Thursday, December 24, 2015

Sensible macro musings, from Doug Elmendorf

I overlapped with Doug during my stint in DC.  These short videos give a pretty good picture of the macroeconomic problems and policies to deal with them.  I have less faith than Doug in the ability of government to design investment policies that spur growth instead of re-distribute income, and I think he understates the tradeoff between re-distribution on growth, but on the whole, I think they are pretty good.

Wednesday, December 23, 2015

Why do Women pay More?

The Washington Post is reporting that NYC Department of Consumer Affairs has found that items targeted to women/girls are pretty consistently higher priced than those targeted to men/boys. Often the only perceptible difference is the color and packaging, as in these scooters:
Or these razors:
Across 800 products you get this pattern:
Possible explanations:

  • Informational disadvantages: Women are not as informed about the prices of alternatives and so are more willing to suck it up and pay the higher price.
  • Indirect Price Discrimination: Women have more inelastic demand and so it is profitable to charge them more.
  • Selection by preference for quality: These products may have lower quality, 'generic' versions, the price of which we do not observe. It could be that men/boys are more willing to trade-off quality for price while the women/girls who prefer the quality product really prefer the quality product.
  • Cost differences from scale economies: Women/girls may prefer a greater variety of consumer goods (e.g., wedding dresses versus wedding suits). This means that there are fewer units purchased for any specific item. With economies of scale, the version for men/boys will have lower average cost than the version for women/girls.

Monday, December 21, 2015

Avon Buyout

On Dec. 17, Cerberus announced that it will purchase Avon's North American operations. Avon has been struggling and this is thought to be a way of booting out the old management and making some important changes in how the firm markets beauty products. Do the markets bear this out?

1. If so, investors should value Avon more, and they do. See the stock market effect for Avon on 17 Dec here:




2. Also, if the buyout improves Avon's performance, it will likely come at the expense of competitors. And it seems that it does. Estee Lauder appears to have taken a hit.


Revlon, though, appears flat with the news. 
L'Oreal's stock price fell over the next two days.


Coty also closed lower but the decline started a day later two. (Coty's brands include: Calvin Klein, Chloe, Davidoff, Marc Jacobs, OPI, philosophy, Playboy, Rimmel and Sally Hansen.)

It does seem curious that the price responses for competitors are all a day later. But in all, it seems that this acquisition will move an asset to a higher valued use.

What causes the increase in tuition?

Government subsidies.

Remarkably, so much of the subsidy is translated into higher tuition that enrollment doesn’t increase! What does happen is that students take on more debt, which many of them can’t pay.

Tuesday, December 15, 2015

Seattle takes aim at the gig economy

Following Hillary Clinton's lead in calling out the gig economy,

The sharing economy—bolstered by high-flying start-ups including Uber, Airbnb and Lyft—allows individuals to share products and services like offering homes and apartments for rent, or driving passengers to destinations. The small tasks often are brokered through mobile smartphone apps, and the platforms connect freelancers with available short-term gigs.

the city council of Seattle has just voted to allow Uber and Lyft drivers to unionize:

In a statement after the vote, a spokeswoman for Lyft said that the ordinance passed would threaten the privacy of drivers, impose costs on passengers and the city and conflict with federal law.

This reminds me of one of my favorite Reagan critiques of progressive policy
If it Moves, Tax it. If it Keeps Moving, Regulate it. And if it Stops Moving, Subsidize it.
HT: Sarah

Saturday, December 12, 2015

REPOST: Why are so many donated kidneys discarded?


In the past, we have blogged about our inefficient kidney matching system:  almost 100,000 people are waiting for kidneys, only about 20,000 receive kidneys.

Now we learn that physicians throw away about 2000 usable kidneys.  One of the reasons is the government's performance evaluation metric:  If the number of failures exceeds expected levels by 50 percent, transplant programs are put on watch list, and then decertified if they dont improve.  This incentive encourages physicians to reject all but the best organs for transplant:
“When you’re looking at organs on the margins, if you’ve had a couple of bad outcomes recently you say, ‘Well, why should I do this?’ ” said Dr. Lloyd E. Ratner, direct of renal and pancreatic transplantation at NewYork-Presbyterian/Columbia hospital. “You can always find a reason to turn organs down. It’s this whole cascade that winds up with people being denied care or with reduced access to care.” 
After the University of Toledo was cited, a transplant surgeon cut back to about 60 transplants a year from 100, becoming far choosier about the organs and recipients he accepted. 
The one-year transplant survival rate rose to 96 percent from 88 percent, but Dr. Rees still bristles at the trade-off. “Which serves America better?” he asked. “A program doing 100 kidneys and 88 percent of them are working, or a program that does 60 kidneys and 59 of them are working? It’s rationing health care under the guise of quality, and it’s a tragedy that we are throwing away perfectly good organs.”
Someone, please, let these people use a market. 

