Wednesday, November 26, 2014

Unobstructed

This short U.S. Bank ad shows how voluntary transactions move an asset to a higher valued use.
It also shows a slightly subtler notion called the Coase Theorem.  It shows that there is no need for government intervention, if the property rights are defined well enough for bilateral trade to occur.

Tuesday, November 25, 2014

Is religion good for you?

The question is fairly difficult to answer because nature doesn't randomly assign individuals to carry strong religious beliefs (experimental group) or to agnosticism or atheism (control group).

Jonathan Gruber (yes that guy) uses religious density as an instrument that changes religious beliefs--acting as sort of a natural experiment--that allows him to trace out of the causal effects of religion.  Here is his conclusion:

Religious density significantly increased level of religious participation, and as well to better outcomes according to several key economic indicators: higher levels of education and income, lower levels of welfare receipt and disability, higher levels of marriage, and lower levels of divorce.

Bottom line:  religious beliefs have tangible benefits.

Monday, November 24, 2014

REPOST: The real meaning of Thanksgiving

What they don't tell you about Thanksgiving in school

Peter Klein gives us a more complete story of the first Thanksgiving:

Faced with potential starvation in the spring of 1623, the colony decided to implement a new economic system. Every family was assigned a private parcel of land. They could then keep all they grew for themselves, but now they alone were responsible for feeding themselves. While not a complete private property system, the move away from communal ownership had dramatic results.

This year I am giving thanks for private property.

Adam Smith on happiness

The father of modern economics knew that economics is an analytical tool to that helps us understand what we see, not advice on how to live your life:


...“Smith wrote as eloquently as anyone ever has on the futility of pursuing money with the hope of finding happiness”, claiming that such “seductions will never satisfy”. What matters instead is “the consciousness of being beloved”, the meaning of which has weathered through the ages but approximates “authenticity”: wisdom and virtue. 

The problem in reaching this idyll is ourselves. We are brilliant at thinking we are brilliant when we are not. We are all deeply flawed, vain and selfish. And while persuading others of our greatness might be understandable, more worrying is that we are trying to convince ourselves. Smith counselled: “It’s our own praise that’s hardest to reject.” We can all relate to the fact that “flattery and falsehood too often prevail over merit and abilities”.

In other words, the gates of hell are locked from the inside.  

Wednesday, November 19, 2014

Protesting Against Yourself

Every year, the town of Wunsiedel receives unwanted guests. Neo-Nazis march in commemoration of Rudolf Hess. The townsfolk have tried to get them to stop. In some German towns, there has been a history of violent clashes between extreme left-wing and extreme right-wing groups. This time, rather than confront these marchers, they merely undermined them. As the WSJ reports:
Instead, the group Rights versus Rights (Rechts gegen Rechts) had come up with a new way to protest the annual neo-Nazi march: For every meter the neo-Nazis walked, local businesses and residents would donate $12.50 to a nongovernmental organization devoted to making it easier for neo-Nazis to leave behind their hateful politics.

The group changed the payoffs of the game in order to change the behaviors of the participants. Do see the short video here in which the bewildered marchers are encouraged by banners and notices along the way of how much funds they have generated. :)

Tuesday, November 18, 2014

If only President Obama had read Chapter 5

It looks as if the President failed to anticipate the consequences of his "net neutrality" policy.  After the White House "offered a full-throated endorsement “for the strongest possible rules” in support of “net neutrality,” AT&T CEO Randall Stephenson said that his company was going to step back from investing billions of dollars in building out its own GiGaPower fiber network:

Stephenson clearly fears that the President’s call to the FCC will result in heavy new regulations that will reduce the profit potential of the company. AT&T is holding back to see just how badly the new rules will damage its investment prospects.
Some economists found the President's analysis short-sighted:
The President defends this supposed pillar of the Internet policy by insisting that “an entrepreneur's fledgling company should have the same chance to succeed as established corporations, and that access to a high school student's blog shouldn't be unfairly slowed down to make way for advertisers with more money.” 
But why should this be the case when paid prioritization is the norm in virtually all highly competitive markets? A quick trip to the Federal Express website, for example, reveals a wide range of “fast and full of options” like “FedEx Priority Overnight and FedEx Standard Overnight.” There is also two- or three-day shipping and Saturday service for those who want it. The different tiers of services are offered, not surprisingly, at different rates. These differential services are available to all customers. It is simply wrong for the President to assume that any system of paid prioritization entrenches established companies at the expense of new entrants, or greedy advertisers at the expense of high-school bloggers.
If President Obama had read Chapter 5, he would have known to "look ahead and reason back."  Don't worry though, I sent him a copy of the third edition 

Monday, November 17, 2014

OPEC caught in prisoners' dilemma

Oil prices have fallen by 30%.  If the oil producing nations cooperate, and cut back output, then prices would go back up.  While this would be good for everyone in OPEC (and bad for consumers), it is not individually rational.

