Friday, August 18, 2017

Fake Eclipse Sunglasses

Like many, I will stop my day to experience the solar eclipse on Monday. Many will regret it. As the WSJ reports, they will have stared up at the sun thinking their eyes were protected by special sunglasses that "can filter out tens of thousands of times as much light from the sun as sunglasses." Instead, they will be exposing their eyes to potential harm from counterfeits.
Mr. Jerit said some dealers on Amazon have created copycat versions of his company's Soluna brand of eclipse glasses, sold by GSM Sales LLC. He says the knockoff Solunas are replicas down to the logo, design and product information printed on the frames, and often are sold at much lower prices. A pack of 10 legitimate Soluna eclipse viewers cost $39.95 on Amazon as of Aug. 4

This is a case of a very large and very temporary expansion in demand. Supply cannot increase fast enough making price rise temporarily. But even more, the new temporary demanders are not as discerning about quality as the traditional customers. These are the characteristics that permit moral hazard. With a higher price, there is room low cost producers to enter temporarily with sub-standard products.

I am predicting that ophthalmologists will be busy over the next few months.


Thursday, August 17, 2017

Sheldon Chooses a Console

I use play this youtube video in class to get a discussion going of all the instances of opportunity costs. The writers did a good job making it accessible even to non-gamers and in carrying a gag as far as they could.

Tuesday, August 15, 2017

Game theory applied to extreme view protests

In light of events in Charlottesville over the weekend, I am reposting from a story in the WSJ. Germans pledged money to an anti-nazi group for every meter that nazis marched. You cannot help but smirk when watching the video.


I suggest that the next time an alt-right, nazi, or KKK rally is planned, a similar campaign is launched. I know many would pledge money for every hour that the speeches are made and their protest lasts if donations went to a suitable organization that peacefully counsels these folks back into the mainstream. Then hand out lozenges so they could continue as long as possible. Have a signboard with a running total so they could see how much they have raised.The media would eat it up.

Monday, August 14, 2017

The Dark Side of Incentive Pay?

The Financial Times recently published a thoughtful commentary by Jonathan Ford arguing that performance pay in the financial sector has been bad for financial market consumers. He extolls the virtues of the post-war, pre-liberalization banking system where a particularly industrious bank manager might get rewarded with a letter of commendation from the bank president. Ford notes that there were flaws.
The system was not perfect: it could entrench snooty managers and make credit hard to come by.

In contrast to these halcyon days, today's financial managers face constant competitive pressure and are constantly rewarded for increasing profits. We hope that profits are generated by delivering ever increasing value to customers. But, especially during the financial crisis, there were many examples of bankers fleecing customers. He notes that the bad acts are a result of bad incentives and suggests a remedy for these bad acts.
But there is of course a simpler way to avoid offering bad incentives. That is simply to pay employees a salary based on what the job is worth.

On net, was the move to market liberalization, and incentive pay as a consequence, worth it?

I will note that, over the past four decades, the financial sector has seen nearly as much innovation as the IT sector. Spreads between interest rates to borrowers and savers and in stock market transactions have shrunk dramatically. More consumers have access to more financial instruments than ever before in part because because more financial instruments are available at cheaper rates than ever before. Ask your grandparents if they diversified their retirement fund into international equity funds when they were your age and you will probably get a blank stare. This innovation is also a result of market liberalization. Would de-liberalization and a reduction in banker incentive pay put also a halt to further financial market innovation?

Thursday, August 10, 2017

Non-Standard Real Estate Commissions

The relationship between home sellers and their realtors represents a classic principal/agent problem. Realtors are engaged in many activities related to selling the property such as photographing it, listing it, coordinating with home buyers' agents, holding open houses, and so on. Since realtors have traditionally earned a 6% commission on sales they have an incentive to engage in these costly activities. But realtors know much more about how the market is likely to shake out than do their clients. All else equal, they would recommend dropping the price so that the house will sell faster and without all that effort since 94% of the lower sales price is born by their clients. What happens when they bear the full 100%? Levitt and Syverson showed that when realtors sell their own homes, on average, they keep them on the market longer and sell them for higher prices.

