Amazon is buying books for $13, and selling them for $9.99.

Donald Marron has an interesting post about Amazon's negotiations with book publishers.  The gist of it is whether Amazon's policy of buying electronic books for $13 and selling them for $9.99 is good for the industry.  In the short run, at least, publishers sell more books at higher prices.  The long-run potential cost of this practice is that Amazon becomes the "platform" or "essential facility" of choice for buyers and sellers of books.  Currently it sells 80% of online books.

If you knew then what you know now, what advice would you give?

...to High School Seniors?  From various sources:

• Set goals each day.
• Be more like Plato and less like Aristotle.
• Don't underestimate yourself: trust your instincts as others are not as smart as they seem.
• It is far less important which college you go to than what you do when you get there.
• Especially early in your career, look for great jobs not great money...the latter is more likely to come if you achieve the former.
• Consider working for smaller companies early in your career, you have to do more and learn more...about a lot more things.
• You make real money through ownership, not a salary.
• Company’s don’t provide job security, credentials do.
• Be obsessed with hiring great talent
• Be painfully honest
• Do something distinguishing, constantly think of ways to know something, have done something that separates you form the rest.
• Volunteer
• Try things that make you feel uncomfortable, that you would not ordinarily do because you’re insecure about your ability to do it.
• Avoid the herd...by the time it’s a herd, the opportunity has passed.

Hypnotizing Chickens

The New York Times reports how that ubiquitous business tool, PowerPoint, has also infiltrated the military.

Like an insurgency, PowerPoint has crept into the daily lives of military commanders and reached the level of near obsession. The amount of time expended on PowerPoint, the Microsoft presentation program of computer-generated charts, graphs and bullet points, has made it a running joke in the Pentagon and in Iraq and Afghanistan.

“PowerPoint makes us stupid,” Gen. James N. Mattis of the Marine Corps, the Joint Forces commander, said this month at a military conference in North Carolina. (He spoke without PowerPoint.) Brig. Gen. H. R. McMaster, who banned PowerPoint presentations when he led the successful effort to secure the northern Iraqi city of Tal Afar in 2005, followed up at the same conference by likening PowerPoint to an internal threat.

“It’s dangerous because it can create the illusion of understanding and the illusion of control,” General McMaster said in a telephone interview afterward. “Some problems in the world are not bullet-izable.”

And, by the way, the post title of "hypnotizing chickens" comes from the name of PowerPoint presentations that are specifically designed not to impart any information, like military briefings for the press.

Restricting Kid's Access to Violent Video Games

The Supreme Court is taking on a case in which California is restricting kids from purchasing violent video games so as to protect children. The counter-argument is that this is an infringement in first amendment protections of free speech. This is slightly off topic for this blog, but I will indulge in some self-promotion as this is an area in which I have done some research.

Ward, Michael R. “Video Games and Adolescent Fighting,” Journal of Law and Economics, forthcoming
Abstract:
Psychologists have found positive correlations between playing violent video games and violent and antisocial attitudes. However, these studies typically do not control for other covariates, particularly sex, that are known to be associated with both video game play and aggression. This study exploits the Youth Risk Behavior Survey (YRBS) that includes questions on both video game play and fighting, as well as basic demographic information. With both parametric and non-parametric estimators, as more demographic covariates are accounted for, the video game effects become progressively weaker. The overall video-game-to-fighting link is modest and not statistically significant. The remaining positive association appears only for individuals who play four or more hours per day.

Ward, Michael R. "Video Games and Crime," Contemporary Economic Policy, forthcoming.
Abstract:
Psychological studies of the effects of playing video games have found emotional responses and physical reactions associated with reinforced violent and antisocial attitudes. These markers may be associated with increases in one's preferences for antisocial behaviors or may indicate that one's desire for actual antisocial behaviors are partially sated. I investigate whether video game play is associated with observed antisocial behavior outcomes. The incidences of various reported crimes are related to a proxy for increased gaming, the number of game stores, from a panel of US counties from 1994 to 2004. With fixed county and year effects, I find that more game stores are associated with significant declines form most types of crimes. Analogous proxies for other youth related leisure activities - sports and movie viewing - do not have a similar effect. I find that mortality rates, especially mortality rates stemming from injuries, also are negatively related to the number of game stores. These results are robust to various alternative specifications.

Ongoing research with co-authors Scott Cunningham and Ben Engelstaetter examines the role of violence in video games on crime.

Benefit Corporations?

Maryland recently became the first state to pass a law creating a new type of legal entity known as a "benefit corporation."

Under the new Maryland law, benefit corporations must spell out their values in their charters, report annually on activities that benefit the public, and submit to third-party auditing of their societal impact. Becoming a benefit corporation, or shedding that status, would require approval of two-thirds of shareholders.

