Protecting the foolish exploited workers from themselves

Apple is facing criticism and media scrutiny for using relatively low-paid employees to make high-cost phones, computers and other gadgets. So they decided to improve working conditions.

Foxconn said it will reduce working hours to 49 per week, including overtime.

"We are here to work and not to play, so our income is very important," said Chen Yamei, 25, a Foxconn worker from Hunan who said she had worked at the factory for four years.

"We have just been told that we can only work a maximum of 36 hours a month of overtime. I tell you, a lot of us are unhappy with this. We think that 60 hours of overtime a month would be reasonable and that 36 hours would be too little," she added. Chen said she now earned a bit over 4,000 yuan a month ($634).

HT: Lamar

Do bad bidders make good targets?

Magic Johnson's group just bought the LA Dodgers for of $2.15B. That the bid was so much higher than anyone else's suggested the possibility that they had failed to anticipate, and thus avoid, the winners' curse:

“When the offers arrived, the bid from the Johnson-Walter group was so much higher than the competing offers, it essentially took the franchise off the block almost instantly.
The person said the other offers, which were perceived as opening bids, were in the range of $1.5 billion, some 25% less than the Johnson-Walter bid. As a result, the other bidders were never given a chance to match, and the deal was wrapped up by Tuesday evening.”

If they over-estimated the value of the franchise, does this indicate bad management, and thus an opportunity for someone else to take over the firm and run it more successfully? See the classic work on this, Do bad bidders make good targets?

...Firms that subsequently become takeover targets make acquisitions that significantly reduce their equity value, and firms that do not become takeover targets make acquisitions that
raise their equity value.

Look ahead and reason back: Italy

Normally, we think of labor as a variable cost, that you can avoid if demand declines. If it is easy to fire workers, it also becomes profitable to hire them when demand increases.

But not in Italy, where it is seen as more of a long term investment.

...firms with more than 15 workers cannot get rid of employees even in a downturn without risking legal proceedings that can last years. If a judge then decides the company has acted unfairly, it can be forced to rehire the worker and pay him his lost earnings.

Mario Monti, economist and former head of the Competition Authority in the EU (while I was at the FTC), is heroically trying to enact what seem like very modest reforms. There is a question of whether such modest reforms will help very much, given the other problems like pervasive corruption, maddening bureaucracy and organised crime.

Double Marginalization in the Movie Industry

Ricard Gil has a great new paper, "Does Vertical Integration Decrease Prices? Evidence from Paramount Antitrust Case of 1948." This was a landmark case that forced the studios to divest the theaters they owned. Gil painstakingly pored over news stories in dusty copies of Variety he found in libraries to collect ticket prices and admissions data for theaters affected and not affected by the decision. His abstract states:

My results show that vertically integrated theaters charged lower prices and sold more admission tickets than nonvertically integrated theaters.

When you own complements, you tend to charge lower prices. He goes on:

A back of the envelope calculation suggests that losses in consumer surplus due to the Supreme Court resolution and the corresponding sale of theater holdings by Paramount and seven other companies were sizable.

The Feds got it wrong again.

What's the difference between Keurig Coffee and Nashville city government?

In order to persuade coffee drinkers to switch from normal drip coffee makers to Keurig's unique K-cup coffee system, Keurig has to keep the initial system price low by essentially giving away their coffee makers. Whatever Keurig loses on the machines, it more than gains on future sales of K-cups.

Similarly, Nashville discounts its future pension liabilities at the unreasonably high rate of 8.25%. This allows the city government to save less--and spend more--than they should.

Both Keurig and Nashville are taking advantage of people's irrational over-weighting of the present relative to the future, which is so common that economists have given it a name, hyperbolic discounting.

The difference is that Keurig will make up for the initial loss with profit from future sales whereas Nashville has no such plan. In the meantime, the size of our unfunded debt keeps growing. Someone else--presumably our kids--will wind up with the bill.

As strange as it may sound, we could learn something from California. Just yesterday, Calpers took the unusual step of lowering its discount rate to 7.5% (the actuary had recommended 7.25%). It is unusual because the the policy alleviates future problems, but causes pain today, exactly the opposite of what hyperbolic discounting tells them they should do.

By lowering the so-called discount rate, Calpers could ask the state to eventually contribute an additional $300 million annually. The pension board asked the staff to come up with a plan to phase in the increased contributions from state and other government agencies over the next two years to help soften the financial blow.

That such a small change in the discount rate (0.25%) can have such big effects illustrates the power of discounting. Imagine what would happen if they had to lower their discount rate to a much more realistic number, say 6.5%? (Derivation here).

