- Consult an economist before buying a wedding dress...
- Adverse selection vs. moral hazard
- The Cost of Protecting Ironing Board Makers
- Projecting Marijuana Prices Post-Legalization
- WARNING: this post has nothing to do with Manager...
- Top 5 problem-solving mistakes by MBA's
- What's the difference between "quantitative easing...
- XKCD Money Poster
- The contractual view of marriage
Friday, December 30, 2011
Thursday, December 22, 2011
In its recent release, the game Diablo III will embraced this activity and even expects to generate earnings by taking a percentage of each transaction. A nice discussion of this can be found at Penny Arcade's video of this market place.
Hat Tip: A Ward
Wednesday, December 21, 2011
Monday, December 19, 2011
Thursday, December 15, 2011
Under the old book arrangement, major publishers charged the same wholesale price for e-books as they received for hardcovers. For a new novel priced at $25, for example, they received $12.50 for the e-book and $12.50 for the hardcover. When Amazon.com discounted the e-book at $9.99, Amazon took the loss.
But under the new pricing model, a $25 hardcover is often priced at $12.99 for the e-book. And because publishers receive 70% of the e-book retail price -- while retailers retain 30% -- that means publishers receive only $9.09. Publishers were willing to accept the lower profits because they felt the new arrangement preserved the value of books and encouraged other retailers to enter the e-book market.
I have a possible explanation after spending only 30 minutes thinking about this (meaning I very well could be wrong).
The publisher/retailer contract includes a different sort of sharing arrangement than before. With a fixed wholesale price, it would seem that, previously, retailers bore more risk but I believe that they were not charged for unsold physical books. This means that publishers bore a a substantial risk of eating the costs of a poor selling book. This gave them an incentive to exercise quality control in order to publish books that would sell well. With e-books, there are less costs to publishing a poor seller. To have similar quality control incentives, the new contract must make publisher payment a fraction of sales rather than a fixed wholesale price. But if it is a fraction, then retailers may want to discount too much. To solve this problem, publishers have prohibit e-book discounting.
The Justice Department confirmed last week that it was investigating whether there was improper collusion between the publishers and Apple to prevent discounting. Publishers last week either disagreed with the allegations, said they were cooperating with regulators or declined to comment. Random House said it isn't part of the probe and otherwise declined to comment. Apple declined to comment at the time.Hat tip to Dr. Jane
Wednesday, December 14, 2011
|Ban mobile phone use while driving||Don't ban mobile phone use while driving|
|Mobile phone use while driving causes more deaths than it saves ||0||Type I Error |
|Mobile phone use while driving saves more deaths than it causes||Type II Error |
Type I Error Costs If distracted drivers only killed themselves, why stop them? The hidden cost is that they typically run into someone else or they take their passengers with them. Drivers may be less careful with other peoples' lives. So, the Type I error costs are all the innocents killed by distracted drivers. This has been the focus of most of the studies and the policy.
Type II Error Costs Drivers with mobile phones have related information during Amber alerts. They have notified media outlets when traffic was bad due to wrecks and thus saved thousands of hours in commute time - during which some wreck could have occurred. They have been able to coordinate with their called parties, getting directions, etc., which saves time which has some value. And of course, they derive utility from the call. But if your job is highway safety, as board member of NTSB, how much do you value these? Since no one writes news stories about the wreck that did not occur from accurate traffic updates, they are largely hidden. Also, if your job is highway safety, you may not value lost time and utility as much as those who must give it up.
Let me repeat that I suspect that banning mobile phone use while driving is likely appropriate. I am just not certain that all the costs went into the decision.
Monday, December 12, 2011
We don’t understand what’s going on. All we know is we’re going to keep running these experiments to try and understand better what it is that our customers are telling us.They use the tools we teach MBAs:
Now we did something where we decided to look at price elasticity. Without making announcements, we varied the price of one of our products. We have Steam so we can watch user behavior in real time. That gives us a useful tool for making experiments which you can’t really do through a lot of other distribution mechanisms. What we saw was that pricing was perfectly elastic. In other words, our gross revenue would remain constant.And this has changed the current business practices:
We’ve gone from a situation where we dream up a game, we spend three years making it, we put it in a box, we put it out in stores, we hope it sells, to a situation that’s incredibly more fluid and dynamic, where we’re constantly modifying the game with the participation of the customers themselvesHat tip Marginal Revolution
Sunday, December 11, 2011
God is an elderly or, at any rate, middle-aged male, a stern fellow, patriarchal rather than paternal and a great believer in rules and regulations. He holds men strictly accountable for their actions. He has little apparent concern for the material well-being of the disadvantaged. He is politically connected, socially powerful and holds the mortgage on literally everything in the world. God is difficult. God is unsentimental. It is very hard to get into God's heavenly country club.