Tuesday, December 8, 2015

Why is Finland is giving every adult $10,000/year?

To replace its cumbersome, costly, and bureaucratic welfare system:

The government thinks that the move will actually save money. Finland's welfare system is very complex and expensive to run, and the government hopes that simplifying it could reduce costly bureaucracy. 
It also argues that the change may encourage more people to look for work. About 9.5% of Finns are currently out of work -- the highest rate in more than a decade -- and the government believes some people are deterred from working because they're better off on unemployment benefit than accepting a minimum wage job.
HT:  Charles




What happens when you ignore lessons from Managerial Economics?

Venezuela's mistakes are familiar fodder to readers of this blog.  Things got so bad in Venezuela that in 2013, I even sent President Maduro a copy of the third edition, and urged him to read chapter two, to help him understand why Venezuela was running out of toilet paper and used cars.

 


“We’re in a state of constant deterioration,” said Juan Pablo Hidalgo, a 27-year-old hotel worker who voted on Sunday against Mr. Maduro’s allies in hope of economic improvement. “In any other country, people can save. Here, no one in my generation can save anything, much less have hopes of owning a car or a house.”

This is what happens when you don't study economics.  I wrote to President Maduro asking him for a plug that I can put on the cover of the fifth edition, "I should have read this book."

Thursday, December 3, 2015

Puzzle: why are marketers ignoring old people?

From a British blog,
A milestone in marketing stupidity has been reached. According to a September report by the U.S. Bureau of Labor, a majority of consumer spending (51%) is now done by people over 50. These people are the target for 10% of marketing activity. On the other hand, marketers spend five times as much money marketing to Millennials, the moronic obsession of every marketer on the planet.

 However, as an economist I dont buy the non-rational explanation offered:

There is no logic to the advertising industry's disregard for people over 50. It is marketing by selfie-stick - narcissism disguised as strategy.

Remember these are averages, and how much to spend on marketing is an extent decision, where the marginal effect of advertising is relevant.  It could be that the marginal benefit to advertising to young people is higher (they buy more in response to ads) or that the marginal cost of reaching them is lower, e.g., because they spend more time online.

For cigarettes, I know that new smokers switch more frequently between brands while established smokers are more loyal to a particular brand.  This may indicate more susceptibility to brand advertising, which rationally explain the high level of advertising aimed at young smokers.

I don't know what the answer is.  Would love those with more experience to weigh in.

HT:  High Lantern Group

Will this end moral hazard in banking?

The Fed ends "too big to fail" bailouts:
Under the new rule, banks that are going bankrupt -- or appear to be going bankrupt -- can no longer receive emergency funds from the Fed under any circumstances. 
If the rule had been in place during the financial crisis, it would have prevented the Fed from lending to insurance giant AIG (AIG) and Bear Stearns, Fed chair Janet Yellen points out.

Wednesday, November 25, 2015

M-PESA Breaks Down Regulatory Entry Barriers

A nice story by 60 minutes demonstrates the value of mobile money. What large corporations are jockeying to roll out in the US, Kenya has been doing for years with the most bear bones of mobile technologies. Users are able to make millions of micro-transactions per day over the mobile network using M-PESA. There are heart warming vignettes about the various ways  this benefits consumers. But the best part of the story for me was the erosion of entry barriers (around the 11:00 minute mark). The CEO of the mobile carrier explains:
Actually, when M-PESA started, Kenya's commercial banks implored the government to impose regulations to impede its development, but the government decided to take a hands-off approach, which is pretty unusual.

But other jurisdictions have taken notice.
The most effective barrier for the success of mobile money around the world is the banking lobby. The banking lobby in most parts of the world is a very strong lobby. And banks have looked at what's happened in Kenya and have decided that they don't want to see that happening in their own countries. 

But for the courage of some Kenyan government official, this may never have gotten off the ground.

