software will pass muster and this is a disincentive to undertake the costly investment at the beginning.
But the more subtle inefficiency arises due to the incentive for gamesmanship that the imperfect contract creates. First, Apple’s incentive in constructing guidelines ex ante is to err on the side of appearing more permissive than they intend to be. Apple knows even less than the developers what the final product will look like and Apple values the option to bend the (unwritten) rules a bit when a good product materializes. While it is true that Apple’s desire to keep a reputation for transparent guidelines mitigates this problem to some extent, the fact remains that Apple does not internalize all the costs of software development.
Second, because Apple cannot predict what software will appear it cannot make binding commitments to reject software that is good but erodes slightly their standards. This gives developers an incentive to engage in a form of brinkmanship: sink the cost to create a product highly valued by end users but which is questionable from Apple’s perspective. By submitting this software the developer puts Apple in the difficult position of publicly rejecting software that end users want and the fear of bad publicity may lead Apple to accept software that they would have like to commit in advance to reject.
The iPhone app store is only a year old and many observers think of it as a short-run system that is quickly becoming overwhelmed by the surprising explosion of iPhone software. When the app store is reinvented, it will be interesting to see how they approach this unique two-sided incentive problem.
Update: Mark Thoma further develops here. He didn’t ask in advance for permission to do that, but if he did I would have given encouraging signals but then rejected it ex post.
Until 2010 that is, whereupon its time to shuffle it:
If Congress doesn’t act, the estate tax will disappear in 2010 but will return in 2011 at the pre-2001 level of $1 million with a tax rate of 55%.
That could generate some interesting data.
I guess I am the Tyrone Slothrop of Northwestern University. I’ve been doing research on the theory of the “democratic peace” – the finding that democracies rarely attack each other. This has been called “an empirical law” in international relations. This idea is famous enough that it is offered as a rationalization for spreading democracy by both left- and right-wing politicians.
Why might democracies be more peaceful? And how about a regime like Iran? Fareed Zakaria says : “Iran isn’t a dictatorship. It is certainly not a democracy.” It is something in the middle. There are elections but an elite also controls many things such as the appointment of the Supreme Leader who has enormous power.
I have done some research with David Lucca and Tomas Sjostrom where we offer a theory for why these regimes which we call limited democracies might be the most warlike of all. And the data does suggest that countries like Iran are very warlike, especially when facing a similar limited democracy.
Here is brief attempt to explain the theory informally – it is done using game theory in the paper. Conflict occurs via combination of greed and fear – two of the causes of war according to the great Greek historian Thucydides. Each side does not know if the other is motivated by greed or fear. Greedy leaders are hawkish. But, even if one side is not greedy, they turn aggressive because the other side may be greedy. So, both sides become aggressive whether it is because of greed or fear of greed. We study how political institutions can control greed or stimulate fear.
In fact, the logic above is our model of dictatorship where leaders interact with no thought for the wishes of their citizens. It is our pure model of greed and fear. It is inspired by the famous logic of the “reciprocal fear of surprise attack” due to Thomas Schelling.
In a democracy, the voters may punish a leader who starts a war unnecessarily. As leaders want to stay in power, this controls greed. But the voters may also punish a leader who is weak in the face of aggression. This unleashes fear as democratic leaders are aggressive in case they are too dovish in an aggressive environment. So, democracies can be peaceful against each other as dovish voters control their leaders. But they can turn aggressive very rapidly if they are concerned their opponent will be aggressive. In a dictatorship, the leader does not fear losing power but no-one controls his greed.
Now, suppose the leader can survive in power if he pleases the voters or if he satisfies a hawkish minority who favor war. This regime has some properties of a democracy – the leader survives in power in the same scenarios as the leader of a full democracy. But he also survives if he starts an unnecessary war – just like a dictator would. The leader only loses power if he is dovish in the face of aggression. Then, neither the average citizen nor the hawks support him. This type of regime which we call a limited democracy is the most aggressive of all. The leader fears losing power and the voters cannot control his greed. So, a little democracy can make things worse if it leads to a regime like this.
The theory leads to a bunch of predictions which we try to confirm in data. I took a shot at explaining the ideas in a talk I gave to Kellogg MBAs. The video is here in case you’re interested (you need Real Player to view it). The article is here (you need Adobe Acrobat to view it).
James Joyce’s Ulysses? The Great Gatsby? Something challenging by Thomas Pynchon? Something whimsical by P.G. Wodehouse?
No, the smart vote goes to Isaac Asimov’s Foundations Trilogy.
The latest fan to come out in public is Hal Varian. In a Wired interview, he says:
“In Isaac Asimov’s first Foundation Trilogy, there was a character who basically constructed mathematical models of society, and I thought this was a really exciting idea. When I went to college, I looked around for that subject. It turned out to be economics.”
The first time I saw a reference to the books was in an interview with Roger Myerson in 2002. And he repeated the fact that he was influenced by Foundation in an answer to a question after he got the Nobel Prize in 2007. And finally, Paul Krugman also credits the books with inspiring him to become an economist. A distinguished trio of endorsements!
Asimov’s stories revolve around the plan of Hari Seldon a “psychohistorian” to influence the political and economic course of the universe. Seldon uses mathematical methodology to predict the end of the current Empire. He sets up two “Foundations” or colonies of knowledge to reduce the length of the dark age that will follow the end of empire. The first Foundation is defeated by a weird mutant called the Mule. But the Mule fails to locate and kill the Second Foundation. So, Seldon manages to preserve human knowledge and perhaps even predicted the Mule using psychohistory. Seldon also has a keen sense of portfolio diversification – two Foundations rather than one – and also the law of large numbers – psychohistory is good at predicting events involving a large number of agents but not at forecasting individual actions.