Santa Claus is another matter. He's cute. He's nonthreatening. He's always cheerful. And he loves animals. He may know who's been naughty and who's been nice, but he never does anything about it. He gives everyone everything they want without thought of a quid pro quo. He works hard for charities, and he's famously generous to the poor. Santa Claus is preferable to God in every way but one: There is no such thing as Santa Claus.
On the other side of the Atlantic, Chancellor Merkel is concerned about the incentives that bailing out profligate borrowers creates:
Mrs. Merkel views the financial industry with profound skepticism and argues, in almost moralistic fashion, that real change is impossible unless lenders and borrowers pay a high price for their mistakes.
Althought the NY Times suspects a political motive:
President Obama, of course, faces re-election and sees the crisis in Europe as one of the biggest threats to his chances, as it could tip the American economy back into recession if austerity worsens the slump there. German officials are well aware of that and complain privately that electoral results are Mr. Obama’s chief concern
I think the two positions are emblematic of the deeper philosophical difference:
Charles L. Schultze, chief economist for former President Jimmy Carter, once proposed a simple test for telling a conservative economist from a liberal one. Ask each to fill in the blanks in this sentence with the words “long” and “short”: “Take care of the ____ run and the ____ run will take care of itself.”
Liberals, Mr. Schultze suggested, tend to worry most about short run, while conservatives are more concerned with the long run. Here Chancellor Merkel seems as if she has just read chapter 20, and is worried that unless we punish profligate borrowers, and those who lend to them, we will get more of both.
I wonder if this is enough. Boots that sell for $600 in a retail ski shop, can sell for $372 online.
Wednesday, December 7, 2011
...allow euro-zone countries to issue so-called "blue bonds" and "red bonds." Blue bonds would be jointly guaranteed by all members of the euro zone and allow member states to borrow up to 60% of GDP. To fund borrowing beyond that, countries would have to issue red bonds, which would be backed only by their national treasuries and therefore trade, under most circumstances, at higher yields.
To complement joint bond issuance, I would suggest that all euro-zone politicians receive a significant part of their compensation in the form of blue or red bonds. If a country has to issue red bonds because its debt-to-GDP ratio exceeds 60%, politicians would be paid in red bonds.
Otherwise they would be paid in blue bonds. Bonds would have to be held for five years but would be convertible: If the debt-to-GDP ratio falls below 60%, red bonds would be converted into blue. Likewise, if this ratio rises above 60%, blue bonds would be mandatorily converted into red bonds.
This way, politicians would be rewarded when their countries are able to borrow cheaply and punished when their countries' cost of funds goes up. Politicians would be well-compensated when their countries are perceived as solvent; they would take heavy losses if their countries fell into serious financial difficulty.
Almost all medical professionals have seen what we call “futile care” being performed on people. That’s when doctors bring the cutting edge of technology to bear on a grievously ill person near the end of life. The patient will get cut open, perforated with tubes, hooked up to machines, and assaulted with drugs. All of this occurs in the Intensive Care Unit at a cost of tens of thousands of dollars a day. What it buys is misery we would not inflict on a terrorist. I cannot count the number of times fellow physicians have told me, in words that vary only slightly, “Promise me if you find me like this that you’ll kill me.” They mean it. Some medical personnel wear medallions stamped “NO CODE” to tell physicians not to perform CPR on them. I have even seen it as a tattoo.Link. HT: marginalrevolution.com
Tuesday, December 6, 2011
Monday, December 5, 2011
I just spoke with someone who had all her bridesmaids sized in the store only to go online and buy them from a discount site. I would assume many of the brides are doing this as well.
Note that this is not just a problem for the store, but also a problem for the dress manufacturer: if stores cannot prevent free-riding, they will invest less in point-of-sales fitting services, and dress sales will suffer. See our earlier post about golf club manufacturer PING, who faced a similar problem,
The discount retailers were advising consumers to visit a full-service retailer to request a custom-fitting session, and then bring the specifications for custom-made clubs back to the discounter. PING could control this kind of opportunistic behavior only by dropping dealers, a very costly option.
PING wanted to set a minimum retail price (called "retail price maintenance") to address the problem. The minimum price meant that discount retailers could not undercut full service retailers. The antitrust laws prevented this until the Supreme Court changed the case law.