Apparently, the law also provides the company with greater protection from shareholder lawsuits. California, New York, and Vermont are considering similar laws.

It will be interesting to follow this phenomenon. Will investors be more or less willing to provide funds to these corporations (which seem to explicitly reject the idea of maximizing shareholder value for the broader goal of maximizing stakeholder value)?

It Ain't Easy Being Green II

It looks like UT Arlington is getting a bargain. The BBC reports that a Danish eco-hotel is paying guests to produce electricity with an exercise bicycle.

Guests will have to produce at least 10 watt hours of electricity - roughly 15 minutes of cycling for someone of average fitness.

For this effort, they will be given meal vouchers worth $36 making this energy cost $3600 per kwh ($36 / 0.01 kwh) or 20,000 times more expensive than our solar panels. I suspect the real value of the plan is in the marketing value and it worked as the BBC picked up the story. However, I predict the scheme may not survive much longer than the marketing value.

Hat tip MarginalRevolution

If transparency is good, isn't more better?

The financial regulation bill just voted out of committee includes a provision that requires derivatives to be traded only over exchanges.

All the major bills would require that most derivatives be settled in a centralized system and traded over exchanges. Supporters say this would improve market transparency, drive down prices for users of derivatives, and provide more information to regulators.

Well, why stop there? How about we require all employment contracts to be settled over exchanges. Every week your job description could be posted and an auction could commence for services rendered. After all, isn't all this fuss over relationship specific investments affecting the form of the contract is just a smokescreen for underhanded dealing? And appeals to transactions costs affecting the form of the transaction carry little weight. After all no one has ever won a Nobel prize for for this harebrained idea (here, here).

How about exchanges for congressmen too? It really sucks when a lobbyist thinks that he has bought a congressman's vote on an issue only to find out later that someone else outbid him in some clandestine deal. Surely an exchange would make bribery campaign contributions more efficient. Moreover, the transparency would allow constituents to see how important various issues are to other groups.

Renting vs. Buying

David Leonhardt at the New York Times reports on a recent study comparing the costs of renting vs. buying in 54 US metropolitan markets.

A simple way to do the comparison is to look at something called the rent ratio: the purchase price of a house divided by the annual cost of renting a similar one. The number 20 provides a useful rule of thumb. When you do the math, you discover that a ratio above 20 means you should at least consider renting, especially if you may move again in the next five years or so. When the ratio is well below 20, the case for buying becomes a lot stronger.

With the decline in housing prices, renting looks less attractive in many markets.

Sign of the times

Seen this weekend, in Nashville

Blonde Women Make More Money

According to a forthcoming study , "Physical appearance and wages: Do blondes have more fun?" in Economic Letters:

This study investigates the influence of hair colour, in particular blonde hair, on women’s own wages and also their spouse’s wages using a large U.S. data set. Regression results indicate that blonde women receive a wage premium equivalent in size to the return for an extra year of schooling. A significant blondeness effect is also evident in the marriage market. Blonde women are no more or less likely to be married; but, their spouse’s wages are around six percent higher than the wages of other spouse’s.

Do tax cuts increase the incentive to work?

Art Laffer is laughing:

Over the past half century, the top marginal tax rate has fallen from 91 percent in the 1950s and early 1960s to 35 percent today.  Thus, the amount a person gets to keep at the margin has risen from 9 percent to 65 percent, that is, by a factor of 7.2.  If the elasticity of taxable income with respect to 1-t is one, as some studies find for high-income taxpayers, then the incomes of the rich would have risen by a factor of 7.2 as well.  If the elasticity is one-half, then their incomes would have risen by a factor of 2.7.  In either case, the change in pretax income attributable to the tax cuts is substantial.

It Ain't Easy Being Green

Our campus is going green. Our student newspaper, The Shorthorn, reports that we are going to put solar panels on top of a new parking structure to be built. How much are you willing to pay so that our energy is "green" rather than "brown?" A lot it turns out.

We will get a $1.8 million grant from the state to purchase and install the 500kw solar panels. I did some digging and discovered that an efficient system operates 2,400 hours a year, so ours could possibly generate 1,200,000 kwh per year. With an expected lifespan is 20 years and at an discount rate of 10% this is equivalent to a present value of 10.22million kwh over the project's lifespan for a cost of just under $0.18 per kwh. These are the average capital costs per kwh. There may be additional, likely minor, operating costs. However, the highest electricity rate in Texas, for residential service, is about $0.12 per kwh (my provider charges me $0.10 per kwh). This means that the capital costs alone are at least 50% greater than the opportunity cost.

