"We must respectfully remind the Commission, however, that a remedy along the lines proposed by ENH, and contemplated by the Commission's decision, will not likely solve the competitive problems caused by this unlawful merger.This is bureaucratese for "no."
Wednesday, October 31, 2007
FTC staff criticizes merger remedy
CEO Stock Options, Risk-Taking, and Performance
The authors find that “CEO stock options engender high levels of investment outlays and bring about extreme corporate performance (big gains and big losses), suggesting that stock options prompt CEOs to make high-variance bets, not simply larger bets. Finally, we find that option-loaded CEOs deliver more big losses than big gains.”
While stock options do appear to help align the CEO’s incentives with shareholders in motivating greater risk-taking, the finding of larger losses is troubling. The authors speculate that this result comes about “because option-loaded CEOs are focused on upside possibilities, with little concern for downside possibilities.” With options, CEOs benefit from share price increases but don’t pay a penalty for share price drops. The article suggests that grants of restricted stock, rather than options, might help address this problem.
Java Problems with MBA Primer
- Click Start | Control Panel | Programs and Features
- If Java 6 is installed, select it and click uninstall to remove it.
- After the removal of Java 6 is complete, restart your computer.
- Go to http://java.sun.com/products/archive/j2se/5.0_12/index.html Click “Download JRE”, then select “Accept”. Click on the “Windows Online Installation” link and save the Java 5 installer to your desktop. When the download is complete, run the installer by double clicking the downloaded file on the desktop.
- Complete the installation wizard to install Java 5.
- Reboot. Note shutting down after the installation of Java 5 takes longer than usual.
- The MBA Primer site should now work properly.
Thanks to Jason Reusch at Vanderbilt for tracking down this problem and determining the fix.
Tuesday, October 30, 2007
Prices of presidential futures contracts
These prices are quoted in cents and payoff $1 if the candidate wins the nomination.
Monday, October 29, 2007
What does real estate have to do with politics?
The Dallas model, prominent in the South and Southwest, sees a growing population as a sign of urban health. Cities liberally permit housing construction to accommodate new residents. The Los Angeles model, common on the West Coast and in the Northeast Corridor, discourages growth by limiting new housing. Instead of inviting newcomers, this approach rewards longtime residents with big capital gains and the political clout to block projects they don’t like.Hat tip to Craig Newmark.
These differences also reinforce different norms and values—different ideas of what it means to live a good life. Real estate may be as important as religion in explaining the infamous gap between red and blue states.
If you're so smart, why aren't you rich?
Taking from the top 1% to give to the top 2-25%
- The bottom three-fourths of households, those making less than $75,000 a year, are not much affected. They each would receive a tax cut of about $100 per year.
- The next 24 percent, those making between $75,000 and $500,000, would receive much more substantial tax cuts. Those in the $200,000 to $500,000 range, who are in the 96 to 99 percentile of the income distribution, would get a tax cut of about $3,600 per year.
- The top 1 percent, those making over $500,000, would pay substantially more in taxes. Those making more than $1 million would see their tax bill rise by an average of more than $100,000.
Overpaying for Acquisitions
When M&A makes sense and If merger is the answer, what is the question, here's more evidence of the difficulty firms face in making profitable acquisitions.
In late 2005, online auctioneer eBay bought the Internet phone service company, Skype for $2.6 billion. In October of this year, eBay admitted that it overpaid and took a $1.43 billion charge against earnings.
$1.4 billion dollars - that's some serious coin. Ouch! Details on the write-down available here.
Saturday, October 27, 2007
Smoking workers get fired
Okemos-based Weyco Inc., a medical benefits administrator, said its offer of smoking cessation classes and support groups helped 18 to 20 of the company’s nearly 200 workers quit smoking over the past 15 months. But the four who couldn’t — or wouldn’t — no longer had jobs on Jan. 1. “We had told them they had a choice, and they chose to leave basically before the policy took effect,” said Weyco chief financial officer Gary Climes. “We’re not saying you can’t smoke in your home. We just say you can’t smoke and work here.”
