What can Nasvhille learn from Detroit's troubles?

In Detroit, where unions controlled the politicians, the politicians appointed union reps to administer the pensions:

Most of the trustees on Detroit’s two pension boards represent organized labor, and for years they could outvote anyone who challenged the payments.

They use this power to "redistribute" wealth from taxpayers to city workers, retired or not: 

Detroit’s municipal pension fund made payments for decades to retirees, active workers and others above and beyond normal benefits, costing the struggling city billions of dollars and helping push it into bankruptcy,

And they made it very difficult for outsiders to get the data necessary to "see" what they were doing. 

An investment banker now advising Detroit, Charles M. Moore, has said in a court declaration that the trustees of the general pension plan were “effectively robbing” the fund when they diverted its assets...

In Nashville, city pensions are underfunded by about half a billion, but our medical pensions are underfunded by about two billion.

Be careful of silos

Interesting talk about inter-divisional conflict: The problem is easily illustrated with a soccer team:

Assume that compensation for defensive players is inversely proportional to goals allowed, and compensation for offensive players is directly proportional to goals scored. Rational defensive players would rather lose 0 to 1 than win 5 to 4—because their payoff is higher when they allow only 1 goal than 4. Similarly, rational offensive players would rather lose 4 to 5 than win 1 to 0—because their payoff is higher when they score four goals than one.

If Walter White Hired a Market Consultant ...

his analysis might look something like the one reported on in the NY Times. Prof. Hart solicits crack and meth addicts into his experiments. After random sized sampling a dose in the morning, they are offered another same sized dose later on or cash or vouchers of varying amounts. When the dose is high and the alternative is low, they take another dose. But at when the dose is low and the payment is high, they opt not to get high again.

When methamphetamine replaced crack as the great drug scourge in the United States, Dr. Hart brought meth addicts into his laboratory for similar experiments — and the results showed similarly rational decisions. He also found that when he raised the alternative reward to $20, every single addict, of meth and crack alike, chose the cash. They knew they wouldn’t receive it until the experiment ended weeks later, but they were still willing to pass up an immediate high.

So there is some non-infinite price elasticity. The characters from Breaking Bad could use the implied elasticity to set profit-maximizing prices.

Fantasy Wealth Creation

NPR's Planet money has a fun story about the economy that is being created around fantasy sports. All these intermediaries are facilitating wealth creating transactions.

There's big money in fantasy sports. Last year, alone, people paid $1.7 billion to play in fantasy leagues. With all that money sloshing around, a fantasy economy has sprung up, giving rise to real businesses. Here are four of them.

They highlight:

• Insurance - against the star player on your fantasy team getting injured.
• Banking - to facilitate participation in multiple fantasy leagues.
• Dispute Resolution - because not all fantasy contingencies are foreseen.
• Extreme gaming - because once a week football games are not enough for your fantasy team.

Surprise Fed announcement causes dollar to weaken

The Fed's surprise announcement that they are going to keep printing money caused US ten year rates to fall from 2.9% to 2.7% in a matter of minutes. And the dollar fell. There are two obvious ways to think about the linkage. First, the carry trade means that the decline in US rates increases demand for borrowing in US dollars. These borrowers then sell dollars and buy foreign currencies to invest abroad. This drives down the dollar, relative to the foreign currency. Second, consider investment demand. As US interest rates decrease, demand from foreign investors falls (who had been selling, e.g., Euros to buy dollars to invest in the US). This drives down the dollar.

Doing "Good" with Other People's Money

Do managers over-indulge in corporate social responsibility (CSR)? Principle/agent suggest that they may over-fund their favorite philanthropic cause if it comes our of shareholder wealth and not their own. In "Do Managers Do Good with Other People's Money?," Cheng, Hong, and Shue examine what happens when insiders have a bigger stake in the company, that is, when more of the "doing good" comes out of their own pocket. When the 2003 Dividend Tax Cut to increased after-tax insider ownership, they observed:

First, increasing managerial ownership decreases measures of firm goodness.

 and

Second, increasing monitoring reduces corporate goodness.

That is, when shareholders could vote on CSR proposals, they tended to slow the growth.

Negotiating at Home

Household members have to decide how to allocate the resources they hold in common. Newlyweds might believe they will always agree on everything, and while few really become jaded, over the years most couples become somewhat disabused of this notion. Spending more on fishing trips, alcohol, and sporting events (traditionally male consumption) necessarily means spending less on romantic getaways, beauty products, and redecorating (traditionally female consumption). While the observance of gender differences verges close to, or into, sexism, these differences can be exploited to study bargaining power. Deciding where to make the split among gender-oriented spending may require some husband-wife bargaining.

This is exactly what Shing-Yi Wang thought when studying the effects of the assignment of housing property rights in China. If these rights go to either the husband or to the wife, then their bargaining position is improved relative to their spouse. Lo and behold, the household consumption of cigarettes and alcohol (male-favored goods) and the allocation household chores (female-favored duties) follow as one would expect from a non-strategic bargaining model.

How Apple Identifies Inelastic Customers

I found this image on the interwebs and so can not verify its accuracy. But if it is correct then Apple 5s customers choosing 32GB over 16GB are paying $120 more for a product that costs ~$8 more to make. Those choosing 64GB over 32GB are paying $130 more for a product that costs ~$22 more to make. (Costs may differ due to access speed, etc., but not much.) Apple can still earn pretty hefty margins.