Students will recognize this as a pricing dilemma, that makes it very hard for rivals to maintain a cooperative outcome.  See earlier post here:  Never start a land war in Asia (or a price war)

Saturday, November 15, 2014

Pirate Joe's erodes Trader Joe's profit

The forces of competition are at it again:

There is a Trader Joes in Bellingham, WA near the Canadian border. Many Canadians cross the border to stock up on Trader Joes groceries because there is no Trader Joes on their side near Vancouver. One man recognized this demand for Trader Joes groceries so he set up a store on the Canadian side of the border in which he sells Trader Joes products. He calls it Pirate Joes. He buys all of the Trader Joes groceries on the US side, brings them to his store and re-sells the Trader Joes products at a slightly higher price. People are willing to buy the Trader Joes products at a slightly higher price because it saves them the hassle/expense of crossing the border (the border dissuades people from going for the even lower prices at the actual Trader Joes store in Bellingham)

Why doesn't Trader Joe's open a store in Canada?

HT:  JS

Who wants to get married in Mexico?

Leonel Luna, a Mexican legislator has proposed 2 year renewable marriage contracts to combat the high cost of divorce in Mexico:
"Almost 50% of couples in Mexico City end up in divorce," Luna says. "What we're trying to do is acknowledging reality and creating a mechanism that will allow couples to end their marriage without going through the additional pain and suffering of a legal battle."

If you cannot immediately spot two problems with this contract, you are not ready to get married:

  • Problem 1:  Post-investment hold-up (who would make relationship-specific investment with a short term contract?)
  • Problem 2:  Adverse selection (what do you learn about a potential spouse who wants a renewable marriage contract

Thursday, November 13, 2014

How Victoria's Secret discriminates against men

The art of price discrimination is to identify consumers who are less sensitive to price, charge them a higher price, and prevent them from mimicking the behavior of more price sensitive consumers.  Victoria's Secret has discovered that their male customers are less sensitive to price than their female ones:

"The general feeling about men is that they would buy anything in order to get out of the store as quickly as possible," the worker, who wished to remain anonymous, told us. "That means they would spend more money." 
...Women are more value-oriented, and so we were encouraged to show them deals," she said. "Men would buy a couple of $50 bras without questioning us because they felt awkward."
HT:  Andrew

Will this start or end a price war?


From Reuters:  
 Wal-Mart Stores Inc has informed managers of its roughly 5,000 stores across the United States that they can match prices with Amazon.com Inc and other online retailers, the head of the company's U.S. business said on Thursday.
In the past, the FTC has sometimes viewed announcements like this as an "invitation to collude"  because it seems likely that the primary target of this announcement is Amazon.  If Amazon believes the announcement then it changes their profit calculus, i.e., it reduces the benefit of cutting price.

A modest proposal to close the gender pay gap

From Ashe Snowe:

“... working age women earn less than men mostly due to the choices women make in their careers. ... And so I humbly present my own proposal for closing the gender wage gap, which I hope will not only solve the problem but also satisfy voices on all sides of the argument. As a society, we must begin telling women what subjects they can major in, what colleges they can attend, and what jobs they can take.”

Wednesday, November 12, 2014

Can Price Discrimination Against Students Survive Competition?

In an earlier post, Can Price Discrimination Survive Competition, we showed that airline price discrimination was dramatically reduced following entry by Southwest.

Twenty-five years ago, the Ivy League Schools were sued by the Justice Department (my old employer) for conspiring to fix out-of-pocket costs faced by students:

The suit claimed that the Overlap members compared family contributions for financial aid applicants admitted to more than one of their schools and eliminated sizable differences to make the family contributions comparable. 
``Students and their families are entitled to the full benefits of price competition when they choose a college,`` Thornburgh said at a Department of Justice news conference announcing the suit and consent decree. ``This collegiate cartel denied them the right to compare prices and discounts among schools, just as they would in shopping for any other service.`` 
``The defendants conspired to eliminate cost competition as a factor in choosing a college,`` Thornburgh said. ``The choice of whether to consider price when picking a school belongs to parents and students, not the college or university.``

The collusion was necessary to maintain the price discrimination scheme.  Without it, the scheme probably would have collapsed:

Schools had defended the sharing of scholarship information as a way to prevent bidding wars for top students. Peter Smith, a spokesman for the Association of American Universities, said on Wednesday: ``If that`s right, I suppose you`ll get some of that (bidding) now. But I don`t have a feel for how many kids that may involve.``
Daniel Steiner, vice present and general counsel of Harvard, said he was concerned that Wednesday`s action might lead to student financial awards in excess of need. ``We have already seen in other parts of the U.S. too much evidence of bidding contests for students,`` he said.
So the Ivy's said it was OK to fix prices as long as the proceeds of the conspiracy were used for good.  

Monday, November 10, 2014

REPOST: what is the cost of marriage?

Wednesday, August 22, 2007


What is the cost of marriage?

To an economist, the cost of an activity is what you give up to pursue it.