For the wedding dresses, the no-photos policy created a problem for Stephanie because she wanted to photograph her bridesmaids in each of the dresses to make sure that they choose the best dresses for the wedding. So she chose to purchase from a large retail chain, like J. Crew, BCBG, Ann Taylor, or Nordstrom’s because they had solved the free riding problem, using exclusives, where only one chain carries the style.
For an economic analysis of resale price maintenance, see the amicii brief of 24 antitrust economists (I am one of the 24.)
UPDATE: Amazon just made free riding a lot easier.
Wednesday, November 30, 2011
If Greece were not part of the Eurozone, its exchange rate with the rest of the world would adjust over time to prevent this type of large and growing trade deficit. More specifically, the need to finance that trade deficit would cause the value of the Greek currency to decline, making Greek exports more attractive to foreign buyers and encouraging Greek consumers to substitute Greek goods and services for imports. The rising cost of imports would also reduce real personal incomes in Greece, leading to less consumer spending and freeing up Greek output to be exported to foreign buyers.
Monday, November 28, 2011
What interested me in the review was the bigger idea that these departures from rationality--documented in psychology labs using student subjects--may actually be rational in the bigger sense:
Even if we could rid ourselves of the biases and illusions identified in this book — and Kahneman, citing his own lack of progress in overcoming them, doubts that we can — it is by no means clear that this would make our lives go better. And that raises a fundamental question: What is the point of rationality? We are, after all, Darwinian survivors. Our everyday reasoning abilities have evolved to cope efficiently with a complex and dynamic environment. They are thus likely to be adaptive in this environment, even if they can be tripped up in the psychologist’s somewhat artificial experiments. Where do the norms of rationality come from, if they are not an idealization of the way humans actually reason in their ordinary lives? As a species, we can no more be pervasively biased in our judgments than we can be pervasively ungrammatical in our use of language — or so critics of research like Kahneman and Tversky’s contend.
Sunday, November 27, 2011
David Stern and the owners came into these NBA labor talks saying they lost more than $300 million last season and $400 million the year before that. By getting the players to agree to what is in practice a 50/50 split of basketball related income (although the deal allows the players to get to 51 percent if revenue increases enough) the owners got the players to essentially accept a 12 percent salary cut that will cover those losses.
We predicted this outcome in an earlier post.
Remember, the alternatives to agreement determine the terms of agreement.
Wednesday, November 23, 2011
Tuesday, November 22, 2011
According to Google economist Hal Varian, his company is running on the order of 100-200 experiments on any given day, as they test new products and services, new algorithms and alternative designs. An iterative review process aggregates findings and frequently leads to further rounds of more targeted experimentation.
A variety of tests have been devised to help distinguish between the pro- and anti-competitive theories:
- Equally Efficient Competitor
- Complementary Market Monopolization
To illustrate how this process works, we use the recent case of Intel's loyalty payments to large customers (sympathetic view, skeptical view) in exchange for buying most of their chips from Intel instead of rival AMD.
AMD claimed that the loyalty payments made it prohibitively expensive for them to compete for large computer manufacturers who would lose large loyalty payments if they switched to AMD. This had the effect of reducing demand for AMD chips, which drove them up their average cost curve, and made it more costly for them to compete, which could harm the competitive process by driving AMD out of some markets.
However, the loyalty payments reduced price for the larger manufacturers which benefited their customers. The lower prices could be modeled as either a form of price discrimination or a discount justified by the lower cost of serving larger customers. They also could be justified as as eliminating the double mark-up problem, but plaintiffs argued that there were less anti-competitive ways of aligning the incentives of chip and computer manufacturers.
Intel eventually settled the case by paying AMD $1.25 Billion, and then faced investigations from US, Asian, and European antitrust agencies.
Monday, November 21, 2011
There are, in general, two ways to to respond to this kind of competition: (i) by offering customers more of what they want or (ii) by harming competitors. The former is good for consumers while the latter is not, and the antitrust laws try to distinguish between these cases with what is called the "no business sense" test. If an action by a firm with market power harms competitors in a way that doesn't make any business sense but for its anticompetitive effect, then it may face prosecution.
I was reminded of this principle when I saw (WSJ link) the leader of the Episcopal church respond to congregations that want to affiliate with a rival Anglican sect, by saying that she'd rather have these properties become Baptist churches or even saloons than continue as sanctuaries for fellow Anglicans.
When the Church of the Good Shepherd in Binghamton, N.Y., left the Episcopal Church ..., the congregation offered to pay for the building in which it worshiped. In return the Episcopal Church sued to seize the building, then sold it for a fraction of the price to someone who turned it into a mosque.