As the above discussion reveals, I did take a stab at reading these books after I saw the Myerson inteview (though I admit I used Wikipedia liberally to jog my memory for this post!). And you can also see how Myerson’s “mechanism design” theory might have come out reading Asimov. I enjoyed reading the first book in the trilogy and it’s clear how it might excite a teenage boy with an aptitude for maths. The next two books are much worse. I struggled through them just to find out how it all ended. Perhaps I read them when I was too old to appreciate them.
The Lord of the Rings is probably wooden to someone who reads it in their forties. It still sparkles for me.
Greg Mankiw is trying to make a reductio ad absurdum critique of the objective of income redistribution. He has written a paper with Matthew Weinzierl which shows that optimal taxation will typically involve taxing all kinds of characteristics that seem patently unfair and unacceptable. He concludes from this that it is the goal of income redistribution that entails these absurdities.
But there is a prominent guy who lives at a nice home at 1600 Pennsylvania Avenue who wants to “spread the wealth around.” The moral and political philosophy used to justify such income redistribution is most often a form of Utilitarianism. For example, the work on optimal tax theory by Emmanuel Saez, the most recent winner of the John Bates Clark award, is essentially Utilitarian in its approach.
The point of our paper is this: If you are going to take that philosophy seriously, you have to take all of the implications seriously. And one of those implications is the optimality of taxing height and other exogenous personal characteristics correlated with income-producing abilities.
This argument fails because the objectionable policies implied by optimal taxation in his model have nothing to do with income redistribution or utilitarianism. Indeed they would be optimal under the weaker and unassailable welfare standard of Pareto efficiency which I would assume Mankiw embraces.
Let me summarize. Optimal taxation involves minimizing the distortionary effect on output from raising some required level of revenue. It does not matter what that revenue is being used for. It could be for redistribution but it could also be for producing public goods that will benefit everyone. Whatever revenue is required, the optimal taxation policy generates this revenue with minimal cost in terms of reduced incentives for private production. Taxing exogenous and observable characteristics that are correlated with productivity is a way of generating revenue without distorting incentives.
If we tax income (a direct measure of productivity) you can lower your taxes by earning less, that is a distortion. If we tax your height (known to be correlated with productivity), you cannot avoid these taxes by making yourself shorter.
So the implication that Mankiw wants us to be uncomfortable with is an implication of the way optimal tax theorists conceive the problem of revenue generation and the implication would be present regardless of how we imagine that tax revenue being spent. It has nothing to do with redistribution and we can feel uncomfortable with height taxation without that making us think twice about our desire to redistribute wealth.
Sandeep has previously blogged about the problems with torture as a mechanism for extracting information from the unwilling. As with any incentive mechanism, torture works by promising a reward in exchange for information. In the case of torture, the “reward” is no more torture.
Sandeep focused on one problem with this. This works only if the torturer will actually carry out his promise to stop torturing once the information is given. But once the information is given the torturer now knows he has a real terrorist and in fact a terrorist with valuable information. This will lead to more torture (for more information) not less. Unless the torturers have some way to tie their hands and stop torturing after a few tidbits of information, the captive soon figures out that there is no incentive to talk and stops talking. A well-trained terrorist knows this from the beginning and never talks.
Let me point out yet another problem with torture. This one cannot be solved even by enabling the torturers to commit to an incentive scheme.
The very nature of an incentive scheme is that it treats different people differently. To be effective, torture has to treat the innocent different than the guilty. But not in the way you might guess.
Before we commence torturing we don’t know in advance what information the captive has, and indeed we don’t know for sure that he is a terrorist at all, even though we might be pretty confident. A captive who really has no information at all is not going to talk. Or if he does he is not going to give any valuable information, no matter how much he would like to squeal and stop the torture.
And of course the true terrorist knows that we don’t know for sure that he is a terrorist. He would like to pretend that he has no information in hopes that we will conclude he is innocnent and stop torturing him. Therefore the torture must ensure that the captive, if he is indeed an informed terrorist, won’t get away with this. With torture as the incentive mechanism, the only way to do this is to commit to torture for an unbearably long time if the captive doesn’t talk.
And this leads us to the problem. In the face of this, the truly informed terrorist begins talking right away in order to avoid the torture. The truly innocent captive cannot do that no matter how much he would like to. And so torture, if it is effective at all, necessarily inflicts unbearable suffering on the innocent and very little suffering on the actual terrorists.
When police stopped a 49-year-old businessman, they discovered his blood alcohol level to be well over Norway’s legal limit. Citing the man’s personal wealth of more than $30 million, a court ordered him to pay $109,000 as a drunken-driving penalty — almost his entire annual income. In Norway, fines are based on income and personal wealth.
Listen to the brief NPR item here. A similar system is in place in Finland where according to this older story, there was a fine in 2004 of 170,000 euros, the largest I could find.
From a pure revenue point of view this makes sense although it seems like the fines are rising too quickly with wealth. You would raise more revenue by setting the fine a little lower than my entire annual income and induce me to get caught more often and pay more fines.