Criticism of Marx

The undergrad professor (John Gurley) who introduced me to economics was a Marxist. I later took his Marxist econ class, and my copy of Das Kapital was almost pure yellow as I highlighted the hell out of it, struggling to understand what it meant.

The above lecture would have cleared up some of my confusion. It focuses on three of Marx's ideas:

1. The enemy of being is having.
2. From each according to his or her ability; to each according to his or her needs.
3. The point of philosophy is to change the world.

Transfer Pricing Failure in Academia

One of the stories causing "lunchroom chatter" in our profession is the closing of the University of Florida's Doctoral program in Economics. Most of us are shocked because it has been a good program with some top notch scholars. But when you dig a little deeper, this appears to have resulted from perverse divisional incentives. It turns out that the department, which is in the Business School, generates much of its class credit hours and tuition money from students in the Arts and Sciences College. While revenues accrue to one accounting unit, the costs accrue to another. Evidently, the transfer price was set to zero. It might be in the university's best interest to keep it open, but this is not in the different academic units' interests.

BTW, my own institution has the opposite problem. The implicit transfer price is set so high that each academic unit jealously guards against their students taking electives outside of the college. As a consequence, virtually no social science majors in Arts and Science, or students from any other college for that matter, take any economics classes because our department is housed in the Business School.  (We do it by requiring elective courses to be in other departments of our college.)

Misnomer: The Affordable Care Act

Unequal pay for women: rational choice or discrimination?

NY Times gets it half right.   A student summarizes the article:

...women disproportionately choose careers based on factors other than income and they have unique challenges when they do seek more lucrative careers.

HT:  Stephanie

How do you "sell" a lottery with a -50% return?

Here's how:

Our proclivity for fantasy makes us an easy target for advertising. Lottery commercials depict winners in stretch limousines, counting stacks of money, dressed in evening gowns and tuxedos, sipping champagne. The commercials hit home because fantasizing about winning the lottery activates the same parts of our brains that would be activated if we actually won, notes Daniel Levine, a professor of psychology: "The motivational areas of the brain can be heavily influenced by vivid daydreaming."

But even fantasy will drop its hold on us if we always lose. Research has shown that positive reinforcement is key in virtually all of the successful lotteries, notes Williams. Lotteries that allow players to choose combinations of four or five numbers from a total of 60 numbers are popular, he says, because many players experience "the near miss," which creates the illusion that they came close to winning the multimillion-dollar jackpot.

Has the US safety net become a hammock?

The Economist thinks so:

..In 39 states, their hypothetical single mother would make more from benefits than a secretary does from work. In 11, she would make more than a first-year teacher. For many Americans, says Mr Tanner, not working is a “rational alternative” to working.

What happened when Tennessee kicked 170,000 out of medicaid?

They started looking for jobs:

We ... find an immediate increase in job search behavior and a steady rise in both employment and health insurance coverage following the disenrollment. Our results suggest a significant degree of “employment lock” – workers employed primarily in order to secure private health insurance coverage. The results also suggest that the Affordable Care Act – which similarly affects adults not traditionally eligible for public health insurance – may cause large reductions in the labor supply of low-income adults.

HT: Larry

Make the rule or your rivals will: Uber vs. taxis

In the past, we have blogged about how Uber took advantage of inefficiencies caused by taxi regulation to come up with a more efficient way of getting consumers to where they want to go.  Now that the incumbent taxis have fought back, using the regulatory machinery of the state utility commissions, the FTC, a federal agency is pushing back against the state regulators:

• One proposed rule change would create a barrier to the entry ...
• Another proposed change would require ... a specific fixed price.  ..., this change would prevent companies from adopting new forms of variable pricing that might be more responsive to consumer demands for transportation service.
• A third proposed change would...  likely would prevent many consumers from using a smartphone application to get transportation service quickly, especially in downtown and “urban village” areas.

At least one agency of the Federal Government is trying to protect your interests.

DISCLOSURE: I used to work at the FTC.

TW/CBS Negotiations II

Did Time Warner blink? Most accounts of the Time Warner / CBS agreement indicate that CBS got most of what they wanted. Earlier, I had suggested that alternative ways to access CBS content may have increased Time Warner's disagreement value. Maybe I was wrong or maybe this just wasn't enough. CBS's strategy was to hold out until football season. At that point, Time Warner's disagreement value would fall because rabid football fans are more likely to switch to other providers such as Dish or Direct TV.

Microsoft Nokia Merger

Microsoft is buying Nokia's smartphone business. Evidently, vertical relations between smartphone software developers and smartphone hardware makers can get strained. RIM has always held the Blackberry OS close to its chest. Apple enters the consumer market as vertically integrated and, tellingly, has not licensed other makers to use its software. Google took the opposite tack by licencing Android to all comers. Only later does it decide to purchase Motorola's smartphone business to better integrate hardware and software capabilities. Microsoft is the late comer to the smartphone operating system business and has had less success lining up phone producers. The deal insures that a major phone maker will be supporting the Microsoft OS for some time to come.

These deals likely solve incentive conflicts between vertically related firms. Some phone makers may free-ride off of others' being on the cutting edge ("bleeding edge") of new features. Since the software and hardware are complementary, there is likely to be a double-marginalization issue. Finally, there is a fair amount of coordination that must occur for promotional activities.