This opportunity cost does not include the externalities but if these external costs are less than 50% of the current price, this is a bad deal for Texas taxpayers. It is a great deal for the campus (free money? where do I sign up). Moreover, we get the marketing value of striving for sustainability (sic).

Bankruptcies, not bailouts, for a healthy economy

Former student John Tamny tells Bernanke that he is part of the problem:

Bernanke's support of taxpayer bailouts as the economy's savior is the equivalent of the drunk waking up hung over, fingering the hangover as his problem, then resuming the drinking in order to blunt the pain caused by the previous night's activities.

7 min video: exodus from CA

Supply, Demand, and Reproduction

A new study from the American Sociological Review suggests that supply and demand forces don't do a particularly good job of explaining the treatment and compensation of sperm and egg donors.

Almeling, whose findings appear in the June issue of the American Sociological Review, uncovered a topsy-turvy market that often defies not just conventional wisdom but also the basic law of supply and demand.

“Men donors are paid less for a much longer time commitment and a great deal of personal inconvenience,” she said. “They also are much less prepared for the emotional consequences of serving as a donor of reproductive material. Women, meanwhile, are not only paid more for a much shorter time commitment, they are repeatedly thanked for ‘giving the gift of life.’
. . .
“A pronounced double-standard exists in the way that men and women donors are valued by the fertility industry, and it can’t be explained medically or by market forces,” Almeling said. “Based on the availability of donors alone, you would expect the abundance of potential egg donors to drive down compensation fees and the scarcity of potential sperm donors to drive up their fees. But I found just the opposite.

Should we replace our sales tax with a carbon tax?

The Stand Up Economist delivered some funny jokes in Nashville this week but also proposed replacing our sales tax with a carbon tax.  He argued that it is more efficient to tax consumption of goods with bigger external costs (there is pollution, traffic, and sprawl, even if you don't think carbon is causing climate change) rather than goods with smaller external costs (sales, business income).

Each year, Tennessee consumes about 142 million tons of carbon so a $30/ton tax would raise more than $3 billion (assuming a 20% reduction in carbon consumption).  This would allow us to cut our state sales tax in half, or eliminate our state business tax entirely.  $30/ton of carbon is about $0.30/gallon of gasoline.

I think i am down with this, but haven't heard the other side.

What would it take to get you to invest in Greek bonds?

Via Calculated Risk:

Greek Bond spread increased to an all time record 463 bps today (shown on graph in red).

Open Source Mathematics

There are open source operating systems (here and here), media, courseware, encyclopedias, video games, performance art and even beer. Now Steven Landsburg reports of an open source mathematical theorem proving project. How cool is that?

Decision Affirms Vertical Contracting Rights

Tuesday's federal appeals court decision in the FCC-Comcast case has the effect of allowing firms to decide what terms to offer in vertical relationships. The FCC's proposed "net neutrality" rules would have tended to restrict ISPs so that they would have to treat all content providers identically. By analogy, must a grocery store carry all potential supplier's products? If they do, can they decide to display some at favorable end-of-aisle locations and others on the bottom shelf? Or do we need "food fungibility" rules?

Even the FCC supporters I have heard, admit that high bandwidth content, like that supplied by BitTorrent, may place higher resource costs on an ISP and that treating it differently from other content providers may be warranted. Similarly, grocery stores treat different products differently based on expected demand. They allocate eye-level shelves to top sellers and bottem shelves to rarely purchased items. The grocery store is optimally deciding how to allocate its complementary resources (shelf-space) so as to generate value to consumers.

Comcast's detractors' argument is usually based on the claim that ISPs could favor their own content over unaffiliated content for non-cost related reasons. This is like the grocery store putting a store-brand item, rather than the name-brand item, in the preferred location. But why sink a valuable resource (preferred shelf-space) into a loser store-brand when they could use it to promote a winning name-brand at a higher price? Even worse, customers seeking the name-brand in vain, will choose a different grocery store that better caters to their tastes. Similarly, consumers enjoy an ISP connection only to the extent that it enables access to their preferred content. ISPs who miss-manage their bandwidth to diminish the value of this content risk driving consumers elsewhere.

Other analogies I toyed with:

1. Do car makers get to choose which parts suppliers to use? - "parts impartiality"
   
2. Do magazine editors get to choose which articles to publish? - "article ambiguity"
   
3. Do theaters get to choose which movies to show? - "movie maliability"
   
4. Do radio stations get to choose which songs to air? - "song substitutability"
   

Tax day is almost here

47% American earners pay no federal income tax but the "top 10 percent of earners -- households making an average of $366,400 in 2006 -- paid about 73 percent of the income taxes"

Taleb on the Degradation of Predictability and Knowledge

If you haven’t read Nassim Taleb’s work or don’t follow what he has to say, you should. He’s the author of Fooled by Randomness and The Black Swan.