Safety breeds risk



Can financial crises and other disasters be prevented? What was the role of the Federal Reserve, regulation, and risk in past crises? In the pursuit of safety from disaster, are we creating the conditions for the next one? Greg Ip, author of Foolproof, joined a panel of experts to discuss the themes of his new book at the Mercatus Center.


Monday, November 23, 2015

Is predatory pricing profitable?

Predatory pricing is rare, at least in the US, because it is an investment that rarely pays off.  After an incumbent firm drives an entrant out of the market by pricing low (and deliberately losing money), the incumbent must be able to recoup the lost money by raising price--without attracting more entry--when the entrant exits the industry.

Perhaps the best examples of predatory pricing come from the airline industry, when the Department of Justice brought several cases in the 1990's.
Probably our best known airline predation investigation involved Northwest's response to Reno Air's entry into the Reno-Minneapolis city-pair in 1993. Not only did Northwest institute service of its own on this route that it had previously abandoned, it also opened a new mini-hub in Reno that overlaid much of Reno Air's own operation. Our investigation was well under way when the matter was resolved because, with the intervention of the Department of Transportation, Northwest decided to abandon its overlay of Reno Air's hub operation.

See here why these cases are so hard to win.

In other words, the government needs to prove that the low fares and extra flights would prove financially ruinous if continued indefinitely. To make the argument stick, the government will have to prove that American could reasonably expect to recover its losses after Vanguard or Sun Jet exits the market by raising fares -- confident that its high fares would not attract another round of upstarts.

What is GDP?

Our friends at MR University have developed an online macro course with good, free content

Course Outline

2 The Wealth of Nations and Economic Growth
3 Growth, Capital Accumulation, and the Economics of Ideas
4 Savings, Investment, and the Financial System
5 Unemployment and Labor Force Participation
6 Inflation and Quantity Theory
7 Business Fluctuations
8 Transmission and Amplification
9 The Federal Reserve
10 Monetary Policy
11 Fiscal Policy

Friday, November 20, 2015

Running an art auction

Art is a textbook example of the advantages of an auction over simple posted price: an auction awards the art to the highest value bidder, and sets a price. Competition between the auction houses has taken the form of price guarantees:
Christie’s agreed to give the seller of “Four Marilyns,” Turkish financier Kemal Cingillioglu, a $40 million house guarantee, which means the house promised to pay him up to $40 million no matter how the silkscreen fared. Since it sold for less [only $32 million], the house could now need to pay him the difference. Christie’s declined to discuss the terms of the deal.
HT: Chris

Wednesday, November 18, 2015

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.

Friday, November 13, 2015

Does life insurance cause suicide?

Insurance companies anticipate this kind of moral hazard, and typically include an exception for death by suicide.  However, the exception lasts only a few years, and varies by country.  Economists compared suicide rates in countries with shorter exceptions and found statistically significant evidence of moral hazard:

...the shorter the exemption period, the greater the demand for life insurance. And the greater the demand for life insurance, the higher the suicide rate. 

HT:  Mollie

How quickly does a strong dollar benefit consumers?

The answer from the Fed's Stanley Fischer:
One way in which the stronger dollar depresses inflation is by putting downward pressure on import prices. .. 
An important difference between the transmission of dollar appreciation to inflation compared with output is that the effects on inflation are probably more transient. In particular, given that most of the effect on inflation occurs through changes in import prices--and import prices respond quickly to the exchange rate--the peak effect on inflation probably occurs within a few quarters. From the standpoint of the outlook, this transience means that some of the forces holding down inflation in 2015--particularly those due to a stronger dollar and lower energy prices--will begin to fade next year. Consequently, overall PCE inflation is likely on this account alone to rebound next year to around 1-1/2 percent. And as long as inflation expectations remain well anchored, both core and overall inflation are likely to rise gradually toward 2 percent over the medium term as the labor market improves further and the transitory effects of declines in energy and import prices dissipate.

Thursday, November 12, 2015

How do brands grow? TV.