From an incentive point of view there might be two rationales. The effect of a fixed penalty gets smaller as my income increases so to generate the same deterrent you want the fine to rise with income. Alternatively, you might wish to make the fine so high so as to deter anyone from ever consider breaking the law but you can only expect to extract such a fine from the very rich. The latter story is suspicious because, based purely on efficient incentives, you do want people to sometimes drive drunk if it is sufficiently important, for example if they need to rush someone to the hospital. And perhaps a better way to deal with the former issue is to just take away driving priveleges for some length of time. That would be a simple way to make the effect of the penalty constant despite varying income.
But shouldnt the fine also vary with the income of all the other drivers in the vicinity? Their income is a measure of the value they contribute to society and so its a good measure of the externality caused by the unsafe driving. If you are putting people with high income at risk then you should be fined appropriately.
I’m almost beginning to feel sorry for Alex Rodriguez. Everyone is picking on him. The latest strike against him is that he is being accused of collusion. He has an enviable batting record but now it seems the figures may be inflated. Alex is accused of pitch-tipping. Pitch-tipping involves somehow signaling the oncoming pitch to the hitter of the opposing team. According to an op-ed in NYT:
So, according to the latest story, Alex is connected to some pitch-tipping scheme in which he relayed signs to the opposing hitter (if he was a friend) or for someone who would return the favor when he was hitting. This was supposedly done in one-sided games where, in theory, one team had no chance of catching up. Alex was said to be in cahoots with a lot of middle infielders. Allegedly, there was some sign he would relay to the hitter — a movement with his glove or his feet — to let the hitter know what type of pitch was coming and where.
That is, there was “I scratch your back and you scratch mine” equilibrium. No contract is in place to enforce this so it would have to be enforced implicitly over multiple rounds as a repeated game equilibrium. It’s pretty cunning and companies have been known to do it. Alex didn’t need a M.B.A. to be taught it. He learned it in the game of hard strikes.
(Hat tip: Pablo Montagnes, PhD student).
Parents today in the US worry too much about letting their kids play outside without supervision. Are they paranoid?
The crime rate today is equal to what it was back in 1970. In the ’70s and ’80s, crime was climbing. It peaked around 1993, and since then it’s been going down.
If you were a child in the ’70s or the ’80s and were allowed to go visit your friend down the block, or ride your bike to the library, or play in the park without your parents accompanying you, your children are no less safe than you were.
But it feels so completely different, and we’re told that it’s completely different, and frankly, when I tell people that it’s the same, nobody believes me. We’re living in really safe times, and it’s hard to believe.
This ignores two crucial details. First, if fewer kids are being left unsupervised then there are fewer crimes to commit so if the number of crimes committed is the same as in the 1970’s then in fact we are living in a more dangerous world. Second, even holding constant the crime rate there is a coordination problem that parents must contend with. If all of your neighbors kids are inside playing their Wii and you let your kid go to the playground then he is the only target so you would be right to pass and go out and get your own Wii. In the 1970’s there were enough of us targets out there already that the marginal kid was safe.
The article is here. Cap clap: kottke.org.
The main logic of torture is to inflict so much pain that the victim reveals all his information to make the pain stop. Incentives for truth-telling in this situation are eerily similar to those in the bank stress tests.
All banks want to report that they are healthy. To distinguish the lying sick banks from the healthy ones there has to be some verifiable information. Healthy ones have this information (e.g. they passed the stress test) and the sick ones do not. The healthy banks have to have the incentive to reveal the information. This is all too clear for the healthy banks: by revealing their results they can avoid bank runs, get liquid, start lending etc.
In the torture analogy, a healthy bank is an informed terrorist with real information of an attack and a sick bank is someone, say an uninformed terrorist, with no information. The assumption of the pro-torture people is that the informed terrorist will have the incentive to report his information to avoid pain. But an uninformed terrorist has the same incentive. To tell one from the other, the informed terrorist’s information has to be verifiable. For example, there has to be “chatter” on Al Qaeda websites that can be used to cross-check the veracity of the torture victim’s confession. If this information is out there anyway, one might ask why torture was necessary in the first place. Presumably, the information is vague or ambiguous. The torture victim’s information brings some clarity.
This process seems heavily error-prone. False confessions may also cross-check by accident. The information is so noisy that a lead that is very weak may be thought to be strong. The more noise there is, the more the victim’s report is uninformative cheap talk – it contains no true information as informed and uninformed terrorists all give information, false and true and impossible to distinguish.
There is a second problem. Once a healthy bank releases the stress test information, the game is over – the market has the information and responds correspondingly. A torture victim faces further torture. There is no way for the interrogator to commit to stop torturing. If the victim knows this beforehand, the victim lies in the first place as there is no way to stop the torture. If the victim finds this out between episodes of water-boarding, the victim might start lying to contradict their earlier true confessions.
The efficacy of torture relies on verifiability of information and the ability of the torturer to commit to stop if good information is revealed. Both properties are hard if not impossible to satisfy in practice.
Suppose that you have evidence of wrongdoing but it is not definitive evidence. You are only 80% sure. Suppose that if you were sure you would feel a certain level of moral outrage. What fraction of that moral outrage should you feel when you are only 80% sure?
Surely it must be less than 100%. The suspect stands before you and you know that he is either guilty or innocent. Whatever level of outrage you feel, you are with 20% probability feeling morally outraged at someone who is innocent.
Is it 80%? Is the level of moral outrage proportional to the probability of guilt? This would lead to the absurd conclusion that, because we know somebody shot JFK, and we don’t know for sure who it is, and everybody around you is guilty with some probability, you feel a certain level of moral outrage toward everybody you meet.