From a recent post on Edge.org

So consider the explosive situation: more information (particularly thanks to the Internet) causes more confidence and illusions of knowledge while degrading predictability.

Look at this current economic crisis that started in 2008: there are about a million persons on the planet who identify themselves in the field of economics. Yet just a handful realized the possibility and depth of what could have taken place and protected themselves from the consequences. At no time in the history of mankind have we lived under so much ignorance (easily measured in terms of forecast errors) coupled with so much intellectual hubris. At no point have we had central bankers missing elementary risk metrics, like debt levels, that even the Babylonians understood well.

Voluntary transactions used to make both parties better off

This is not satire:  from Bloomberg; not the Onion:

“If you’re a for-profit employer or you want to pursue an internship with a for-profit employer, there aren’t going to be many circumstances where you can have an internship and not be paid and still be in compliance with the law,” said Nancy Leppink, deputy administrator of the department’s wage and hour division, according to a story in the New York Times.

"Pope Vows To Get Church Pedophilia Down To Acceptable Levels"

This spoof headline from the Onion and accompanying spoof article are examples of why economists are no fun. To your average non-economist, there is no (positive) acceptable level of child abuse. Hence, we see policy-makers playing lip service to some sort of zero-tolerance goal.

But, to your average economist, it is perfectly reasonable that the church (or any organization) would choose policies that reduce pedophilia but could not possibly eliminate it. Economists are on the look out for the "opportunity cost" of a spectrum of possible policies. Better screening and better vigilance will likely reduce incidents of child abuse and probably should be implemented. But zero-tolerance would require extremely intrusive measures. How would twenty-four hour surveillance affect the rite of confession? Would potential priests be turned off by constant electronic monitoring? What sort of authority would priests have in coming generations if they were prohibited from any contact with non-adults?

The real danger of the zero-tolerance mentality is the typical response when an incident inevitably does occur. We immediately ask where the "failure" was and who was at "fault." We rarely ask if, despite carefully constructed policies, it is still the case that "shit happens." This often leads us to build yet another Maginot Line.

Quants

More entertainment than insight, but fun still.

Quants from Studio Takt / Music & Sound on Vimeo.

One Reason Big Companies Pay More

It’s the same reason crime scene clean-up workers make a good buck: the working conditions require a compensating wage differential. From a recent working paper:

Abstract

Using a Spanish survey, this paper investigates the relationship between firm size and working conditions, and whether firm size differences in workers’ job satisfaction can be accounted for by differences in their work environment. The results indicate that: (1) workers in larger firms have a significantly lower level of autonomy and, in general, face worse working conditions; (2) working in large firms has no statistically significant effect on job satisfaction after controlling for working conditions; and (3) no systematic differences exist in worker mobility across firm-size categories. We conclude that observed wage differentials by firm size are utility-equalizing, so they are due to differences in working conditions.

Fighting over a shrinking pie

Government is by far the most unionized sector of the work force, and among the few places left where blue-collar workers can retire with traditional lifetime pensions. This is creating some obvious conflict:

At the heart of this fight is an unbalanced equation: The economy is shrinking cities' and states' tax income as their pension and health-care costs have soared. As a result, some governments are diverting money from services to cover benefits, or raising taxes and fees. That doesn't sit well with some taxpayers—many frustrated at seeing their own benefits being cut by private-sector employers.

California offers a view of the fallout. The state's largest pension fund, the California Public Employees' Retirement System, known as Calpers, is estimated to be only 57% to 65% funded. Having suffered investment losses in recent years, the state has had to dip deeper into its revenues to make up the funding gap. Last year, a budget impasse forced the state to issue IOUs for taxpayer refunds.

That didn't take long

15 states reduce costs with furlough Fridays for state workers. Businesses are responding with price discrimination schemes to reduce prices to these low-value buyers.

• Lake Tahoe offers a "Frickin' Friday" $15 ticket for furloughed California employees; the normal adult lift price is $47.
• In Lincoln, Calif., the Thunder Valley Casino offers furloughed state workers $30 in coupons on Fridays, which can be used for dessert, side dishes and $5 match play at the tables.
• In Adel, Ga., Ben Rehberg says he got the idea to offer 10% discounts to furloughed state workers there for his computer-repair service after he was furloughed last year from his main job as a state technical consultant.
• a California associate personnel analyst, started a Web site called "Fantastic Furlough" listing all the discounts available to furloughed state employees around Sacramento. They include 30% off eyebrow waxing, braids and other services at Itz Ur Tyme Hair Design and 10% off lunches at Miyagi Bar & Sushi (not including alcohol.)