Distilled wisdom from Byron Sharp's How Brands Grow: What Marketers Do not Know:

Sharp begins by noting that the majority of any successful brand’s sales comes from “light buyers”: people who buy it relatively infrequently.The consequences of this insight are big:
  • ...you will never increase your brand’s market share by targeting existing users ... loyalty programmes, says Sharp, “do practically nothing to drive growth”.
  • ...a successful brand needs to find a way of reaching people who are not in its target market, ... advertising must somehow gain the attention of people who are not interested in it, have never bought it, or who bought it so long ago they can’t remember.
  • Advertising, says Sharp, works best when it doesn’t try and persuade, but merely makes us remember the brand at the point of purchase
  • Brands are not the rich sources of differentiation marketers like to think of them as, but short cuts through the complexity of decision-making. Most consumers aren’t aware of, ... the difference between NescafĂ© and Kenco and don’t want to spend longer than they need to thinking about which they prefer. They just want to get coffee and get home.
  • Brand engagement is largely pointless...A senior marketer at the drinks company Diageo, where Sharp’s book has been influential, put it to me bluntly. “After 10 or 15 years of f***ing around with digital we’ve realised that people don’t want to ‘engage’ with brands, because they don’t care about them.’
So what does all this mean for advertising?
Ideally, it would reach millions of people who aren’t particularly thinking about your product. You’d want them to see the same thing at around the same time, so that they can talk to each other about what they’ve seen, reinforcing each other’s memories of it. You would need to sneak up on them, since they have near-zero interest in hearing from you, indeed don’t want to. You’d need a form of content requiring negligible mental effort to process: one which comes in bite-sized chunks, but which is still capable of moving and delighting. It turns out there is an app for that: the TV ad.

Wednesday, November 11, 2015

Set the markets free

Wealthy patrons are getting kidneys much more quickly and frequently than poor ones:
Researchers studied the national database of organ donors from 2000 to 2013 and found that patients who simultaneously listed at more than one center had higher transplant rates, lower death rates while waiting, were wealthier and were more likely to be insured.
How do they do it?
... wealthier patients ... have the money for travel, temporary housing and other costs of multiple listing that are not covered by health insurance, Givens said. Patients with state-run Medicaid generally have lower income and may not have the option to list themselves at a center in a different state.
Time is now for a market.

HT:  Marginal Revolution

Tuesday, November 10, 2015

How are rents determined for Nashville Penthouses?


By an auction:

The starting prices ( see the auction here) underscore the light-speed leaps that rents in the city have taken because of that demand.  
Bidding on the one-bedroom penthouse units begins at $5,300 per month (nope, not a typo). Minimum starting bids for the two-bedroom units range from $5,600 a month to $9,000 a month (still not a typo, I double-checked).  
The minimum bid for a three-bedroom unit is between $8,000 a month to $10,000 a month (people, I have professional editors. These figures are real. See for yourself!)

HT:  Burch


Question: what happens when you reduce punishment?

Answer:  Crime increases



In this case, we are talking about major league pitchers deliberately throwing at batters, called "Hit By Pitcher" or HBP.  In 1994, the HBP rate exploded.  Why?

Before 1994, if a pitcher deliberately hit a batter, the batter's team would retaliate.

After 1994, the rules changed to a "warning-then-eject" rule.  Once the “warning-then-eject” rule was implemented, teams effectively got a free HBP, with no fear of retaliation. Team A hits team B, then both teams get warned and team B can’t retaliate without automatically losing their pitcher and manager! They de-incentivized retaliations to such a degree that they actually incentivized the first HBP.

Article summarizing the history of the HBP rule and with nice graphs of the HBP data: 
http://www.hardballtimes.com/the-hbp-explosion-that-almost-nobody-seems-to-have-noticed/

HT:  Eric E.

Socialism, really?

With a presidential candidate calling himself a socialist and suggesting we emulate Denmark, I want to do a little bubble bursting.  From past blog posts mentioning Denmark.  (The last one on the Scandanavian Model is the most interesting to me.)

Sunday, November 8, 2015

Rev. Mgt. comes to DC (for parking meters)

from the Washington Post:

This “surge pricing” means you could be paying $8 an hour to park in Chinatown-Penn Quarter at peak times. 
You read that right. $8. An hour. 
City officials say the idea is to reduce downtown traffic congestion, 25 percent of which, studies show, is caused by vehicles circling the block looking for a parking space. It is simple supply and demand, they say.


Wednesday, November 4, 2015

Why do grads of liberal arts colleges earn less?


WSJ reports what those who have read chapter 9 knew all along:
Administrators at some liberal arts colleges say the disparity can be explained in part by the fact their students are following passions that may not yield high earnings, not because the graduates lack job options. They also caution that median earnings figures are skewed in favor of colleges that offer degrees in higher-paying fields such as engineering, business and health care.