Fortunately, there is a theory of crime and punishment that does not suffer from these paradoxes. Punishment for suspicion of a crime is designed to create incentives for good behavior and this implies a precise relationship between the level of suspicion and the level of punishment. And the relationship usually clashes with that of moral outrage.
For example, you can be certain that a crime was not committed and still insist on punishing. For example, the best way to deter doping in sports might be to set such drastic penalties that nobody will ever use performance-enhancing drugs. To enforce this we must use drug tests. And when a drug test comes up positive, we know it was a false positive because we know that the penalty is so high that nobody would be doping. But we must punish anyway because this is our deterrent.
The opposite is possible as well. You can be quite certain that a crime was committed and let the suspect go free with no penalty. For example, suppose there are two kinds of evidence suggestive of a crime. There might be circumstantial evidence and there might be an eye-witness. It may be an optimal deterrent to punish only in the event of an eye-witness and never when there is only circumstantial evidence, even very strong circumstantial evidence. This would minimize type II errors (convicting the innocent in the event of circumstantial evidence) and would still be a sufficient deterrent if the penalty in the event of an eye-witness could be set high enough.
Ok, so we can escape the paradoxes of moral outrage. Now that we have that settled, what I am trying to figure out is how these ideas extend so that I can escape the paradoxes of statistical voyeurism.
Did you know that since 2001 heroin, cocaine, marijuana and all similar drugs were decriminalized for personal use in Portugal? Decriminalization means that there are no criminal penalties, and instead citations for use result in the offer of counseling and voluntary rehabilitation. This CATO study reports that since then use of these drugs has actually declined.
The study is interesting for the historical account and other context but the claim about usage rates is hard to believe. The paper is missing details on how usage rates are calculated but a simple alternative explanation is this. Without criminal penalties, law enforcement has reduced incentives to issue citations and thus users are undercounted.
The chef Bobby Flay is ubiquitous on the Food Network. I usually see him in two shows, Iron Chef America and Throwdown with Bobby Flay. Both are competitive shows. Flay usually loses on Throwdown and wins on Iron Chef.
On Throwdown, Bobby Flay makes one dish and competes with an expert . For example, recently there was a show where he made a deep dish pizza against Chicago native Lou Malnati. The two dishes are judged by two experts side by side with a partisan local audience watching. Flay lost.
On Iron Chef America, the format is different. There is a secret ingredient (though I bet both contestants have a fair idea of what it will be!). In this format, Flay and his fellow Iron Chefs are matched against a gourmet chef. Last week the secret ingredient was butter. The entrant was Koren Grieveson of avec in Chicago. Koren picked Cat Cora to compete against. And the competition was tied. As I said, this is a rare event in Iron Chef because the incumbent usually wins. Why?
I think it’s all in the judging. On Iron Chef, the chefs get to present their dishes to the judges so there is no anonymity. On Throwdown, they do not identify who cooked which dish.
I wish they would adopt the same format for Iron Chef. The judges are biased towards the incumbent. For example, while Cat Cora’s food looked good, she won more points in the category of “originality”. One of her dishes was bread and butter, another was gnocchi in a butter sage sauce. These are original only if one adopts an ironic definition of the word “original”. But then everything is original and the category makes no sense! Frankly, I went to avec last night and I just find it hard to believe Cat Cora’s food is better. Maybe I am expressing the bias manifested on Throwdown: the bias of the local audience towards the local contestant. This can also be fixed by making the judges judge in a different room. Similarly, on Iron Chef, a third party, say Alton Brown, could present the dishes. If the judges have questions, the show can set up speakers in a separate room where the chef is standing nervously. S/he can answer the questions into an earpiece worn by Alton Brown. He can relay the answers to the judges. This can be done in a theatrical way to add more drama and tension.
A basketball game where one team is vastly superior to the other is boring to watch. By leveling the playing field, Food Network can add more uncertainty to the competition and get more viewers.
The NBA will not draft players who are under 19 or who are not at least one year past high school graduation. Most players opt for at least one year of NCAA basketball where they are unpaid and (at least nominally) full-time students. The first step toward the unraveling of this system has occurred as Jeremy Tyler has left San Diego High School and will skip his senior year to play professional basketball in Europe. After two years he will be eligible for the NBA draft at which point he is a likely number 1 pick.
“It’s significant because it shows the curiosity for the American player just refusing to accept what he’s told he has to do,” Vaccaro said. “We’re getting closer to the European reality of a professional at a young age. Basically, Jeremy Tyler is saying, ‘Why do I have to go to high school?’ ”
By the time students here wield their scalpels, they will know the dead intimately, composing poems and slide shows to them, writing their biographies and sometimes lighting incense in their honor. When they are finished, the students will carry the donors’ coffins to the crematory, mourning them as their “silent mentors” who taught them with their bodies.
Read about how a Buddhist nun in Taiwan has used religious teachings to change a long-standing aversion to cadaver donation. Maybe ideas like this can be used to promote organ donation by the living.
The Baseline Scenario has a nice overview of the political issues around the estate tax. The estate tax, politely referred to as The Death Tax, is motivated both by principles of fairness and principles of economics. The fairness motivation is obvious. And death seems like a focal moment for redistributing wealth.