Some states protect workers who smoke, saying they can’t be discriminated against for that reason. But Michigan is one of 22 states that doesn’t have such a law, according to the Washington-based Bureau of National Affairs.
Useful management tool: future value
But EVA is not a panacea: it is a backward-looking measure, and fails to recognize actions that increase the future value of the enterprise. Today's WSJ recommends decomposing the market valuation of the firm into current value and future value so that managers can better "see" how the market is reacting to their actions. Here is how its done:
1. Calculate the enterprise value of the firm: Enterprise value is the sum of current stock market valuation (shares times price per share) plus the market value of interest-bearing debt.
2. Calculate the current value of the profit stream, assuming no profit growth: Divide current operating profit by the cost of capital.
3. Calculate the future value of the firm: Future value is enterprise value minus the current value
4. Track both future value and current value as a percent of enterprise value: This allows you to see how your current actions affect future vs. current value.
To understand how an analysis of future value can help executives shape business strategy, consider the big-box retailing sector.
For years, large retailers were rewarded with higher share prices for opening new stores at a breakneck pace. But growth through expansion may be nearing its limit for these retailers as their markets become saturated.
In our research on a select set of major retailers, we saw a downward trend for future value in the industry as a whole. From 1998 to 2006, most of the retailers continued to invest heavily in new-store openings, fueling an increase in the companies' current value. Future value, however, didn't keep pace with the growth in current value. In fact, future value as a percentage of enterprise value for the group as a whole declined from almost 75% to 30%, an indication that investors were losing faith in simple market-penetration and geographic-expansion strategies. Had these companies been tracking future value regularly, they might have recognized earlier that a strategy based on increasing scale was running out of room and begun investing differently for growth.
Friday, October 26, 2007
Sicker patients avoid tightly managed health plans
...sicker individuals less likely to enroll in the tightly managed plan and the high-deductible consumer-driven health plan. This is a significant finding, as empirical evidence of adverse selection, beyond that measured by observable factors, is rare.Health plans are not allowed to price according to customer risk characteristics, so they offer different kinds of plans, designed to attract different kinds of customers instead.
Price discrimination in shipping
...shipping firms charge higher prices when transporting goods with higher product prices, lower import demand elasticities, and higher tariffs, and when facing fewer competitors on a trade route.
Why is Facebook worth $15B?
Facebook is collecting loads of data about people, their preferences, their friends’ preferences, and so on. This is valuable stuff for marketers. As a tiny example, you can put in your Facebook profile a list of your favourite movies. So can your friends. Facebook knows your favourite movies, your friends’ favourite movies, and who your friends are. Assuming that you and your friends have similar tastes, they can use this data to target ads to you for movies that you might like but may not have seen.
... If you can use some information to target those ads to people who are interested (’surgical strikes’, to continue the military analogy), then you’ll achieve a similar result by spending less money (less ‘collateral damage’ …). In economic terms, it’s a more efficient production process for advertising.
Marketing is the new finance
I think marketing is the new finance. In the 1960s and 1970s [we] got interesting data, and a lot of analytic fire power focused on that data; Bob Merton and Fischer Black, the whole team of people that developed modern finance. So we saw huge gains in understanding performance in the finance industry. I think marketing is in the same place: now we’re getting a lot of really good data, we have tools, we have methods, we have smart people working on it. So my view is the quants are going to move from Wall Street to Madison Avenue.From WSJ via 26econ.com.
German booksellers making the rules so their rivals won't
In previous posts, we have talked about the effect of laws and regulations on your competitive position (Google, making the rules so its rivals won't, Unions using CON laws as a barrier to entry, Unions using zoning laws against Wal-Mart, Make the local zoning rules or your rivals will). But the German booksellers put everyone else to shame.
Germany’s book culture is sustained by an age-old practice requiring all bookstores, including German online booksellers, to sell books at fixed prices. Save for old, used or damaged books, discounting in Germany is illegal. All books must cost the same whether they’re sold over the Internet or at Steinmetz, a shop in Offenbach that opened its doors in Goethe’s day, or at a Hugendubel or a Thalia, the two big chains....