Tuesday, November 3, 2015

Google Expands its Platform Strategy

Google is partnering with General Assembly to offer a boot camp for mobile developers using the Android operating system (reported by Bloomburg and NPR).
According to a report General Assembly released in September, the demand for mobile developers of all types has increased more than 150 percent in the past five years. 
The No. 1 thing they [Android developers] hear from their developer network is, I need more developers!

The Android operating system is core to Google's larger strategy. Helping to train developers to write apps for it will increase the supply of complements to the entire platform. In the longer term, this effort is likely to make the platform that much more valuable.

Monday, November 2, 2015

What happens when Wal-Mart opens a Supercenter?



 Stossel's conclusions are supported by Academic Research:  when Wal Mart opens a supercenter (grocery store), they offer "many identical food items at an average price about 15%-25% lower than traditional supermarkets." This raises welfare for consumers by about 20% of their food expenditures.   In addition to the direct effects of another option for consumers, there is the indirect benefit of increased competition on rival prices, an additional 5%.  And these effects are much bigger for poorer consumers.

Thursday, October 29, 2015

Federal health insurance death spiral?

An insurance "death spiral" is driven by adverse selection:  if sicker people are more likely to sign up for the insurance, then rates must increase to compensate the insurers for the higher expected costs.  The higher rates mean that only even-sicker customer will find the rates attractive, so rates must rise again; and the spiral continues.

It looks as if the death spiral has started in Mississippi:

Mississippi will be ground zero for ObamaCare's individual mandate to buy coverage or pay a tax penalty. The state already is near the bottom when it comes to the percentage of the subsidy-eligible individuals who are enrolled via HealthCare.gov — just 38%. 
Now Mississippi's subsidized premiums are about to jump far more than any of the 36 other states using HealthCare.gov. For 30-year-olds in Yazoo City earning about $25,000 (214% of the poverty level), the after-subsidy cost of the cheapest bronze plan will spike by $554, or 60%, in 2016. That will hike the cost of this $6,800-deductible plan — the cheapest way to avoid paying a $695 mandate tax — to just under $1,500.
HT: MarginalRevolution

Tuesday, October 27, 2015

Only Schmucks shop at Best Buy stores

It looks as if Best Buy has been discriminating against its in-store customers, by showing them a fake intranet with prices higher than its real internet store.
Company spokesman Justin Barber, who in early February denied the existence of the internal website that could be accessed only by employees, says his company is “cooperating fully” with the state attorney general’s investigation. Barber insists that the company never intended to mislead customers. 
State Attorney General Richard Blumenthal ordered the investigation into Best Buy’s practices on Feb. 9 after my column disclosed the website and showed how employees at two Connecticut stores used it to deny customers a $150 discount on a computer advertised on BestBuy.com. 
Blumenthal said Wednesday that Best Buy has also confirmed to his office the existence of the intranet site, but has so far failed to give clear answers about its purpose and use. “Their responses seem to raise as many questions as they answer,” Blumenthal said in a telephone interview. “Their answers are less than crystal clear.”

This kind of indirect price discrimination (higher prices at the store, lower prices online) is typically legal, deceiving consumers about its existence likely runs afoul of the Consumer Protection Laws, at least in Conneticut, which has a very aggressive Attorney General.

Remember, consumers don't like learning that they are "schmucks."

HT:  Ben

Tuesday, October 20, 2015

How did property rights save China, the Pilgrims, and Vietnam?

Good short video on the incentive aligning effects of private property at our friends at MarginalRevolution University

Why does Deloitte pay its women managers more than men?


Bloomberg has an article documenting a gender pay gap for MBA's, that shows up only after several years in the work force:
One explanation for the gender gap may be that women are less likely to be bosses. Women in our survey say they’re responsible for a median of three employees; men manage five. Twenty seven percent of women say they had no direct or indirect reports, vs. 20 percent of men.

Deloitte appears to be an outlier:
A company that bucks the trend is Deloitte, which is known for going to extra lengths to keep mothers in the workforce. For the 33 female MBAs at Deloitte who responded to our survey, the typical salary was $169,000—$4,000 more than the 65 men at the firm.

My question is whether the $4000 is a compensating differential, the compensation paid to women to keep them at Deloitte?

Monday, October 19, 2015

The Koreas at night

This is a nice "natural experiment," that shows the effects of a market economy (south) vs. central planning (north).