The economic motivation also points toward the moment of death as a natural timing for taxation. The economic cost of taxation is the distortion of freely made choices that it induces. Sales taxes reduce the gains from trade, income taxes reduce the incentive to work, etc. On the other hand, activities and resources that are in fixed supply can be taxed without distortion. Well, death is in fixed supply, we all get exactly one. And while the timing can be controlled to some extent, the effect of income after death on its timing is surely second-order.
However, economic arguments against estate taxation point out that it distorts behavior before death increasing consumption over investment. The estate tax translates into a tax on investment because, in the event of death, a fraction of the payoff will be confiscated. Provided that a bequest is a normal good, this reduces investment.
There is a simple way to amend the estate tax to undo this distortion and increase tax revenue. The government can offer a tax shelter in the form of a life-insurance policy where the household pays c in cash to the government in return for shielding a fraction q of wealth from estate taxation. The effect is to capture some of what would have been extra expenditure on consumption in the form of a direct transfer to the government, and compensate the estate by reducing taxes after death.
“If [the spammers] are really able to write a programme to read distorted text, great – they have solved an AI problem,” says von Ahn. The criminal underworld has created a kind of X prize for OCR.
Reading the ubiquitous CAPTHCAs (those smeared words that are often impossible for even humans to read) is a big incentive to design new optical character recognition algorithms. I don’t understand the article’s connection to “Turing tests” but the economics are interesting. Spam is an inefficient way to provide incentives for research, it would be better to just use cash. But since they are going to try to spam us anyway (the cash just adds to the incentive), we might as well keep the cash and reward them with spam.
That’s the position of an editorialist writing in the Washington Post. The author is a tenured professor so this is not an attack from the outside. He argues that tenure continues to be an important safeguard of academic freedom but that
…the system has turned the academy into one of the most conservative and costly institutions in the country. Yes, conservative: Economists joke that their discipline advances one funeral at a time, but many fields must wait for wholesale generational turnover before new approaches take hold.
The system also hamstrings younger untenured professors, making them fearful of taking intellectual risks and causing them to write in jargon aimed only at those in their narrow subdiscipline: Thus in economics, people have “utility functions” instead of needs and wants.
Tenure is indeed important for academic freedom. I have seen a few cases in which tenure insulated from public pressure academics who expressed controversial views. However, in my opinion this is a small part of the benefit of the tenure system and in fact the editorial has it backward.
It is true that academia is conservative. But by merely observing that
- We have tenure
- We are conservative
it does not follow that 1 implies 2. Without tenure it would be even worse. Basic research occurs in universities because there is a missing market: it is too difficult to guage its benefits in the short-run. This is often true even for insiders within the field, let alone outsiders who would make hiring, firing, and promotion decisions based on published research. Without a good measure of successful research, these decisions would be based on litigatable bright-line criteria which would create greater distortions in research than tenure has. Witness that a professor of political economy would judge economists for using “utility functions.”
Indeed, the author makes exactly my point with the example of untenured professors. Only untenured professors face the prospect of having their research evaluated for promotion. They understand very well the incentives this creates. Unfortunately there must be one such evaluation period. Tenure ensures that there is at most one, and that it is as short as possible.
It may be the biggest moment “for potty parity that we have seen, to have two big facilities open at the same time, and all these restrooms open at once,” said Kathryn Anthony, a professor of architecture at the University of Illinois and a board member of the American Restroom Association.
The new Yankee Stadium and Mets’ ballpark will adhere to new laws in place in New York City requiring two women’s toilets for every one men’s toilet. Read about it here in the New York Times (via The Browser.) Empirically, a woman’s visit to the stall lasts twice as long as a man’s on average so the ordinance is intended to equalize waiting times for men and women. A few thoughts come to mind (double-entendres noted in parentheses).
- This will actually overshoot (!). The waiting times will be equalized only at times of peak demand when queuing occurs. If women have more stalls than men, they will queue less often. As a result average waiting times will be lower for women than for men.
- We should not be equating waiting times anyway, we should equate the marginal cost of an additional fixture relative to the resulting reduction in average waiting times. Urinals are cheaper than stalls.
- There is a moral hazard problem coupled with an externality that is not being taken into account. When queuing is a possibility, the patron trades-off the instantaneous urgency versus the alternative of waiting for off-peak moments, for example avoiding the seventh-inning stretch. If prices could be charged, Ramsey pricing would dictate that prices would be positive only at times of peak-load (!). This is to encourage the less urgent to wait for the off-peak reducing the externality imposed on others. When prices cannot be charged, some level of congestion will be part of a second-best (number two !) incentive instrument.
- In queuing problems in general, it is efficient to first serve those whose needs require the shortest use of the facility because they impose the least externality on others. This principle points toward disparity in favor of men.
- I hope they have looked into this.
It’s Sunday morning. You are reading the Week in Review section of the New York Times and realize piracy still exists in the twenty-first century. Who would have thought it? The Travel Section leaves you a bit wistful as you realize how many interesting places in the world you’ll never visit. Now you pack like a small army because you have two young children. You wish you had done the Inca Trail in 1987 when you went to Peru. That might have invited a kidnapping at the hands of the Sendero Luminoso, but maybe that’s better than grad school?
You hear the sound of Lego and see your kids building the John Hancock Building out of Lego. You smile, thinking, “The Inca Trail can never compare to the joy I just felt seeing the kids playing together so happily.” You turn to the crossword puzzle. Your reverie comes to a screaming end as a fight breaks out behind you. Who got one of diagonal bits that criss-cross the Hancock a bit wonky? You will never know but each kid blames the other.