See also Stossel on city pensions; and how the Swedes solved their pension mess.

And as if this weren't scary enough, the pension problems are dwarfed by the unfunded medical benefits:

while most public pension plans are 75 percent funded, the figure for health-care plans is only 4 percent nationwide. So unlike pensions, governments are setting aside little money in advance to pay for their future obligations.

HT: Instapundit

Should you trust your auto repair garage?

To answer this question, economist Henry Schneider took his used Subaru to 40 garages, loosening the battery cable and draining some coolant before each visit. He even wrote himself a script and memorized it, to make sure he was telling every garage the same thing. “We bought the car recently, and we should have had it looked at before we bought it, but we didn’t,” he would say. “It hasn’t started a few times. Can you check that out?” He also asked for a thorough inspection.

At only 27 of the 40 garages did mechanics tell Mr. Schneider that he had a disconnected battery cable, the very problem to which he had pointed them by saying his car didn’t always start. Only 11 mentioned the low coolant, a problem that can ruin a car’s engine. Ten of the garages, meanwhile, recommended costly repairs that were plainly unnecessary, like replacing the starter motor or the battery. (Tellingly, his results were in line with what the Automobile Protection Association found when it performed its experiments in Canada.)

Note that this is similar to the experiments run by 60 Minutes that exposed a similar problem at Sears Automotive.

How much would you pay for this hospital chain?

Bank of America Merrill Lynch is running an auction to sell Iasis, a chain of 18 acute-care hospitals in urban and suburban markets in seven Southern and Western states. The winning price is expected to be about $2.4 billion, or 8 times trailing Ebitda.

Usually, investment bankers will informally "shop" the assets around, which can be thought of as more of a negotiation than a formal auction.

...use negotiation when flexibility (like change orders) is important, as is likely for large complex projects; and if you negotiate, use a reputable firm because you are subject to hold up when unforeseen contingencies arise. Contracting with a reputable firm can reduce the risk of hold-up.

In this case, I suspect that what the papers are reporting as an auction, is better described as a negotiation. BofA/Merrill has a reputation to protect.

Correlation is NOT causation

Mistaking Correlation for causality is a mistake that goes by many names: "The Fundamental Error of Attribution," "Endogeneity," "Selection bias," or "Measurement Error." Here is a site that computes correlations:

In general, 45 percent of people subscribe to Netflix. But among those who consider themselves skilled Capri Sun pouch puncturers, 58 percent subscribe to Netflix

Here is another one that shows you how to avoid mis-interpreting them:

Given the problems with interpreting correlational data, one might reasonably ask: why do we bother with them at all if it is a causal relationship that we seek? Why not just gather data that could provide a more definite answer, or otherwise just ignore correlations? The reason is pragmatism. Correlational data are usually relatively easy and inexpensive to obtain, at least in comparison to experimental data. Also, many cause-effect relationships are so subtle that we often first learn of them through correlations detected in observational data. That is, they are often useful.

What makes economies succeed?

The NY Times discovers incentives:

In parts of modern sub-Saharan Africa, as was true in medieval Europe or the antebellum South, the people who work the fields lack any incentive to improve their yield because any surplus is taken by the wealthy elite. This mind-set changes only when farmers are given strong property rights and discover that they can profit from extra production. In 1978, China began allowing farmers to benefit from any surplus they produced. The decision, most economists agree, helped spark the country’s astounding growth.

Volatility is plunging as stock prices rise

Volatility index, a measure of the standard deviation, or how much the stock market is expected to change in the coming year is down below 16%. This has led to an increase in stock prices.

The VIX uses options pricing to measure the market’s expectations for future swings in the S&P 500. It tends to fall when stocks rise. The VIX came close to 50 last summer when stocks were swooning and many were fearing a double-dip recession. It was also over 30 as recently as early December. But the VIX has had a relatively smooth ride lower throughout much of 2012.

If volatility comes back (a measure of risk), expect stock prices to fall to compensate new stock purchasers for bearing the additional risk.

The straight talking bears explain gas prices

Heads, speculators win; tails, the rest of us bail them out

I wonder if the same government contractors who under-estimated the costs of the "Patient Affordability Act" are also designing the housing industry bailout:

The Obama administration will extend mortgage assistance for the first time to investors who bought multiple homes before the market imploded, helping some speculators who drove up prices and inflated the housing bubble. ...

Landlords can qualify for up to four federally-subsidized loan workouts starting around May, as long as they rent out each house or have plans to fill them, under the revamped Home Affordable Modification Program, also known as HAMP, ...

Anticipate moral hazard, lest you be victimized by it.