I include this under the heading of "Managing vertical relationships" because the buildings are an "upstream" input into the production of Church services. The Episcopal Church is trying to raise the cost of rivals for accessing this input.
The success of the strategy depends on how much rival costs go up without access to these particular land parcels. Using this criterion, the chances of success seem small.
UPDATE: In response to the very good comments to the post, here is a brief commentary on the "no economic sense" test taken from the short-lived Section 2 Report (since renounced) that described how the Department of Justice would enforce this part of the antitrust laws.
The Department finds the no-economic-sense test useful, among other things, as a counseling device to focus businesspeople on the reasons for undertaking potentially exclusionary conduct. At the same time, the Department does not believe that a trivial benefit should protect conduct that is significantly harmful to consumers and the competitive process. Therefore, the Department does not believe that this test should serve as the general standard under section 2.
So even though it may have been the intent of the Episcopal church to monopolize, its ability to do so is unlikely.
Sunday, November 20, 2011
When the Pilgrims first settled the Plymouth Colony, they organized their farm economy along communal lines. The goal was to share everything equally, work and produce.Peter Klein has some commentary, as does the revisionist NY Times:
They nearly all starved.
Why? When people can get the same return with a small amount of effort as with a large amount, most people will make little effort. Plymouth settlers faked illness rather than working the common property. Some even stole, despite their Puritan convictions. Total production was too meager to support the population, and famine resulted. Some ate rats, dogs, horses and cats. This went on for two years.
"So as it well appeared that famine must still ensue the next year also, if not some way prevented," wrote Gov. William Bradford in his diary. The colonists, he said, "began to think how they might raise as much corn as they could, and obtain a better crop than they had done, that they might not still thus languish in misery. At length after much debate of things, [I] (with the advice of the chiefest among them) gave way that they should set corn every man for his own particular, and in that regard trust to themselves. ... And so assigned to every family a parcel of land."
The people of Plymouth moved from socialism to private farming. The results were dramatic.
"This had very good success," Bradford wrote, "for it made all hands very industrious, so as much more corn was planted than otherwise would have been. ... By this time harvest was come, and instead of famine, now God gave them plenty, and the face of things was changed, to the rejoicing of the hearts of many. ... "
Saturday, November 19, 2011
Clinch River survived the first round of his spending cuts, in part out of deference to Senate Majority Leader Howard Baker (R-Tenn.), a strong supporter of the reactor, which was in his home state. But finally, in 1983, with the Congressional Budget Office saying the cost might exceed $4 billion, Congress terminated the program. Blueprints had been drawn up, modeling done, components ordered and some ground cleared, but the reactor was never built. The price tag for the federal government: $1.7 billion ($3.9 billion in today’s dollars).
After a carbon-capture project in Alaska burned through $117 million during the 1990s, Republican lawmakers tried to give the moribund project another $125 million in 2005. Just this year, the utility AEP, one of the nation’s largest emitters of carbon dioxide, abandoned a pilot project because it was too expensive — even though the Energy Department was willing to kick in $334 million, half the expected cost. A North Dakota project was shelved last December despite a $100 million federal grant.Synthetic Fuel
A handful of coal and auto companies tapped the new funds to build a facility that was intended to produce 50,000 barrels a day, the first of what was supposed to be a network of synfuel plants, many on federal lands. But after oil prices leveled off, then fell, in the early 1980s, the project was not economically sound, even with government help. The private partners pulled out.Hydrogen car
... on the road to the showroom, the hydrogen car made a wrong turn. From 2004 through 2008, the federal government poured $1.2 billion into hydrogen vehicle projects; the Government Accountability Office noted that about a quarter of that money went to “congressionally directed projects” outside the initiative’s original research and development scope. Visitors to General Motors outside Detroit could drive a vehicle powered by hydrogen, but the technology was costly, and there was no infrastructure to support the vehicles. They died in development.
Thursday, November 17, 2011
Using panel data, we demonstrate a 50% increase in research productivity following a dramatic increase in the piece rate paid for articles by a major Chinese University. The increased productivity comes exclusively from those who were already research active.
Hat tip E. Frank Stephenson at Division of Labor
Wednesday, November 16, 2011
QUESTION: Two pigs, one dominant and the other subordinate, are put in a pen. There is a lever at one end of the pen which, when pressed, dispenses 6 units of food at the opposite end. It "costs" a pig 1 unit of food to travel from the food to the lever and back.