What to do?
The situation reminds you of the famous Moral Hazard in Teams paper by Bengt Holmstrom. Someone clearly did not exert the cooperative effort level. But you cannot tell who it was as there is no kid-specific signal, just the aggregate signal of the building falling over and the fight. First, you think that you should be fair and punish a child if and only if the weight of evidence is high. You realize you’re screwed as you never have that level of evidence. You could ask the children what happened and cross-check what one did against the other. In fact, this would give an opportunity to apply your own research and you’re excited about that. It dawns on you that the 8 year old can always out-lie the 4 year old. And the volume of the four year old’s cries is measured on the Richter scale. Your research obviously did not take account of these practical matters.
Incentive theory gives the obvious answer: punish them both. This works very well if there is nothing random that can cause the building to fall over. Then, each child knows they get punished if they start fighting so no-one fights as long as the punishment is big enough. If a fight can start randomly – and we parents know this can happen – sometimes you’ll punish them even though nothing truly bad happened. This is unfair and inefficient but what can you do? This second-best solution is still better than no incentives at all.
Briefly, you think about the theory of repeated games which claims to get cooperation even when the game is quite noisy and there is lots of private information about who did what to whom. You remember that Jeff has made important contributions to this theory. You use your common sense and decide that using his research might take the application of game theory to family life a little bit too far. You get up, confiscate the Lego and send the kids to their room to get out of their pajamas and put clothes on. The ultimate punishment. The lovely mother of your lovely children has solved the crossword puzzle by the time you’re done. Bugger.
Legalization of marijuana has gained some momentum recently in terms of conspicuous support in the press, expansion of medical marijuana freedoms, and relaxation of enforcement (see especially this article.) The argument is often made that the tremendous expense in terms of lives and money of the war on drugs does not justify whatever moral benefit there is of minimizing drug use.
But legalization would only make the drug war more costly. The reason is simple. Legalized pot does not reduce the incentive of government and its lobbyists to fight back the illegal market, in fact it only adds to that incentive.
The effort spent prosecuting the war on drugs is determined by a balance between the marginal cost of additional enforcement and the marginal benefit of reduced consumption. When pot is illegal, that marginal benefit comes from the (perceived by lobbyists) moral and cultural virtue. When pot is legal, the marginal cost of enforcement is the same but to the moral benefit would be added the financial stake in licensing legal producers and taxing consumption.
The government’s revenue from licensing and taxation of marijuana sales relies on foreclosing the black market which would not be subject to taxation and therefore would clear at a lower price. Government policy under legalized marijuana would be shaped by basic economics. The effort in fighting the black market imposes a cost on illicit producers which acts effectively as a tax. The level of that tax determines the market price in the black market and this is the maximum price that the legal market can sustain. If we start with the level of enforcement currently in place, this translates to a certain tax revenue that the government would earn were it to legalize pot and keep enforcement at its current level.
But raising the level of enforcement would allow the government to raise taxes on the legal trade. Since the marginal cost of enforcement was already equal to the marginal benefit based on moral considerations, the additional marginal benefit from increased taxes means that the government will increase enforcement.*
If you favor legalization of marijuana for libertarian reasons (or if you are just hoping for cheaper weed), you should instead push for a relaxation of enforcement without decriminalization (as the Obama administration is reportedly acquiescing to.) Decriminalization would give the create a vested interest in the drug war that would be hard to undo.
(*Theoretically, it is possible that, say, excise tax revenue would be increased by increasing consumption at the margin rather than decreasing. This would be true only if the current level of enforcement is already holding the black market price above the monopoly price. It is hard to believe that this is true today. )
Uber-twitterer and oenephile of the Proletariat Gary Vaynerchuck has just signed a million dollar deal with Harper Studio who will publish 10 (!) books by the hitherto unpublished, self-proclaimed non-reader. As reported here (bowlerbow: EatMeDaily), this represents an experiment in the terms of book contracts by the fledgling division of Harper Collins which was built on the premise that contracts delivering massive advances to the author and retaining sales revenue for the publisher are no longer part of a viable business model.
Publishing contracts must solve a thorny bilateral incentive problem which arises as a result of the timing of investment by author and publisher. The author commits effort up front writing the book and then the publisher is expected to commit resources editing and marketing the completed manuscript. The problem is to provide incentives for one party without dampening the incentives for the other. The traditional advance/residuals contract solves this problem because the residuals give the publisher incentive to market the book and maximize sales leaving the advance as the compensation for the author. The accompanying shift of risk from author to publisher is efficient because the publisher handles many books simultaneously, effectively creating a diversified portfolio.
The book market has famously weakened and it is becoming rarer and rarer for sales to justify the large advances that were hallmarks of existing contracts. This means that a larger fraction of the author’s compensation must come directly out of book royalties, undermining the incentive and risk-shifting benefits of the old structure. To adapt, publishers are seeking authors who already have an established “platform” such as a blog or other online community. Such authors are less averse to residuals because their ready-made audience makes the prospect less risky. Vaynerchuck would appear to fit the bill perfectly. His video blog, winelibrarytv attracts more than 80,000 viewers per day and as of today he has 177,000 followers on Twitter.