So maybe a 6% commission is not enough to eliminate shirking. How do you provide stronger incentives without giving away too much? Alina Dizik at the WSJ reports that owners of high priced houses are getting creative.
[Mr. Mahller's] agent would earn a 2% commission, and the buyer's agent would get a 2.5% commission on the home's sale price. The sweetener: Mr. Mahller's agent also pocketed an extra 5% commission on the difference between the asking price of $2.7 million and the final sale price, which was $2.85 million.

Micro econ videos from Marginal Revolution University

Course Outline

2 Supply, Demand, and Equilibrium
3 Elasticity and Its Applications
4 Taxes and Subsidies
5 The Price System
6 Price Ceilings and Price Floors
7 Trade
8 Externalities
9 Costs and Profit Maximization Under Competition
10 Competition and the Invisible Hand
11 Monopoly
12 Price Discrimination
13 Labor Markets
14 Public Goods and the Tragedy of the Commons
15 Asymmetric Information
16 Consumer Choice
17 Exam

Tuesday, August 8, 2017

Why I can't buy a Tesla

Well, besides not being able to afford one.

Because the state of Texas does not allow Tesla to sell me one. Reason TV documents this form of auto dealer protectionism. Tesla has chosen to only sell direct to consumer, or has vertically integrated into retailing. The state of Texas prohibits automobile sales that do not go through a dealer, or they require manufacturers to outsource the retailing function. It is hard to imagine how this regulation benefits consumers. Don't let Bubba tell you that Texas is a bastion of free markets.

Monday, August 7, 2017

Nukes as Sunk Costs

Two South Carolina utilities have plans to abandon two nuclear reactors that are still under construction. The two reactors have cost the utilities roughly $9 billion and are less than 40 percent completed. They were expected to begin generating electricity after 2021 at cost of $25 billion — more than twice the initial $11.5 billion estimate. At the same time, demand growth has not materialized and the costs of alternative energies, such as natural gas and wind, have fallen substantially.

Scana Corporation, the project's owner, said in a statement,“Ceasing work on the project was our least desired option, but this is the right thing to do at this time.” This beats throwing more money at an increasingly unviable project.

Splitting the check? There's an app for that

Do you have to pay for other people's drinks if you didn't order any? Do you chip in for an appetizer you didn't eat? How do you split tax and tip?

So starts the CNN story about splitting the check (without losing friends). The social etiquette of group dinning may be evolving due to  the advent of smartphone payment apps like Venmo and Square Cash that allow funds transfers among friends. Moreover, apps such as Tab or Plates are specifically designed to split the check using these funds transfer apps.

It used to be that when I initiated the invitation, I expected to pick up the tab. Often, there was an expectation of later reciprocal invitations which helped facilitate the development of longer term relationships. Sometimes though, it encouraged free-riding as they ordered from the top-shelf. But if it is easy settle-up after each shared meal, both reciprocation and free-riding are reduced.
Paying only for what you ordered -- particularly down to the cent -- used to feel stingy. But the apps help reduce the pressure to round up or kick in a little extra.

Friday, August 4, 2017

Set prices to reflect costs AND demand

Andy Kessler at the WSJ documents multiple instances of inappropriate use of break-even analysis.
  • The USPS saw the volume of first class mail "fall from 103.7 billion letters in 2001 to 61.2 billion last year." More substitution with email and online bill pay makes demand more elastic implying margins should fall. Instead, the USPS raised prices 50% to make up for the shortfall.
  • ESPN's subscribers have dropped from 100 million in 2011 to 89 million today. To 'make up the difference' it raised prices from $4.69 per sub a month to $7.21 today.
  • Microsoft kept raising the price of its Windows operating system to computer manufacturers at the same time Android based computing came to dominate the market.
  • Booksellers have raised effective prices on digital books "to offset the decline of physical copies."
The article documents many more examples. These examples share some commonalities. Firms had enjoyed substantial market power but now face unexpected competition. Managers feel pressure to meet investor expectations. And then they forget their marginal analysis. The lesson is:
Increasing prices attracts others to attack your market. Amazon's Jeff Bezos warns: "Your margin is my opportunity." 