If only one pig presses the lever, the pig that presses the lever must run to the food; by the time it gets there, the other pig has eaten 4 of the 6 units. The dominant pig can push the subordinate pig away from the food, and cannot be moved away from the food by the subordinate pig.
If both pigs press the lever, the subordinate pig is faster, and eats 2 of the units before the dominant pig pushes it away.
QUESTION: If each pig plays rationally, optimally, and selfishly, which pig will press the lever?
To answer the question, construct a simultaneous game, where the "payoffs" to the pigs are the net amount of grain consumed.
ANSWER: The subordinate pig always does better by not pulling the lever, regardless of what the the other pig does. This is called a "dominant strategy." The dominant pig's best response to this strategy is to pull the lever. The unique equilibrium is for the dominant pig to pull the lever and consume 1 net unit of food while the subordinate pig consumes four.
Pull Don't Pull
Pull (3,1) (1,4)
Don't Pull (6,-1) (0,0)
Ironically, with these payoffs, the subordinate pig will soon become dominant. Then the equilibrium will change.
“The problem for pulp producers is the tax credit encourages them to run at higher rates, which is putting pressure on already weak pulp prices,” said Mike Richmond, a paper and forest-products analyst at Salman Partners Inc., a Vancouver stock brokerage.
Thursday, November 10, 2011
The Armchair Economist: Economics and Everyday Life
Wednesday, November 9, 2011
When the Great Depression hit New York and the city’s 30,000 taxi owners couldn’t pay their bills, the city’s impulse was not unlike that of the Roosevelt Administration in Washington: limit supply, so that demand would be adequate to support the suppliers left standing. FDR’s plans were (thankfully) declared unconstitutional, but New York City’s taxi cartel was there to stay. To operate a yellow cab and solicit passengers on the street you need a medallion. And the number of medallions is fixed at 13,237 – roughly 3,000 fewer than in the year (1937) the system was created.
A recent auction of a medallion was $1 million, which suggests the following break-even analysis:.
...let’s say the expected return on a $1 million medallion is seven percent annually (a low figure in light of the risks). To meet expectations, fare would have to be high enough to yield about $200 a day in profits. Yes, that’s right: $200 a day, after netting out the cost of drivers, fuel, maintenance and vehicle depreciation!Is there any chance of reform? Sadly, the taxi cartel illustrates why it is so hard to undo these regulations:
If corporate medallions are worth $1 million each, the whole lot of them is worth something north of $10 billion (owner-operated medallions are presumably worth less than $1 million). And the owners are hardly likely to give up this unearned, government-defended surplus without a struggle. In any event, there’s no one around willing to give them a fight.
Monday, November 7, 2011
First, the owners are losing net revenues, the players their gross revenues.
Second and most important, owners are sacrificing SR (short run) net revenues for LR (long run) increases in franchise values from cost control. Players have no LR gains to motivate SR pain.
Owners have a LR view, players SR, so it makes much less sense for players to take a SR hit without a big offsetting gain.For these reasons, one would predict that the owners would capture a bigger share of the gains from trade.
If you look at the troubles which happened in European countries, this is purely because of the accumulated troubles of the worn out welfare society. I think the labour laws are outdated. The labour laws induce sloth, indolence, rather than hardworking. The incentive system, is totally out of whack.
An analyst at an investment bank (think Goldman Sachs) builds a model suggesting that their portfolio of securities is essentially worthless. The firm ends up selling the assets to other sophisticated firms whose models place different valuations on them.
For some reason, however, the protagonist wrestles with his conscience before deciding to fulfill his fiduciary responsibility to shareholders. And this takes up the bulk of the movie.
When they sell the assets, price drops by about 35% as other firms realize that their models must be wrong.
The happy ending is predictable: price adjusts to reflect the real value of the assets. Future investors are protected from losses that would have been incurred had they purchased over-priced securities. And the firm survives because they were the first to realize that their securities were mis-priced. Other firms presumably failed. Performance is rewarded: the analyst who built the model makes a lot of money, while the other analysts are fired.
All my friends who voted for President Obama are raving about the movie. I suspect they see it as an expose of the inherent corruption of Wall Street and a cause for the rebels who are occupying it.
Here is a question for my economically challenged friends. Would the ethical issues raised by the movie have been any different if the firm had been buying rather than selling securities, i.e., how is searching for under-valued securities to buy any different from searching for over-valued securities to sell?
The movie is playing at the Belcourt in Nashville and On-Demand on Comcast.