Now this system is under threat from, of all people, the Swiss. Just across the border, the Swiss lately decided to permit the discounting of German books — a move that some in the book trade here fear will eventually force Germany itself to follow suit, transforming a diverse and book-rich culture into an echo of big-chain America.
Hats off to the German booksellers for avoiding ruinous price competition. They even have the NY Times drinking their Koolaid.
But [preventing discounting] has also — American consumers should take note — caused book prices to drop. Last year, on average, book prices fell 0.5 percent.
Goebbels must be smiling.
Prices Convey Valuable Information
As everyone's favorite Managerial Economics text notes, "prices are the primary mechanism that market participants use to communicate with one another." When you remove this communication mechanism from the market, you end up with problems like those Klein mentions: shortages, delays, congestion, and misallocation.
iPod's buyer power provokes response
... get hardware makers or cell carriers to absorb the cost of a roughly $5-per-month subscription fee so consumers get a device with all-you-can-eat music that's essentially free. Music companies would collect the subscription fee, while hardware makers theoretically would move many more players.
...the Total Music subscriber pays only for the device--and never shells out a penny for the music. "You know that it's there, and it costs something," says one tech company executive who has seen Morris' presentation. "But you never write a check for it."
Under one scenario industry insiders figure the cost per player would amount to about $90. They arrived at that number by assuming people hang on to a music player or phone for 18 months before upgrading. Eighteen times a $5 subscription fee equals $90.
Thursday, October 25, 2007
How movie studios play "chicken"
The first principle of scheduling any film's release date is to avoid going directly against a similar movie. Studios realize that a standoff between films aimed at the same demographic -- kids, women, ''urban'' teenagers -- splits the vote, in effect, and hurts both films. ''No one is interested in going head to head in this business,'' Harper says. ''Someone is almost always going to give. It's just a question of who.''
Given the stakes involved, film companies generally disclose their future release dates well in advance, giving everyone time to minimize the chance of collision. But at the end of the year, with so many films vying for coveted berths, some jostling is inevitable. As Jeff Blake, vice chairman of Sony Pictures Entertainment, notes, ''There are only four weekends in December, so you're always going to be bumping into other movies.''
Why do American League batters get beaned more often?
Wednesday, October 24, 2007
Returns to venture capital
Entrepreneurs earned an average of $9 million from each company that succeeded in attracting venture funding....
Venture capitalists received an average of $5 million in fee revenue from each company they backed. The outside investors in venture capital received a financial return substantially above that of publicly traded companies, but that the excess is mostly a reward for bearing risk.
Biology and Bargaining
The article first mentions some research from MIT that suggests there may be a biological basis to bargaining tendencies. Researchers found that identical twins display more similarities in their bargaining behavior than do non-identical twins. The article also mentions research from the Max Planck Institute for Evolutionary Anthropology in which chimpanzees played the game using raisins. Unlike humans, who have a tendency to make generous offers when they are the first player and to reject non-generous offers when they are the second players, chimpanzees exhibit the type of rational, profit-maximizing behavior economists would expect. Receiving chimps were content as long as they received one raisin, and offering chimps tended to make very low sharing offers. Interestingly, the article describes the offering chimps’ behavior with the phrase “never made a fair offer.” What’s unfair about maximizing your own outcome?
Tuesday, October 23, 2007
Health care: cost vs. coverage
This week's Economist contrasts John McCain's focus on the cost of health care (see figure at left) that has caused the proportion of firms offering health care to their employees to fall from 69% in 2000 to 60% now, with the Democratic candidates' focus on universal coverage. McCain
...does not pretend to be able to solve this problem, but he offers a number of mechanisms that will help. The most important is to shake up the insurance market, by, for instance, allowing health-insurance companies to tout for business across state lines.
