Wednesday, November 26, 2014


This short U.S. Bank ad shows how voluntary transactions move an asset to a higher valued use.
It also shows a slightly subtler notion called the Coase Theorem.  It hows that there is no need for government intervention, if it can be solved with bilateral trade.

Tuesday, November 25, 2014

Is religion good for you?

The question is fairly difficult to answer because nature doesn't randomly assign individuals to carry strong religious beliefs (experimental group) or to agnosticism or atheism (control group).

Jonathan Gruber (yes that guy) uses religious density as an instrument that changes religious beliefs--acting as sort of a natural experiment--that allows him to trace out of the causal effects of religion.  Here is his conclusion:

Religious density significantly increased level of religious participation, and as well to better outcomes according to several key economic indicators: higher levels of education and income, lower levels of welfare receipt and disability, higher levels of marriage, and lower levels of divorce.

Bottom line:  religious beliefs have tangible benefits.

Monday, November 24, 2014

REPOST: The real meaning of Thanksgiving

What they don't tell you about Thanksgiving in school

Peter Klein gives us a more complete story of the first Thanksgiving:

Faced with potential starvation in the spring of 1623, the colony decided to implement a new economic system. Every family was assigned a private parcel of land. They could then keep all they grew for themselves, but now they alone were responsible for feeding themselves. While not a complete private property system, the move away from communal ownership had dramatic results.

This year I am giving thanks for private property.

Adam Smith on happiness

The father of modern economics knew that economics is an analytical tool to that helps us understand what we see, not advice on how to live your life:

...“Smith wrote as eloquently as anyone ever has on the futility of pursuing money with the hope of finding happiness”, claiming that such “seductions will never satisfy”. What matters instead is “the consciousness of being beloved”, the meaning of which has weathered through the ages but approximates “authenticity”: wisdom and virtue. 

The problem in reaching this idyll is ourselves. We are brilliant at thinking we are brilliant when we are not. We are all deeply flawed, vain and selfish. And while persuading others of our greatness might be understandable, more worrying is that we are trying to convince ourselves. Smith counselled: “It’s our own praise that’s hardest to reject.” We can all relate to the fact that “flattery and falsehood too often prevail over merit and abilities”.

In other words, the gates of hell are locked from the inside.  

Wednesday, November 19, 2014

Protesting Against Yourself

Every year, the town of Wunsiedel receives unwanted guests. Neo-Nazis march in commemoration of Rudolf Hess. The townsfolk have tried to get them to stop. In some German towns, there has been a history of violent clashes between extreme left-wing and extreme right-wing groups. This time, rather than confront these marchers, they merely undermined them. As the WSJ reports:
Instead, the group Rights versus Rights (Rechts gegen Rechts) had come up with a new way to protest the annual neo-Nazi march: For every meter the neo-Nazis walked, local businesses and residents would donate $12.50 to a nongovernmental organization devoted to making it easier for neo-Nazis to leave behind their hateful politics.

The group changed the payoffs of the game in order to change the behaviors of the participants. Do see the short video here in which the bewildered marchers are encouraged by banners and notices along the way of how much they funds they have generated. :)

Tuesday, November 18, 2014

If only President Obama had read Chapter 5

It looks as if the President failed to anticipate the consequences of his "net neutrality" policy.  After the White House "offered a full-throated endorsement “for the strongest possible rules” in support of “net neutrality,” AT&T CEO Randall Stephenson said that his company was going to step back from investing billions of dollars in building out its own GiGaPower fiber network:

Stephenson clearly fears that the President’s call to the FCC will result in heavy new regulations that will reduce the profit potential of the company. AT&T is holding back to see just how badly the new rules will damage its investment prospects.
Some economists found the President's analysis short-sighted:
The President defends this supposed pillar of the Internet policy by insisting that “an entrepreneur's fledgling company should have the same chance to succeed as established corporations, and that access to a high school student's blog shouldn't be unfairly slowed down to make way for advertisers with more money.” 
But why should this be the case when paid prioritization is the norm in virtually all highly competitive markets? A quick trip to the Federal Express website, for example, reveals a wide range of “fast and full of options” like “FedEx Priority Overnight and FedEx Standard Overnight.” There is also two- or three-day shipping and Saturday service for those who want it. The different tiers of services are offered, not surprisingly, at different rates. These differential services are available to all customers. It is simply wrong for the President to assume that any system of paid prioritization entrenches established companies at the expense of new entrants, or greedy advertisers at the expense of high-school bloggers.
If President Obama had read Chapter 5, he would have known to "look ahead and reason back."  Don't worry though, I sent him a copy of the third edition 

Monday, November 17, 2014

OPEC caught in prisoners' dilemma

Oil prices have fallen by 30%.  If the oil producing nations cooperate, and cut back output, then prices would go back up.  While this would be good for everyone in OPEC (and bad for consumers), it is not individually rational.

Students will recognize this as a pricing dilemma, that makes it very hard for rivals to maintain a cooperative outcome.  See earlier post here:  Never start a land war in Asia (or a price war)

Saturday, November 15, 2014

Pirate Joe's erodes Trader Joe's profit

The forces of competition are at it again:

There is a Trader Joes in Bellingham, WA near the Canadian border. Many Canadians cross the border to stock up on Trader Joes groceries because there is no Trader Joes on their side near Vancouver. One man recognized this demand for Trader Joes groceries so he set up a store on the Canadian side of the border in which he sells Trader Joes products. He calls it Pirate Joes. He buys all of the Trader Joes groceries on the US side, brings them to his store and re-sells the Trader Joes products at a slightly higher price. People are willing to buy the Trader Joes products at a slightly higher price because it saves them the hassle/expense of crossing the border (the border dissuades people from going for the even lower prices at the actual Trader Joes store in Bellingham)

Why doesn't Trader Joe's open a store in Canada?


Who wants to get married in Mexico?

Leonel Luna, a Mexican legislator has proposed 2 year renewable marriage contracts to combat the high cost of divorce in Mexico:
"Almost 50% of couples in Mexico City end up in divorce," Luna says. "What we're trying to do is acknowledging reality and creating a mechanism that will allow couples to end their marriage without going through the additional pain and suffering of a legal battle."

If you cannot immediately spot two problems with this contract, you are not ready to get married:

  • Problem 1:  Post-investment hold-up (who would make relationship-specific investment with a short term contract?)
  • Problem 2:  Adverse selection (what do you learn about a potential spouse who wants a renewable marriage contract