But when authors receive a large share of sales revenue, how can publishers be motivated to do the footwork of marketing the book to generate those sales? To some extent an author with a platform can do his own marketing but if word of mouth were all that was required to turn a book into a hit, there would be no reason for the publisher in the first place. Here is where the second novelty in the Vaynerchuck deal comes in: the long-term relationship. The contract marries Vaynerchuck and HarperStudio for 10 books. If HarperStudio can make his first book into a hit, it makes Gary into a star and it stands to reap the benefits on not just the first book but the 9 more to come.
“On the back end” as Gary would put it.
A debate is going on between Lawrence Lessig and Congressman John Conyers about a bill that Conyers is sponsoring. The bill would repeal an existing rule for NIH funding that requires funded research to be published in Open Acess journals. In addition it would generally prevent federal agencies from imposing these restrictions in the future. A good place to start is here and here are Lessig and Conyers. (hat tip: sandeep.)
There is some debate about the legal issues but to me those issues appear to be a red herring clouding the main dispute. There is probably one point of agreement: for-profit journals will be hurt. The disagreement is whether or not this is a good thing.
Requiring open-access publication obviously fulfills the aim of getting the maximum social benefit from dissemination of publicly-funded research. The marginal cost of distribution is zero, so the efficient price is zero. But the bill’s proponents argue that a dissemination is only one of the services provided by journals. Far more important is the evaluation and editing of submitted articles by the peer-review process. They worry that a zero price means that open-access journals have insufficient incentive to invest in this process. The result is that it becomes harder for outsiders to distinguish good, credible research from bad, sloppy research.
I have two points to add to this. First, as an editor of an Open Access journal and a member of editorial boards for many commercial journals I can testify that the publisher’s revenues are not being used effectively (or in most cases, at all) in providing incentives for editors and reviewers to do a good job. To the extent that the peer-review system works, it works because reviewers have external incentives like reputation, prestige, and plain old scientific integrity. And these incentives work at least as well in the Open Access world. (In fact, they seem to work even better since reviewers feel better about their work when it is serving the public interest and not the profits of publishers.)
Second, even if you disagree with the above it remains an empirical question which market structure would best provide material incentives for peer-review. Open Access publishing prevents the use of distortionary prices for raising the funds to pay reviewers. The alternative is a model in which authors pay for peer-review with submission fees. Of course this is also distortionary because the social benefit of having a manuscript carefully evaluated may outweigh the author’s willingness to pay.
But let’s remember: we are debating a policy about public funding of research. Basic research is publicly funded precisely because the social benefit of the research outweighs the researcher’s private incentive. Given this, the funding agency maximizes the value of its subsidy by funding not only the research itself but its dissemination. This is achieved by requiring Open Access publishing and earmarking some of the funds to pay for peer-review.
Suppose a bank is “too big to fail”. It’s got some bad assets that the government wants to buy so the bank becomes liquid again and people are willing to lend to it. But the assets come in different qualities and the government would like to buy them at different prices to minimize the loss to the taxpayer. It might want to pay a low price for the really bad stuff and a medium price for the medium bad stuff etc. If it knew the quality of the assets , no problem – you can just pay different prices for different qualities. But if the bank knows the quality it would try to palm off bad asset as a medium quality asset to get the better price. The standard solution to this is to use inefficiency to “screen” different types of assets. For example, the government says it is willing to buy a lot at the low price but less at the high price.
You have to set the quantity traded carefully so there is no incentive to sell the bad assets at the medium price as the amount the government would buy is too small to make it worth it.
All well and good it seems but remember this bank is “too big to fail”. So, here’s what can happen: The bank sells bad assets to the government pretending they are medium assets. It keeps the bad assets the government does not buy. If they tank, guess what, as it’s too big to fail, the bank can dump the assets on the government anyway. So, in the end, this scheme does not work, the government ends up buying medium and bad assets at the medium asset price.
I haven’t worked this out, but it seems to be what when banks are too big to fail this is what’s going to happen whatever you try to do: you end up paying high prices for bad stuff and there’s nothing you can do about it. (Morally speaking, I’m replicating an old argument of Dewatripont and Maskin’s on the “soft budget constraint.”) The banks are happy as they get lots of surplus and the taxpayers pay a high price for liquidity. The fact that the government has a social motive, saving the financial system, makes it impossible to eliminate adverse selection.
One solution might be just to find out the quality of the stuff you’re buying directly by auditing the asset value carefully. Of course, you might have to rely on the bank for information and then they manipulate it and we’re back where we started.
What then is fair to taxpayers and saves the financial system? Some equity ownership in the banks for the taxpayer. Otherwise, all the surplus goes to the banks.
This post from Mark Thoma is useful in spelling out some of the accounting behind the Geithner plan and its old incarnation due to Paulson and co. But we cannot asssess the policy unless we come to grips with the Treasury’s motives for intervening in the first place. When we do the picture changes a lot and it becomes clear that this amounts to a blanket insurance policy for the banks.
Suppose that a bank has a stockpile of toxic assets, and suppose that this bank is solvent only if those assets value at least $X. When TALF comes to negotiate the purchase of these assets, we know that the bank will not accept anything less than $X for them. Accepting less than $X turns a concern which is potentially solvent (under rosy assumptions about a recovery in the market for the assets) into one which is certainly insolvent. The balance sheet woud now be transparent and the bank will be shut down.
So TALF either results in no sale, or a sale above $X. A sale at $X or higher ensures that the bank is solvent and therefore amounts to guarantee of the bank’s liabilities.