US has fourth highest corporate tax rate
Universities hire more part-time faculty
Now we have evidence that universities are hiring more part time faculty. I would guess that the changing external environment (more competition in higher education) is behind the change. Part-time faculty are cheaper, it is easier to align their incentives and, at least in MBA programs, the "clinical" faculty have the practical knowledge that students crave. [Click here for a bigger graph.]
The AAUP, the closest thing faculty have to a union, is objecting
We have warned repeatedly that the excessive employment of faculty without job security would eventually undermine both academic freedom and shared governance. That time has arrived. When most faculty are at risk of summary dismissal, the freedom for faculty to speak forthrightly is diminished. And faculty control over the curriculum is also undercut.
Monday, October 22, 2007
Why are cars getting thirstier?
In previous posts we have asked whether consumers really want less pollution and what they have to give up to get it. Now the Economist tell us that our cars are not using less gasoline,
Over the past 20 years, the proportion of trucks and SUVs bought annually in America has gone from around 20% to over 50% of all new vehicles sold. ... As a consequence, the average amount of power under the hood has almost doubled, while the average vehicle weight has increased by nearly a third.
Our revealed preference for pollution
Only half of Americans would favour rules to force power companies to emit less if that raised their monthly electricity bill from $85 (the average in 2005) to $155 (an estimate of the hike needed to lower American emissions by 5% by 2020). And only 37% could stomach a tax that raised petrol (gasoline) prices to $4 a gallon. That would be an unprecedented hardship for Americans but barely half what the stuff now costs in Britain.In other words, our preference for pollution is revealed by our purchasing behavior.
Clarifying the Corporate Social Responsibility Debate
First, if a company invests a dollar to make a dollar at some point in the future, what's the net present value of that investment? It's negative, and the company is destroying economic value. To create value, the dollar investment needs to deliver a return that exceeds the company's cost of capital.
Second, let's assume for the moment that some CSR activities do actually create value. These cases are NOT what the debate is about. Both sides of the debate would favor these types of activity. The debate is really about CSR that decreases shareholder wealth. Shareholder value proponents do NOT oppose all types of CSR - they only oppose CSR that decreases shareholder wealth.
Sunday, October 21, 2007
What makes us happy?
An economist's take on the human condition: a global projection of subjective well-being, via Mangans,
It was found that SWB [subjective well-being] correlated most strongly with health (.7) closely followed by wealth (.6) and access to basic education (.6). This adds to the evidence that from a global perspective the biggest causes of SWB are poverty and associated variables.
Saturday, October 20, 2007
Tourists vs. locals
Friday, October 19, 2007
"Hostile" vs. "friendly" takeovers
In the United States, tender offers are regulated under the Williams Act amendments to the Securities and Exchange Act of 1934. That regulation is considered relatively shareholder-friendly. Less friendly to shareholders, however, is the treatment of target managers’ responsibilities in the face of an unwanted takeover bid. Managers of a target company are permitted to use a wide variety of defenses to keep those bids at bay. The most remarkable of the defenses is the “poison pill” or shareholder rights plan, which is designed to dilute a hostile bidder’s stake massively if the bidder acquires more than a specified percentage of target stock — usually 10–15 percent. Poison pills achieve this effect — or more accurately, they would achieve this effect if they were ever triggered — by, among other things, inviting all of the target’s shareholders except the bidder to buy two shares of stock for the price of one. The managers of a company that has both a poison pill and a staggered board of directors have almost complete discretion to resist an unwanted takeover bid.However takeover activity is still higher in the US, but now most of the takeovers are "friendly" not "hostile." And just to be sure that you are not confused by nomenclature, "friendly" means "hostile to shareholders."
In contrast, UK takeover regulation has a strikingly shareholder- oriented cast. The most startling difference comes in the context of takeover defenses. Unlike their U.S. brethren, UK managers are not permitted to take any “frustrating action” without shareholder consent once a takeover bid has materialized. Poison pills are strictly forbidden, as are any other defenses, such as buying or selling stock to interfere with a bid or agreeing to a lock-up provision with a favored bidder, that would have the effect of impeding target shareholders’ ability to decide on the merits of a takeover offer.