In the year following a divorce, women's living standards fall by 27 percent while men's living standards rise by 10 percent.Steven Landsburg's classic column on Why Men Pay To Stay Married argues that the difference is a compensating differential, the "price" that men pay to women to compensate them for the relatively unpleasant job of marriage.

If men stay in marriages that cost them a lot of money, that just proves they really like being married. They're getting something they value, and they're paying for it.

When I first read this 8 years ago, I thought it was funny. Now, after 19 years of marriage, I wonder why the price is so low.

For more on marriage, see these posts.

What is causing inequality?

The talking bears describe the "Bernanke Put"

What is missing from Economics?

Colleague Ted Fischer will tell us this thursday:


Saturday, November 8, 2014

Free money

Another Planet Money episode on inter-temporal arbitrage (mobile assets moving over time: from low-value summer to high-value winter) that is making me rethink my longstanding opposition to government subsidies for public radio.

HT:  Sarah

Thursday, November 6, 2014

Some Cops Don't Like Being Monitored


Ford's New Police Interceptor will be able to monitor police driving behavior in real-time. This is an effort to increase driving safety by cops but also to deter the unintended uses of these vehicles. From wired:
Everyone’s seen a cop driving like a jerk: Double parking and blocking traffic. Cruising down the highway way beyond the speed limit, with no suspect to run down. Blatantly texting while driving. Pulling the old turn-on-the-siren-just-long-enough-to-run-the-red-light trick. And for anyone who’s fantasized about making a citizen’s arrest of one of their city’s finest, police departments soon will be able to track how their cops are driving, and when they’re behaving badly.

But at least some of the cops don't like curbs in their ability to engage in moral hazard. From The Free Thought Project:
Police union representatives have already spoken out against this new feature, calling it intrusive.

Tuesday, November 4, 2014

Why is Apple borrowing in euro's?


...because the European interest rates are so low.  Apple will borrow in euros, sell the euros to buy dollars (called the "carry trade"), and return the dollars to shareholders.  This is an increase in the supply of euros in the market for foreign exchange, which depreciates the euro relative to the dollar.  In fact, a lot of speculators are betting on a stronger dollar or a weaker euro.

How has the 2000 Pepsi-Gatorade Merger worked out?

From Business Week at the time of the merger:

Some of the more obvious synergies between Quaker Oats and Pepsi won't happen for a while. To overcome the Federal Trade Commission's fears of monopolization of the sports-drink market, Pepsico agreed not to bundle Pepsi and Gatorade in contracts with merchants for 10 years. It also agreed not to allow its bottlers to distribute Gatorade, which would have been an easy and cost-effective way to ship Gatorade to smaller stores.

Does anyone know of if these synergies ever materialized?

If the preceeding post made you queasy...

Here is a satire of economists' belief in markets, "The Market as God," by a Divinity professor:

A few years ago a friend advised me that if I wanted to know what was going on in the real world, I should read the business pages. Although my lifelong interest has been in the study of religion, I am always willing to expand my horizons; so I took the advice, vaguely fearful that I would have to cope with a new and baffling vocabulary. Instead I was surprised to discover that most of the concepts I ran across were quite familiar. 
Expecting a terra incognita, I found myself instead in the land of déjà vu. The lexicon of The Wall Street Journal and the business sections of Time and Newsweek turned out to bear a striking resemblance to Genesis, the Epistle to the Romans, and Saint Augustine's City of God. Behind descriptions of market reforms, monetary policy, and the convolutions of the Dow, I gradually made out the pieces of a grand narrative about the inner meaning of human history, why things had gone wrong, and how to put them right. Theologians call these myths of origin, legends of the fall, and doctrines of sin and redemption. But here they were again, and in only thin disguise: chronicles about the creation of wealth, the seductive temptations of statism, captivity to faceless economic cycles, and, ultimately, salvation through the advent of free markets, with a small dose of ascetic belt tightening along the way, especially for the East Asian economies. 

Markets vs. Mother Theresa: who has done more for the world's poor?


Extreme poverty fell 15% in the last 25 years, due in large part to the spread of the institutions of capitalism:  markets, free trade, private property, and de-regulation:
China and India are leading examples. In 1978 China began allowing private agricultural plots, permitted private businesses, and ended the state monopoly on foreign trade. The result has been phenomenal economic growth, higher wages for workers—and a big decline in poverty. For the most part all the government had to do was get out of the way. State-owned enterprises are still a large part of China’s economy, but the much more dynamic and productive private sector has been the driving force for change. 
In 1991 India started dismantling the “license raj”—the need for government approval to start a business, expand capacity or even purchase foreign goods like computers and spare parts. Such policies strangled the Indian economy for decades and kept millions in poverty. When the government stopped suffocating business, the Indian economy began to flourish, with faster growth, higher wages and reduced poverty.

This has got to be one the greatest achievements in history.  Consequentialists rejoice!

HT:  Carpe Diem and WSJ