I am not expert enough to know whether guaranteeing the bank’s liabilities is a good idea (I suspect it is not the best), but I can say this. If free insurance is what the Treasury wants out of TALF, then TALF is a bad way to do it. A simpler and far better way is to simply declare that the bank’s liabilities are backed by the government. It amounts to the same thing if TALF were to work properly. But there are many ways TALF could go wrong.
For example, there is no assurance that under TALF the bank will actually use the $X cash from the sale to stay in business. No doubt Geithner will make sure that an AIG-style transfer to executives and shareholders will not happen but there are too many other possibilities to guard against in law. By contrast, a real insurance guarantee means that the money does not change hands until the creditors come calling and then it goes directly to the creditors without the bank ever touching it.
A second problem with TALF is that the government typically does not know the exact value of $X. To be sure that it actually covers $X, it would have to accept the high probability that it overpays. With a real insurance policy there is no need to guess at X because it will be revealed when the bank defaults.
BTW, I made a related, but somewhat different point about TALF’s predecessor here (pretty technical.)
I remember once thinking what an amazing stroke of luck it was that on the Earth there happen to be so many wonderful gifts for people to enjoy. For example, it seemed close to definitive proof of a benevolent God that tangerines were just hanging there from trees for us to pick and eat. Somebody had to understand us very well and care about us a lot to give us this delicacy for free.
Of course this is a fallacy. It was not the fruit that was designed for our taste buds but the other way around.
We need to be incentivized to consume whatever we need to survive. And there is no need to bring any Designer into the story because this can be taken care of by natural selection.
These points are nicely recounted in this TED lecture by Dan Dennett. However, he stops short of considering the plot twist in which we develop conscious thought and learn how to manipulate nature’s incentive scheme. It starts with nutra-sweet, vasectomies and pornography. That’s when the real game begins.
Tyler Cowen asks why do people lose originality as they gain influence? There are two observationally equivalent ways to explain it.
- Since nobody really knows anything more than anybody else, opinion-rendering boils down to a game where everybody makes a random guess. The outcome of this game is that one person says something unconventional that turns out to be right. (by pure luck.) He gets noticed for that. Influence is the reward for being noticed. (We don’t have to assume that the public is unaware that he is just as ignorant as everyone else. The public is just trying to coordinate on whom to listen to. Winning the random-guessing game makes him a focal point.) Having influence is nice and in order not to jeopardize that he goes on saying the same thing as before which turned out to be right and is now conventional wisdom.
- Since nobody really knows anything more than anybody else, opinion-rendering boils down to a game where everybody makes a random guess. And people go on making random guesses over and over. People whose guesses are right get noticed and get influence, the more unconventional the guess the more you get noticed. Its very rare that something really unconventional is correct, so the people who repeatedly make unconventional guesses eventually lose influence. It follows that those that survive this game for a long time are those whose random guesses were unconventional once and conventional the remainder of the time. We forget about all of the others.
Tyler asked for case studies. But given the nature of the question what he really wants is a theory that generates a forecast that we can test against future data. So as you guessed from the title, my case study is Noriel Roubini. In 10 years he will either continue to be a regular talking head who no longer says anything unconventional (theory 1) or he will continue to make unconventional guesses and will have lost influence and be forgotten (theory 2).
Al Roth, Utku Unver and Tayfun Sonmez are economists who study matching markets: mechanisms for linking buyers and sellers. They have for the last few years been involved in a remarkable project which utilizes the ideas from matching markets to improve the way kidney donors are matched with patients who need kidney transplants. Traditionally there have been only a few ways in which these transplants were made possible:
- a patient’s family member with matching tissue characteristics donates a kidney.
- a patient receives a kidney from an altruistic donor with matching tissue characteristics.
- two patients who have family members willing to donate but whose tissue characteristics match only the other patient have four simultaneous operations to transplant the kidneys from patient A’s family member to patient B and from patient B’s family member to patient A.
1. is unlikely because there are a surprisingly high number of characteristics that have to match. 2. happens but there is a very long queue of kidney patients waiting for donors and many patients die before reaching the top of the queue and finding a matching donor. (On top of that, waiting around on artifiicial kidney dialysis = suffering.) The possibility of 3 improves the chances of a succesful transplant for many.
What these authors did was to point out the tremendous increase in the potential number of successful transplants that would arise if longer chains of transplantation were allowed and suggested mechanisms for matching patients along long chains where a donor gives to a patient who has a family member whose tissue matches with another patient who has a family member whose tissue matches… eventually returning to a family member of the original donor. Even better, if the original donor is an altruist, one fewer constraint has to be satisfied.
Well, today it was announced that the longest donor chain in history was just succesfully carried out: 10 patients long. Here is a link to the announcement on Al Roth’s blog.
The NY Times reports on some preliminary results from one of Roland Fryer’s field experiments in which students are rewarded with cash for high AP test scores.
Results from the first year of the A.P. program in New York showed that test scores were flat but that more students were taking the tests, said Edward Rodriguez, the program’s executive director.
Fabio Rojas at Orgtheory.net, interprets this as saying that the incentive didn’t work.
The question is simple: does paying kids improve performance? As I mentioned yesterday, the preliminary evidence is that children are more likely to participate in the test, but they are not more likely to get better grades.
I think he has jumped to his conclusion. If more students take the test, then we are drawing in the marginal students whose baseline test scores would be lower than average and would bring therefore bring the average down. Since the average did not go down that means that performance by infra-marginal students (and probably even the marginal students) improved.
Cheap Talk 