Little Green Lies
The sweet notion that making a company environmentally friendly can be not just cost-effective but profitable is going up in smoke.
Back in 2003, FedEx announced that it would soon begin deploying clean-burning hybrid trucks at a rate of 3,000 a year, eventually sparing the atmosphere 250,000 tons of greenhouse gases annually from diesel-engine vehicles. "This program has the potential to replace the company's 30,000 medium-duty trucks over the next 10 years," FedEx announced at the time. The U.S. Environmental Protection Agency awarded the effort a Clean Air Excellence prize in 2004.
Four years later, FedEx has purchased fewer than 100 hybrid trucks, or less than one-third of one percent of its fleet. At $70,000 and up, the hybrids cost at least 75% more than conventional trucks, although fuel savings should pay for the difference over the 10-year lifespan of the vehicles. FedEx, which reported record profits of $2 billion for the fiscal year that ended May 31, decided that breaking even over a decade wasn't the best use of company capital. "We do have a fiduciary responsibility to our shareholders," says environmental director Mitch Jackson. "We can't subsidize the development of this technology for our competitors."
Thursday, October 18, 2007
Do smarter people cooperate more?
Immigrants are more price sensitive
"Market Socialism" and China's new antitrust laws
Without the checks and balances of an independent judiciary, enforcement could discourage growth. Right now, foreign investors are indifferent between India's strong private property rights, but large regulatory burden; and China's weak property rights, but small regulatory burden. Poor enforcement of China's antitrust laws could change that.
Coincidentally, the Chinese Communist Party has just announced that it will not be developing the kinds of Democratic institutions that provide checks and balances on state power in the West. Without them, it is difficult to see how antitrust enforcement would avoid the regulatory miasma that can accompany poor enforcement. But China's oxymoronic "socialist market economy" has surprised us before. In the words of Deng Xiaoping, "I don't care if the cat is black or white as long as it can catch mice."
Wednesday, October 17, 2007
Airline competition and delays
In the table below "Slots" refers to the period before Congress got involved; "No Slots" refers to the period after they got involved.
Table 2. Number of Scheduled Arrivals and On-Time Performance
|Slots||No Slots||Change||Slots||No Slots||Change|
Economists in the Antitrust Division have a simple solution: reduce the number of landing slots, and then auction them off to the highest bidders. Reduce delays and promote competition.
Perhaps the best reason for having antitrust laws and agencies who enforce them is that they can provide a little light in a very dark place.
Playing the Ponies with Economics
Thoroughbred horse breeders can elect to sell the horses they breed, race the horses themselves, or a mix of the two. Chezum and Wimmer note that this creates a classic adverse selection situation. Breeders have the best information about whether their horses have good future racing prospects. Of the breeders who both sell and race their horses, which horses would we expect them to sell and which would we expect them to keep to race themselves? We’d expect them to keep the best ones for themselves and sell the less promising ones.
Chezum and Wimmer examine the post-time odds from two-year old maiden races at Saratoga and Keeneland and find that horses who are raced by their breeders have lower odds (bettors favor them) than otherwise similar horses have. Bettors appear to recognize the adverse selection issue and believe that horses raced by their breeders are of higher quality. So, here’s one more benefit from taking a managerial economics class or just reading a managerial economics text. Learn to bet like the pros!
Tuesday, October 16, 2007
Substitution between dentists and pliers
How anticompetitive are your state laws?