For more on what makes countries rich and poor, see Marginal Revolution University's lecture on Basic Facts about Growth and Development

Tuesday, October 13, 2015

Misusing words

Students of this blog know about how much I hate Bureaucratese.  Student will be happy to know that I found a new pet peeve:  incorrectly used words.  I think my favorite is "impact."

Impact and affect (and effect)

Many people (including, until recently, me) use impact when they should use affect.Impact doesn't mean to influence; impact means to strike, collide, or pack firmly.
Affect means to influence: "Impatient investors affected our rollout date."
And to make it more confusing, effect means to accomplish something: "The board effected a sweeping policy change."
How you correctly use effect or affect can be tricky. For example, a board can affect changes by influencing them and can effect changes by directly implementing them. Bottom line, use effect if you're making it happen, and affect if you're having an impact on something that someone else is trying to make happen.
As for nouns, effect is almost always correct: "Employee morale has had a negative effect on productivity." Affect refers to an emotional state, so unless you're a psychologist, you probably have little reason to use it.
So stop saying you'll "impact sales" or "impact the bottom line." Use affect.
(And feel free to remind me when I screw that up, because I feel sure I'll backslide.)

HT:  Kimberly

Monday, October 12, 2015

Congrats Angus Deaton, Nobel Prize winner

The WSJ has a profile on the latest winner.
“Life is better now than at almost any time in history,” he wrote. “More people are richer and fewer people live in dire poverty. Lives are longer and parents no longer routinely watch a quarter of their children die.” 
Across its 370 pages, Mr. Deaton sought to explain why the world is a better place than it used to be, with substantial increases in wealth, health and longevity, but also why there are vast inequalities between and within nations. 
He concluded that international aid had little to do with that progress, and suggested that free trade and new incentives for drug companies would make a larger contribution in the future.

Saturday, October 10, 2015

A Mechanism to Fight Sexual Assaults

The Callisto sexual assault reporting system is clever use of game theory. Two features of sexual assault reporting is that: 1) they are widely believed to be under-reported because victims fear being caught in a "he-said-she said" case that goes nowhere; 2) but when one victim comes forward, sometimes there are more victims who could come forward too. As Ian Ayres explains in the WaPo, Callisto encourages the latter without exposing victims to the former. It does this by allowing a victim to file contemporaneous accounts into escrow. These accounts will only be unsealed if the accused party is named by another victim. This means that, if accounts in escrow are ever unsealed, the case becomes a "he said; they said," which is often more successful in court.

Hat tip: Joel Waldfogel

Monday, October 5, 2015

Why isn't our richest state saving enough for its state pensions?

Conneticut has a ``huge'' pension problem.  They have only 52% of the assets necessary to pay their discounted future pension liabilities, AND they are discounting future liabilities at an 8% rate.

Remember from earlier posts, a higher discount rate makes future liabilities look smaller, so cities and states save less for their pensions.  If they don't earn, e.g., at least 8%, then they wont have enough to pay the pensions when they finally come due.  This is what happened to Detroit.

What makes Conneticut so interesting is that they are the richest state in the USA and have saved the least, behind only Illinois and Kentucky.  Ordinarily, states which have big unfunded liabilities like this would have trouble borrowing money because investors would demand higher compensation (higher interest rates) for holding bonds with a higher risk of default.  However, because Conneticut has high taxes, and many high-income residents, there is a big demand for state's tax-deductible bonds.  This keeps the cost of borrowing low, and allows state politicians to ignore the pension problem:


“There’s almost limitless money to buy Connecticut bonds,” said Matt Fabian of research firm Municipal Market Analytics. Investors “are getting less of a risk premium than I think you deserve because of the high demand created by the wealth of the taxpayers in the state,” added Paul Mansour, head of municipal research at Hartford, Conn.-based Conning.

Saturday, October 3, 2015

Internal Prediction Markets Work Better than we Thought

New research by Cowgill and Zitzewitz investigates internal prediction markets used by corporations to evaluate new products or procedures. Compared to the more common political prediction markets, these markets have features that would seem to make them perform poorly. They tend to be thinly traded, bidders may have weak incentives, there is limited entry into the set of bidders, and the potential for traders with biases or ulterior motives. Despite that, Cogill and Zitewitz state:
The inefficiencies that do exist generally become smaller over time. More experienced traders and those with higher past performance trade against the identified inefficiencies, suggesting that the markets' efficiency improves because traders gain experience and less skilled traders exit the market.