Thursday, November 3, 2011
Tuesday, November 1, 2011
Monday, October 31, 2011
You don’t need to know anything about economics to do some basic math. Here it is…lets imagine a country with debt-to-GDP of 120%. Lets also imagine that the country pays interest of 6% (that’s what Italy is currently paying; Greece is paying much more). If that’s the case, you’re paying interest that is equivalent to 7.2% of GDP. (That’s 120% x 6%.) Italy’s tax revenue is around 22% of GDP. If one-third of their tax revenue is needed to pay interest, the numbers don’t work out.The US is different from Italy only in that our debt is a little lower, and our interest rates are a lot lower. But as soon as the markets figure out that we cannot or will not reduce our spending, then our situation looks very much like Italy's. What happens when we have to pay 1/3 of our federal budget to bondholders?
So what are the long run prospects for Italy?
At a press conference after the first summit, Angela Merkel and Nicolas Sarkozy were asked whether they were reassured by Mr Berlusconi’s promises. The German and French leaders hesitated, stole a glance and smirked. The room burst into laughter. Rarely has a leader—from a founding member of the European Union, no less—been treated so disdainfully by his peers.
Friday, October 28, 2011
Thursday, October 27, 2011
the European joke has come full circle. Indebted nations borrow more money to bail out other indebted nations who ask insolvent banks to cut a 50% off deal on the loans that were given to them, but the insolvent banks will then have to raise capital which the will of course borrow from the over-indebted nations whom they just gave money to. Get it? Problem solved - BTMFD!!!.
The Occupy Wall Street volunteer kitchen staff launched a “counter” revolution yesterday -- because they’re angry about working 18-hour days to provide food for “professional homeless” people and ex-cons masquerading as protesters.So, lets get this straight: the Occupy Wall Street crowd want to re-distribute income from those who have it to those who don't. Like many deontologists, they ignore the trade-offs created by their principles.
Tuesday, October 25, 2011
In the Metro-North parking lots along Connecticut's Gold Coast, the haves and the have-nots aren't defined by their clothes, car or even their net worth. Here, it's about whether they have a flimsy green piece of paper visible on their dashboards.
A public parking pass in this and other towns along the Long Island Sound has become a precious asset. The waiting list for a Fairfield Parking Authority permit has 4,200 people and stretches past six years. In another town, Rowayton, the annual permit sale is an epic frenzy similar to that surrounding the release of a new iPhone, with residents camping out overnight to ensure they get a $325 pass.
They will surely lose more over the coming month due to the price change and they would have gained subscribers simply through "natural growth." But how much could this account for? For example, suppose natural growth would have put subscribers at 30 million. Then the price change would have had to cause 5 million subscribers to stop service over the long-run just to get an elasticity greater than 1.0, in the elastic range where profits are maximized. This is six times the 800,000 lost subscribers so far.
As a result, Netflix earned $62.5 million in the quarter compared to $38 million the same quarter last year. On this news, the stock price plummeted 37%, wiping out $2.3 billion in market capitalization. Stock market analysts claim that the stock price is warranted despite the good earnings news because they expect much lower future earnings.
QUESTION: Most city pension funds use an 8.25% to discount the future pension liability. What are the consequences of this high discount rates?
ANSWER: (from earlier blog post) A recent paper blamed some of the under-funding on the use of discount rates based on the characteristics of the invested assets:
- the use of higher-than-appropriate discount rates reduces the value of the pension obligations that is reported to the public, and thus likely reduces the contributions that sponsors feel they must make to pre-fund their pension obligations.
- the link between the discount rate and the expected return on plan assets may encourage sponsors to invest in riskier portfolios than they would otherwise choose in order to justify a higher discount rate, and thus a lower contribution into the pension trust.
- these rules may encourage fiscal gaming in the form of “Pension Obligation Bonds.” These devices allow governments to borrow, invest in risky assets through the pension trust, and treat the difference between the expected asset return and the bond interest rate as “found money.”
Wednesday, October 19, 2011
Unfortunately, in Tennessee and 30 other states, such higher prices are also illegal: the state prosecuted 17 firms for raising price.
It is not clear whether the suits were caused by overzealous enforcement or by the vague statute which prohibits increases “grossly in excess of a price generally charged." Any economist could build an argument that such enforcement is immoral using a consequentialist ethic, but it also seems to fail on simple deontological grounds:
It is the special claim of the virtue argument that it intends to promote a civic virtue of shared sacrifice for the common good, yet price gouging laws are destructive on both points. Because price gouging laws interfere with price signals, resources from outside of the disaster-affected area are not so readily mobilized. Rather than promoting a shared sacrifice in response to a disaster, economic damage tends to be more localized. A further result of interfering with price signals is that fewer resources get to where they are most needed, and therefore the common good is harmed rather than promoted.The naive reaction to higher prices following an obvious supply decrease seems to represent an embarrassing failure of economics education in the state of Tennessee. Perhaps we need a "competition" day, as they have in Europe, so that we can spread the good news of markets to state legislators and those who enforce the law.