On the selling side, twelve states currently ban rebates and/or inducements to sellers. From a survey of agents,
“If we give rebates and inducements, it would get out of control and all clients would be wanting something. The present law keeps it under control.”
| || |
And eight states are trying to eliminate discount brokers
Monday, October 15, 2007
More on Fox Business Channel
Friday, October 12, 2007
The problem with employer-based heatlh care
Early last year, Shelley MacMahon, 53 years old, and her husband, Tom, 61, moved to New Mexico from New York. The attraction: year-round sunshine and being closer to family. But what started out as an adventure soon turned into a nightmare as Mr. MacMahon, who has high blood pressure and high cholesterol, struggled to find health insurance. "We had no idea how hard it would be to find coverage," Ms. MacMahon says.In New Mexico, insurers can charge consumers based on their expected costs. New York has different regulations
... in New York, insurers are required to charge all consumers the same or very similar premiums without regard to such factors as age, gender or health status. In New Mexico, insurers can factor these differences into their premiums, make permanent exclusions for pre-existing conditions or deny coverage outright.Can you make a prediction about which kind of consumers are likely to move to NY?
Former FTC Chief economist on Whole Foods merger
Now, Michael Salinger, former chief economist of the FTC, comments publicly on the evidence in a reply to a Wall St. Journal editorial criticizing the case.
First, the value of antitrust enforcement is that it substitutes for more onerous sectoral regulation. In the same article, he criticized the FCC's interest in open access to the Internet. Under Chairman Deborah Majoras's leadership, the FTC has urged caution in approaches to regulating the internet. Both in principle and as a matter of political reality, the argument for light-handed sectoral regulation is more persuasive if vigilant antitrust enforcement keeps markets competitive.Second, in merger review, parties settle the easy cases, so the cases that go to court are necessarily the close calls. One can debate whether the agencies are currently drawing the line in exactly the right place, but these debates should not obscure the more general value of merger review. Allowing merger to monopoly would be a mistake, and simply banning merger to monopoly is probably not the right place to draw the line.Third, the challenge to the Whole Foods/Wild Oats merger was the result of heightened requirements that merger challenges be based on facts and economic analysis. Mr. Jenkins ridicules the Staples/Home Depot challenge, but the facts were that prices were lower in cities where those companies competed directly against each other than in cities where they did not. Similarly, the FTC challenge to the Whole Foods/Wild Oats merger was based on more than Whole Foods CEO John Mackey's ill-considered statements.Fourth, the FTC can approve mergers but cannot block them without court review. Because of this asymmetry, there are good reasons for the agency to make its best case when it has economic evidence to indicate that a merger might harm competition. Inevitably, there will be cases like the Whole Foods/Wild Oats merger when it does not convince a court that the evidence is sufficient. That is how the system is supposed to work.
Hay - Why Have Prices Doubled?
I am sure that the astute readers of this blog and anyone else who has read a managerial economics textbook (perhaps, like this one) will consider possible shifts in supply and demand as factors explaining this change. Drought-like weather conditions have certainly contributed to a contraction in supply partially explaining the price increase.
But, a more subtle factor is contributing as well. Changes in the price of substitutes can also impact demand for a product. And, prices for corn, one of the primary substitutes for hay, have shot up this year thanks to the increased demand for ethanol. As more farmers shift away from high-priced corn to feed their animals, demand for hay goes up and prices increase.
Wednesday, October 10, 2007
NIMBY opposition to power plants falling
Now, the Saint Consulting Group reports that NIMBY (Not in My Backyard) opposition to power plants is falling.
Americans are waking up to the need for more electric power plants. The number of Americans who support power plant development in their hometown rose dramatically over the past year, according to the 2007 Saint Index(©) survey on attitudes toward real estate development.Why is this important?
Thirty-eight percent of American adults support a local power plant project, compared to just 23 percent in 2006 — a 15 percent rise.
Development of real property has become agonizingly tough. What started on both coasts of the US has spread throughout heartland America: population density, maturing markets, and intense competition are causing battle lines to be drawn in numerous wars over how cities and towns are being developed....
The outcomes are determining which companies gain market share, who wins local elections, and what communities are going to look like into the future.
Where will it all end?