So, there is learning-by-doing in bidding in prediction markets.

Hat tip: Marginal Revolution

Wednesday, September 30, 2015

Strong dollar hurts US exports


In 2010, President Obama set a goal of doubling exports in five years. Now it looks like we are not going to make it:
U.S. exports are on track to decline this year for the first time since the financial crisis, undermining a national push to boost shipments abroad. Through July, exports of goods and services were down 3.5% compared with the same period last year. New data released Tuesday by the Commerce Department showed that exports of U.S. goods sank a seasonally adjusted 3.2% in August to their lowest level in years.

But what is bad news for producers, is good news for consumers:
As unemployment has declined, American consumers have reasserted their dominant role in driving economic growth.

And with the Fed set to raise interest rates, it is likely that the dollar will get even stronger:
Fed Vice Chairman Stanley Fischer in August said it was “plausible to think that the rise in the dollar over the past year would restrain growth…through 2016 and perhaps into 2017.” If the Fed begins to raise short-term interest rates later this year, that could provide new fuel to push the dollar’s value even higher.

Tuesday, September 29, 2015

Shell Pulls Out of the Arctic

A big story this week is that Royal Dutch Shell will cease exploration in the arctic. Reportedly, they had invested in $7 billion in the effort but the prospects don't look so good now after disappointing results, a fall in the price of oil, and increased uncertainty over environmental regulations. The important lesson that Shell recognized is that a $7 billion sunk cost is still a sunk cost.

Why do inmates tattoo their faces?

The answer from our friends at MarginalRevolution.com, where they analyze signaling as a solution to the problem of adverse selection.


Take the quiz at the end of the video to figure out the answer to the question in the blog post.

Friday, September 18, 2015

What Exactly Does Snapshot Measure?

Here is a fuller expose of Progressive Insurance's Snapshot.We love this example of monitoring potential moral hazard through driving behavior. People are expected to drive better if they benefit from policy discounts from good driving (or is it reducing the "beep-beep" nagging by the device?). But it turns out just two practices trigger the nagging: hard braking and driving in the wee hours.

Hat tip: Isaac Labauve

Lessons from NUMMI

"This American Life" did an episode on the 1980s collaboration between GM and Toyota at the plant in Freemont, CA called NUMMI. This plant had been failing and the Japanese were the biggest threat to the American Automakers. What could GM learn from Japan? There are a number of lessons from the experience and the episode. One has to do with where to vest decision rights to shut down the production line. Another is that imitation is particularly difficult (RBV?). Perhaps another is that it takes generational change or, as my adviser repeated, "Real change comes one funeral at a time."

Hat tip: Isaac Labauve

Sunday, September 13, 2015

Shiller calls "bubble"



Robert Shiller has successfully called "bubble" twice before, in 2006 on the housing market, and in 1996 on the stock market.  Now he has called "bubble" on the stock market, based largely on his famous P/E ratio [Price/Earnings] graph, reproduced above (since June, it has come down a little).
“It looks to me a bit like a bubble again with essentially a tripling of stock prices since 2009 in just six years and at the same time people losing confidence in the valuation of the market,” he said.

Of course, not even Shiller can predict when the alleged bubble will pop. He was a year early on the 2007 housing bubble bursting, and 3 years early on the 2000 stock market bubble.  Unlike a lot of economists, Shiller is willing to admit he has no idea when it will pop, if indeed it it a bubble:
... [Shiller] made clear that it remained impossible to time any fall in the market, and cast doubt on whether stocks would drop should the Federal Reserve raise rates later this week.

Thursday, September 10, 2015

Supremes take on FDR's raisin cartel...

...and win:
Here's a concrete example. In 2003–04, the RAC demanded 30 percent of the crop, which amounted to more than 89,000 tons of raisins. It gave away 2,312 tons to school lunch and other government programs and it sold 86,732 tons for export. The RAC pocketed $111,242,849 from that sale, or $1,249.30 per ton. It then spent all of the proceeds on its own operations. In return, raisin growers got nothing.

