Monday, October 12, 2015

Congrats Angus Deaton, Nobel Prize winner

The WSJ has a profile on the latest winner.
“Life is better now than at almost any time in history,” he wrote. “More people are richer and fewer people live in dire poverty. Lives are longer and parents no longer routinely watch a quarter of their children die.” 
Across its 370 pages, Mr. Deaton sought to explain why the world is a better place than it used to be, with substantial increases in wealth, health and longevity, but also why there are vast inequalities between and within nations. 
He concluded that international aid had little to do with that progress, and suggested that free trade and new incentives for drug companies would make a larger contribution in the future.

Saturday, October 10, 2015

A Mechanism to Fight Sexual Assaults

The Callisto sexual assault reporting system is clever use of game theory. Two features of sexual assault reporting is that: 1) they are widely believed to be under-reported because victims fear being caught in a "he-said-she said" case that goes nowhere; 2) but when one victim comes forward, sometimes there are more victims who could come forward too. As Ian Ayres explains in the WaPo, Callisto encourages the latter without exposing victims to the former. It does this by allowing a victim to file contemporaneous accounts into escrow. These accounts will only be unsealed if the accused party is named by another victim. This means that, if accounts in escrow are ever unsealed, the case becomes a "he said; they said," which is often more successful in court.

Hat tip: Joel Waldfogel

Monday, October 5, 2015

Why isn't our richest state saving enough for its state pensions?

Conneticut has a ``huge'' pension problem.  They have only 52% of the assets necessary to pay their discounted future pension liabilities, AND they are discounting future liabilities at an 8% rate.

Remember from earlier posts, a higher discount rate makes future liabilities look smaller, so cities and states save less for their pensions.  If they don't earn, e.g., at least 8%, then they wont have enough to pay the pensions when they finally come due.  This is what happened to Detroit.

What makes Conneticut so interesting is that they are the richest state in the USA and have saved the least, behind only Illinois and Kentucky.  Ordinarily, states which have big unfunded liabilities like this would have trouble borrowing money because investors would demand higher compensation (higher interest rates) for holding bonds with a higher risk of default.  However, because Conneticut has high taxes, and many high-income residents, there is a big demand for state's tax-deductible bonds.  This keeps the cost of borrowing low, and allows state politicians to ignore the pension problem:

“There’s almost limitless money to buy Connecticut bonds,” said Matt Fabian of research firm Municipal Market Analytics. Investors “are getting less of a risk premium than I think you deserve because of the high demand created by the wealth of the taxpayers in the state,” added Paul Mansour, head of municipal research at Hartford, Conn.-based Conning.

Saturday, October 3, 2015

Internal Prediction Markets Work Better than we Thought

New research by Cowgill and Zitzewitz investigates internal prediction markets used by corporations to evaluate new products or procedures. Compared to the more common political prediction markets, these markets have features that would seem to make them perform poorly. They tend to be thinly traded, bidders may have weak incentives, there is limited entry into the set of bidders, and the potential for traders with biases or ulterior motives. Despite that, Cogill and Zitewitz state:
The inefficiencies that do exist generally become smaller over time. More experienced traders and those with higher past performance trade against the identified inefficiencies, suggesting that the markets' efficiency improves because traders gain experience and less skilled traders exit the market.

So, there is learning-by-doing in bidding in prediction markets.

Hat tip: Marginal Revolution

Wednesday, September 30, 2015

Strong dollar hurts US exports

In 2010, President Obama set a goal of doubling exports in five years. Now it looks like we are not going to make it:
U.S. exports are on track to decline this year for the first time since the financial crisis, undermining a national push to boost shipments abroad. Through July, exports of goods and services were down 3.5% compared with the same period last year. New data released Tuesday by the Commerce Department showed that exports of U.S. goods sank a seasonally adjusted 3.2% in August to their lowest level in years.

But what is bad news for producers, is good news for consumers:
As unemployment has declined, American consumers have reasserted their dominant role in driving economic growth.

And with the Fed set to raise interest rates, it is likely that the dollar will get even stronger:
Fed Vice Chairman Stanley Fischer in August said it was “plausible to think that the rise in the dollar over the past year would restrain growth…through 2016 and perhaps into 2017.” If the Fed begins to raise short-term interest rates later this year, that could provide new fuel to push the dollar’s value even higher.

Tuesday, September 29, 2015

Shell Pulls Out of the Arctic

A big story this week is that Royal Dutch Shell will cease exploration in the arctic. Reportedly, they had invested in $7 billion in the effort but the prospects don't look so good now after disappointing results, a fall in the price of oil, and increased uncertainty over environmental regulations. The important lesson that Shell recognized is that a $7 billion sunk cost is still a sunk cost.

Why do inmates tattoo their faces?

The answer from our friends at, where they analyze signaling as a solution to the problem of adverse selection.

Take the quiz at the end of the video to figure out the answer to the question in the blog post.

Friday, September 18, 2015

What Exactly Does Snapshot Measure?

Here is a fuller expose of Progressive Insurance's Snapshot.We love this example of monitoring potential moral hazard through driving behavior. People are expected to drive better if they benefit from policy discounts from good driving (or is it reducing the "beep-beep" nagging by the device?). But it turns out just two practices trigger the nagging: hard braking and driving in the wee hours.

Hat tip: Isaac Labauve

Lessons from NUMMI

"This American Life" did an episode on the 1980s collaboration between GM and Toyota at the plant in Freemont, CA called NUMMI. This plant had been failing and the Japanese were the biggest threat to the American Automakers. What could GM learn from Japan? There are a number of lessons from the experience and the episode. One has to do with where to vest decision rights to shut down the production line. Another is that imitation is particularly difficult (RBV?). Perhaps another is that it takes generational change or, as my adviser repeated, "Real change comes one funeral at a time."

Hat tip: Isaac Labauve

Sunday, September 13, 2015

Shiller calls "bubble"

Robert Shiller has successfully called "bubble" twice before, in 2006 on the housing market, and in 1996 on the stock market.  Now he has called "bubble" on the stock market, based largely on his famous P/E ratio [Price/Earnings] graph, reproduced above (since June, it has come down a little).
“It looks to me a bit like a bubble again with essentially a tripling of stock prices since 2009 in just six years and at the same time people losing confidence in the valuation of the market,” he said.

Of course, not even Shiller can predict when the alleged bubble will pop. He was a year early on the 2007 housing bubble bursting, and 3 years early on the 2000 stock market bubble.  Unlike a lot of economists, Shiller is willing to admit he has no idea when it will pop, if indeed it it a bubble:
... [Shiller] made clear that it remained impossible to time any fall in the market, and cast doubt on whether stocks would drop should the Federal Reserve raise rates later this week.