For months, states have been leapfrogging each other to move up their primary votes, seeking a bigger voice in the selection and more revenue from big-spending campaigns. But the race has caused confusion among candidates, who must make advertising and travel decisions, and irked some party officials, who want to bring order to the process of picking their nominees.The traditional early voting states of Iowa and New Hampshire are in danger of losing their pole position,
Yesterday, state Democratic powerhouse Debbie Dingell, wife of Michigan Rep. John Dingell, linked the candidates' withdrawal from the Michigan primary to national-party efforts to allow Iowa to retain its historical influence at the expense of larger states. "This election is not about president of Iowa, it is about president of these United States," she said.PREDICTION: this year, most primaries move to January and February; in 2012, they learn how to get out of the prisoners' dilemma by taking turns.
The Circle of Economic Life
We see this sad tale unfolding once again; this time in the cable business channel market as reported in this story from Business Week. CNBC has built a dominant position, recording an operating margin of 57% and total operating profits of over $300 million according to the article. Who's the shark being drawn by these juicy margins? News Corp. plans to launch the Fox Business Network in the next few weeks.
It's the circle of economic life - I wonder if we could make a movie like the Lion King featuring the death of old companies followed by the rise of new titans (do you think Elton John would write us a theme song?).
Monday, October 8, 2007
Credit cards, bankruptcy, and agency costs
In the past quarter century, unsecured credit card debt has replaced other kinds of (secured) consumer debt, including retail store credit, personal finance companies, friends and family, and pawnbrokers. The graph above shows an increase in "revolving" consumer debt service (as a percentage of income); and a corresponding decline in "non-revolving" debt service.
Over this time period, the bankruptcy rate has quintupled. Colleague Todd Zywicki (visiting Vanderbilt this semester) intreprets the correlation:
...[credit cards] have increased the incentive for indebted consumers to elect bankruptcy as a response to their financial difficulties, thereby increasing the propensity to file bankruptcy.In October, 2005, bankruptcy reform made it more difficult for borrowers to walk away from credit card debt if they had the ability to repay. Predictably, the number of bankruptcies fell from 2 million in 2005 to 600,000 in 2006.
Under Zywicki's hypothesis, bankruptcy reform lowered the cost of providing credit to consumers by allowing lenders to better penalize moral hazard (actions that increase the likelihood of default) and better guard against adverse selection (lending to borrowers who intend to default).
Note the parallel of bankruptcy reform to the use of credit history to price car insurance. A better predictor of car insurance allows insurance companies to reduce moral hazard by penalizing bad driving and to reduce adverse selection by raising prices to bad drivers.
Maybe College Doesn't Pay
As someone who has (over?) invested in education, I’m not sure I’m convinced. But, I see value in questioning “truths” many simply seem to take at face value.
Friday, October 5, 2007
The next big idea: human computing
Thursday, October 4, 2007
Is everything for sale?
Okay, I'm tired of beating around the bush. I'm a beautiful (spectacularly beautiful) 25 year old girl. I'm articulate and classy. I'm not from New York. I'm looking to get married to a guy who makes at least half a million a year. I know how that sounds, but keep in mind that a million a year is middle class in New York City, so I don't think I'm overreaching at all.My colleagues in the divinity school would criticize what they call the "commodification of relationship," but when you try to sell yourself, it seems only fair that you get treated like a potential investment.
Are there any guys who make 500K or more on this board? Any wives? Could you send me some tips? I dated a business man who makes average around 200 - 250. But that's where I seem to hit a roadblock. 250,000 won't get me to central park west.
...what you suggest is a simple trade: you bring your looks to the party and I bring my money. Fine, simple. But here's the rub, your looks will fade and my money will likely continue into perpetuity...in fact, it is very likely that my income increases but it is an absolute certainty that you won't be getting any more beautiful! ...
So in Wall Street terms, we would call you a trading position, not a buy and hold...hence the rub...marriage. It doesn't make good business sense to "buy you" (which is what you're asking) so I'd rather lease. In case you think I'm being cruel, I would say the following. If my money were to go away, so would you, so when your beauty fades I need an out. It's as simple as that. So a deal that makes sense is dating, not marriage.