From the feds' point of view, this might make sense. Raisins are kept off the domestic market, prices are tightly controlled, and a government agency makes a few bucks along the way. But there's a major problem with the government's approach. According to the Fifth Amendment to the U.S. Constitution, the government must pay just compensation when it takes private property for a public use. And as far as Marvin and Laura Horne were concerned, the raisin marketing order was nothing less than an uncompensated taking of their valuable property. "It was a theft," Marvin Horne told Reason TV in July 2013. "The reserve was nothing but highway robbery."
Justice Kagan seemed to understand this:
"Mr. Palmore," asked Justice Elena Kagan, "would anything be wrong—with a—with a disposition of this Court that went something like this: Everybody agrees that this is not a jurisdictional issue, including the government, so [the 9th Circuit] got that wrong....And now the 9th Circuit can go and try to figure out whether this marketing order is a taking or it's just the world's most outdated law."

HT:  Larry

Wednesday, September 9, 2015

Breaking the Taxi Monoply

How fast do profits erode once the entry barrier to Uber is lifted? Enough to dissipate one-third of the value of operating a cab in New York in just two years.


Hat tip: Mark J. Perry

Saturday, September 5, 2015

What's the marginal incentive to commit murder in China?

In Taiwan, "hit to kill" or "double hit" cases have been common for decades.  For example,
A 2008 television report features security camera footage of a dusty white Passat reversing at high speed and smashing into a 64-year-old grandmother. The Passat’s back wheels bounce up over her head and body. The driver, Zhao Xiao Cheng, stops the car for a moment then hits the gas, causing his front wheels to roll over the woman. Then Zhao shifts into drive, wheels grinding the woman into the pavement. Zhao is not done. Twice more he shifts back and forth between drive and reverse, each time thudding over the grandmother’s body. He then speeds away from her corpse.

This phenomenon is caused by the incentives facing a driver:
In China the compensation for killing a victim in a traffic accident is relatively small—amounts typically range from $30,000 to $50,000—and once payment is made, the matter is over. By contrast, paying for lifetime care for a disabled survivor can run into the millions.

In other words, once you hit a pedestrian, the marginal benefit of killing the pedestrian is positive.

Wednesday, September 2, 2015

WHAT NASHVILLE CAN LEARN FROM NYC: Affordable Housing mandates reduce the supply of affordable housing

The Nashville City Council is considering requiring that a certain percentage of units in new residential developments be priced as affordable. The mandates would apply to multi-unit developments bigger than five units.

While this may sound good, lets think clearly about its effects: mandates reduce the profitability of new development.  This will lead to less new development, or developers will substitute towards smaller developments, not subject to the mandate.  In the former case, fewer new developments would be built; in the latter, lower-density development would take place.  Either way, this represents a decrease in supply.  A decrease in supply would increase price, exacerbating the very problem--expensive housing--that it was designed to ameliorate.   (And don't forget that density is green.)

Housing markets are also subject to what is known as "filtering," apartment rents tend to go down as the apartment building ages.  So today's expensive housing is tomorrow's affordable housing.  This implies that a reduction in the supply of expensive housing today, will reduce the supply of affordable housing tomorrow.

These kinds of zoning restrictions are popular because they drive the price of existing housing above replacement cost, benefiting Nashville's homeowners. But they come at the expense of renters and new residents. As the Financial Times put it:

They are the ransom that renters and recent buyers must pay to existing homeowners – whose homes the rules protect – for use of an artificially limited stock of housing. So severe have those restrictions become that the value of the ransom runs into the trillions. 
Wealth of this kind is far more destructive than the alleged sins of the top 1 per cent. It is wealth created not by improving our living standards but by making them worse; by building too few houses in London and San Francisco, not too many. It is not earned by skill or effort. It is taken directly from the pockets of some – the young, especially those who were born poor – and transferred to others via political regulations on building. This is not wealth, this is plunder. 

The effects of affordable housing are similar to price gouging laws that in Mississippi prevented generators from reaching the Gulf Coast after Katrina. Similarly, affordable housing mandates will prevent new housing from reaching Nashville.  The market wants to help, so let it.

OK, if mandates won't do it, how do we increase the supply of affordable housing in Nashville?  Here I think Nashville could learn something from New York.  In New York, the affordable mandates are triggered only by a relaxation of zoning.  For example, a developer buys up a block of houses and asks the planning commission to re-zone it for a multi-unit apartment complex.  In exchange for the zoning change, the developer agrees to set aside some of the units for lower income tenants.

The crucial difference is that in NY, affordable mandates are triggered only by development that increases supply.  In contrast, the proposed change in Nashville would reduce supply.