Tuesday, October 18, 2011
...working toward a plan that would encourage flat “global payments” to networks of providers for keeping patients well, replacing the fee-for-service system that creates incentives for excessive care by paying for each visit and procedure.
Monday, October 17, 2011
Manufacturing wages in China continue to increase at 15-20% per year on average, and have actually increased by a whopping 300% for Taphandles since it opened a Chinese factory in 2006. In contrast, manufacturing wages in the U.S. have remained relatively flat, or have even decreased in some industries that have adopted a two-tier wage structure.
[Shortly after the inauguration], he supported Mr. Obama's call for heavy spending on infrastructure. "But if you look at the make-up of the stimulus program," says Mr. Zuckerman, "roughly half of it went to state and local municipalities, which is in effect to the municipal unions which are at the core of the Democratic Party." He adds that "the Republicans understood this" [which now makes it hard to reach agreement on current legislation].
Then there was health-care reform: "Eighty percent of the country wanted them to get costs under control, not to extend the coverage. They used all their political capital to extend the coverage. I always had the feeling the country looked at that bill and said, 'Well, he may be doing it because he wants to be a transformational president, but I want to get my costs down!'"
"...To fan that flame of populist anger I think is very divisive and very dangerous for this country." ... The U.S. "has fundamentally great qualities," he says. "It's a society that welcomes talent, nourishes talent, admires talent . . . and rewards talent." [Note that inequality is a consequence of rewarding talent.]So what does this teach us about leadership? My take is that a great leader is one who sacrifices his own interests in favor of those of the organization he leads.
[Bottom line for Mr. Zuckerman]: "I don't want my daughter telling me, 'Dad, I want to move back to Canada because that's the land of opportunity.'" [see our earlier post on migration to Canada].
- The city invested in new technology,
- at a too-good-to-be-true price,
- unproven at the scale they wanted,
- from an entrepreneur who was uncertain that he could deliver, and
- despite being unable to find insurance to cover the city in case the project didn't work.
- To top it off, the one council member who voted against the project was not re-elected.
Saturday, October 15, 2011
Friday, October 14, 2011
"Windsor, Ont.-based immigration lawyer Drew Porter is also seeing history reverse itself. He is fielding more calls from high-net-worth Americans who are worried their taxes are set to rise. “I’ve been doing this for 20 years now, and always the calls were from people that did well in Canada and wanted to move to the U.S. to increase their standard of living and minimize their income taxes,” he says. “It’s quite noteworthy to me that now I’m getting calls from the U.S. interested in Canada for the same reasons."HT: Carpe Diem
Making hairbraiders get an expensive and irrelevant cosmetology license serves only one purpose: to protect the cosmetology industry from competition and stifle Jestina’s right to pursue her occupation of choice. African hairbraiding is a centuries-old natural hair care technique that uses no dyes or chemicals; it is safe for the braider to perform and does not hurt the person getting their hair braided. And with Utah’s increasingly diverse population growing through adoption and migration, the need for African hairbraiders in the state is growing
Thursday, October 13, 2011
Wednesday, October 12, 2011
...for every 10% increase in a man's Body Mass Index, his salary must increase by 2% in order to [compensate women]. However, women who weigh more by two BMI units compensate [men] with a year of extra education, rather than money.In other words, women have to be compensated with income for marrying a heavier man; while men must be compensated with education for marrying a heavier woman. HT: Larry
Sunday, October 9, 2011
And the economist is played by this guy.
It ain't fair.
Saturday, October 8, 2011
In 1984, the graphical user interface on the Macintosh computer gave it a huge advantage over its rivals who had command line interfaces. Mr. Jobs exploited this advantage by charging a high price to buy the computer, but also to develop software for it. Meanwhile, Bill Gates, with his inferior product, was doing everything he could to encourage developers to make software that ran on his operating system.
Gates' strategy was the right one because the demand for an operating system increases with the availability of programs that run on it.
Steve Jobs learned from his mistake however, and when he developed the iPhone and iPad, it was an open system, designed to make it easy for App developers to design and make software for it.
Friday, October 7, 2011
One look at the wage scale for flight crews tells you why this occurs:
It would be relatively easy to solve this problem by taking the decision on when to push back from the gate away from the flight crew and give it to the airline instead.