I wonder if the woman would profit from reading our earlier post on strategy from Whole Foods' CEO, John Mackay:
...we have not achieved our tremendous increase in shareholder value by making shareholder value the primary purpose of our business. ... In the customer-centered business, customer happiness is an end in itself, and will be pursued with greater interest, passion, and empathy than the profit-centered business is capable of.The man also is wary of adverse selection the problem caused when, in this case, the seller has more information the buyer.
...I wonder why a girl as "articulate, classy and spectacularly beautiful" as you has been unable to find your sugar daddy. I find it hard to believe that if you are as gorgeous as you say you are that the $500K hasn't found you...
"It's Up to You" Pricing
What's the price? It's up to you to decide - consumers can pay whatever they want.
I must have missed the lecture that covered this pricing strategy in school.
Wednesday, October 3, 2007
Will a 2008 Democratic victory result in a boom, then a bust?
Now it looks likely that we will have a Democratic President in 2008. In the graph below, a contract that pays $1 if a Democrat is elected President is trading at $0.61 at intrade.com. This would imply a 61% probability of a Democratic President.
Can we use the same analysis to predict that a Democratic presidential victory would cause businesses and consumers to accelerate demand in anticipation of more regulation, higher taxes, and restrictions on international trade? Followed by a bust?
I have heard some macroeconomists suggest that the 1982 recession, and the subsequent expansion, were caused by anticipation of the Reagan tax cuts. Congress cut the marginal tax rates, the amount you pay on the last dollar you earn, 25% across all income brackets.
Truckers are stockpiling dirty diesel engines
But they increase the cost of trucks by $12,000, or about 10%. In addition, truckers (consumers of the new engines) expect higher maintenance costs and worse fuel mileage.
Predictably, the new regulations caused a big increase in demand for 2006 engines and trucks,
Both the 2006 boom, and the 2007 bust were predictable with simple supply-demand analysis, especially since a similar regulatory change occurred in 2002.
Truckers seeking to beat the price increases made 2006 a record year for truck makers. More than 373,000 big-rig trucks were built in North America, says Ken Vieth of A.C.T. Research, which follows truck sales trends. The tally easily topped the previous record of 330,000 trucks in 1999.
But next year, Vieth predicts "a production drought," with sales falling by more than 40% to 220,000 as trucking firms hold off buying to see how the new clean-diesel trucks perform. ...
The cost to truckers goes beyond new big-rig purchases, according to Moskowitz. The new fuel costs 5 cents to 10 cents more per gallon to refine and may produce lower fuel mileage. The new engines weigh more, further cutting mileage. "Over the long run, their increased costs will be passed on to the shippers and ultimately, the consumers," Moskowitz says.
For policy makers, this points out yet another disadvantage of a command-and-control approach to clean air. Mandates from Washington have to be phased in, and this gives consumers an incentive to stockpile old, cheap, but dirty engines so they can use them in the future. Instead of telling producers what to produce, or consumers what to consume (by picking technologies, like ethanol, to subsidize), tax what you don't want (pollution) and let the market decide how best to reduce it.
Bottom line: How many economists does it take to screw in a light bulb? None--the market will do it.
Tuesday, October 2, 2007
Would you pay $200 to prevent shingles?
I was reminded of this when I saw a story about a new vaccine for shingles, a particularly painful outbreak of rash or blisters that is caused by the same virus that causes chickenpox. Given the incredible discomfort caused by this disease, you would think that consumers would be willing to pay a fairly sizeable amount to avoid it. Well, not in all cases. According to the article, here's the view of one consumer who already suffered through one "quite nasty" case and doesn't want to pay $200 for a vaccine to prevent another case:
"I can afford to do it, but I got my back up and I'm not going to," said Davidson, who regards her refusal as something of a moral issue. "More people should take a stand; $200 is a horrendous amount of money. The drug companies are rolling in money and should help pay instead of running full-page ads," she said, citing prominent advertisements for the vaccine taken out by manufacturer Merck earlier this year.
I hope Ms. Davidson derives sufficent utility from her moral stand of sticking it to the drug companies to compensate her for the pain of another instance of shingles.