Thursday, October 6, 2011
Tuesday, October 4, 2011
This may be the reason that Dexia, the Belgian bank, which recently passed regulatory "stress tests" with flying colors, is now in talks with the Belgium government for another bailout, just three years after their last bailout.
Is this so hard to understand: if you bail out banks that make risky loans, you get more risky loans.
Monday, October 3, 2011
after the bailout, bailed banks approve riskier loans and shift investment portfolios toward riskier securities.
As if this weren't bad enough, the shift to risk occurs within the same asset class so has little effect on the capitalization ratios watched by regulators to make sure that banks aren't taking on more risk. We are left with a most unhappy conclusion:
...the net effect is a significant increase in systemic risk and the probability of distress due to the higher risk of bank assets.
Wednesday, September 28, 2011
Marketplace has an interesting story about Amazon's new Kindle Fire. Amazon might succeed where others have be able failed because it might to exploit complementarities. Here's part of the transcript:
And something else is smaller too: the price.
Bezos: It's $199.
Sarah Rotman Epps: You could buy four Kindle Fires for the price of one souped-up iPad.
That's Sarah Rotman Epps, a tech analyst with Forrester Research. Epps says Amazon may be selling the Fire at a loss. That's because the online retailer wants the Fire is to function mainly as a virtual shopping cart.
Epps: Putting this device in consumer's hands pretty much guarantees that they will be a serious Amazon spender.
Loading up on digital content like music and books, and maybe some pots and pans too.
Analysts predict sales of the Fire could top three million this year. The tablet ships on November 15th -- in plenty of time for you know what.
Tuesday, September 27, 2011
Monday, September 26, 2011
Thursday, September 22, 2011
Wednesday, September 21, 2011
Monday, September 19, 2011
Most companies that are great at something – like AOL dialup or Borders bookstores – do not become great at new things people want (streaming for us) because they are afraid to hurt their initial business. Eventually these companies realize their error of not focusing enough on the new thing, and then the company fights desperately and hopelessly to recover. Companies rarely die from moving too fast, and they frequently die from moving too slowly.amen brother
Perhaps these are commitment devices. Speaker Boehner can easily go back on a private "line in the sand" spoken to committee members. It is harder for him to repudiate a public statement (though it has been done). So President Obama has to stake out his territory and commit to his version of the deal in which one-third of the amount is from tax increases. Negotiations when both sides commit to intractable positions usually do not end well.
Saturday, September 17, 2011
A bank's capital ratio is designed to measure a bank’s capital relative to its risk exposure and is one of the ratios that regulators like the FDIC and the Bank of International Settlements uses to measure the "health" of a bank. Here is how a banker sees the new regulations:
When I returned to my office this morning I received a call from a trade group person who told me that the new Tier 1 Leverage ratio for banks is now unofficially 9%, up from 5% that has been in place for years.
The combined shock to the system of capping debit card fees, doubling the capital requirement, significantly restricting OD charges plus the impact of 263 new regs from Dodd-Frank and all within 3 years is severe.
The higher capital requirements (almost double) cut the returns to capital almost in half. This is part of the reason that Bank of America's is raising capital from Warren Buffet:
Under the terms of the deal, Berkshire will buy $5 billion of preferred stock that pay a 6 percent annual dividend, and receive warrants for 700 million shares that it can exercise over the next 10 years. Bank of America has the option to buy back the preferred shares at any time for a 5 percent premium.
If you take a step back, we see that the regulators are running a procyclical policy: reducing capital requirements in boom years (before 2008); and raising them in bust years (today).
- make it easy for firms to fire workers, and
- reduce the benefits from being unemployed.
Thursday, September 15, 2011
An important implication is that, often, it is not worth it for a customer to find a better price. It depends on the costs of obtaining the new price quote and the variation in prices. From the seller's perspective, this means it can set prices above marginal cost and still retain some customers. Customers' different search costs can be the source for a firm having a downward sloping demand curve. So, even in the long-run with free entry, firms' prices need not equal marginal cost.
Tuesday, September 13, 2011
This hurts Brazilian firms:
The strong real is an even bigger problem for manufacturers. Humberto Barbato owns a company that makes parts for high-power transmission lines. Decades ago, he benefited from government policies that helped manufacturers set up export businesses. Now the currency is pricing him out of hard-won overseas markets. At home, he's losing clients to cheap Chinese imports.
And helps Brazilian consumers:
He does get some comfort. While visiting his son in Florida recently, he went on a strong-real shopping binge with the other Brazilians at the local mall. "That's my revenge," Mr. Barbato said.