Thursday, August 3, 2017

Fantasy Football Draft or Auction?

Tristan H. Cockcroft at ESPN has seen the beauty in auctions.With football season just around the corner, many a fan is looking to put together the ultimate fantasy football roster. And the first step is drafting players among your league members. What is wrong with a draft?
I'm tired of the annual charade of one of my longest-standing home leagues, in which the owner who draws the dreaded 10-spot -- it's a 10-team league -- reacts as if it's some sort of death sentence.

He proposes an English auction perhaps, as our favorite textbook shows, because it is essentially equivalent to a second price auction in which the bidding strategy is simple. Simplicity is important when you are bidding on multiple players and not just buying a single item. Still, he provides lots of advice on strategy: don't fall in love with players, avoid bidding wars, don't bid for players you won't use, don't get rattled, etc.

Tuesday, August 1, 2017

Bargaining as a Group

Last month, FTC alumni Dan O’Brien and Jon Leibowitz along with Russell Anello, completed a study extolling the virtues of Healthcare Group Purchasing Organizations (GPOs). GPOs bring together multiple firms to buy of common products jointly rather than separately. Among the ways this lowers costs is by lowering their counter-party's disagreement value.
A healthcare provider’s bargaining strength depends in part on the size of the loss it can impose on a vendor by refusing agreement. If a vendor has little to lose from failing to reach an agreement with the provider, then the provider’s bargaining position is weak, while if the vendor has a lot to lose, then the provider’s position is strong.

Monday, July 31, 2017

Who is the world's largest automaker?

Forbes reports that during the first half of 2017, Renault-Nissan sold the most cars worldwide.
Does it matter? Not according to Nissan’s chief of investor relations, Joji Tagawa. It may bring bragging rights, but he claims it is not an important performance indicator. 

What does matter? Chairman and CEO of Renault, Carlos Ghosn promised to:
“continue to leverage our significant economies of scale and global market presence to deliver valuable synergies for our member companies this year, while maintaining a strong technology lineup and offering customers breakthrough electric models.”

Or managing scale and scope economies.

Friday, July 28, 2017

The Injustice of Corporate Welfare

The Beacon Center has produced a nice video on cities using tax abatements to lure companies. The video focuses on the unfairness to competitors of them paying taxes that subsidize their competitors.

But it also causes an inefficiency in two ways. First, the taxes represent another wedge between consumer value and producer cost that could prevent moving an asset to a higher valued use (because producer cost + tax > consumer value > producer cost). Second, the subsidy could make profitable moving an asset to a lower valued use (if producer cost  > consumer value > producer cost - subsidy).


And so we continue our slow slide into becoming a banana republic.

Thursday, July 27, 2017

When is an Airport a Sunk Cost?

















Fred Cyrus Roeder writes in Handelsblatt that Berlin's yet to be completed new airport is "A Textbook Example of the Sunk-Cost Fallacy." It is already seven years past its original opening date and costs are currently 150% higher than originally planned. Both numbers will undoubtedly rise. Moreover, an expansion is already needed for it to fulfill its intended purpose.

How could this have happened?
The fatal flaw was the decision by Berlin’s mayor and the governor of Brandenburg, the state surrounding the city, to ignore conventional wisdom and attempt to supervise hundreds of contractors instead of hiring one good general contractor to oversee construction. This decision transferred any liability from the private-sector contractor directly to the taxpayer.

Herr Roeder advocates scrapping the whole project and starting over.

Wednesday, July 26, 2017

Consumers screen out based on poor brand image ... and so do prospective employees

One might expect that bad press about a company's brand will turn away some potential customers. But a recent survey by CareerBuilder indicates that job candidates also shy away from companies experiencing negative publicity.
"In today's 24/7 news cycle and social media world, earning and maintaining a good reputation can be a challenge," said Rosemary Haefner, chief human resources officer at CareerBuilder. "It's easier than ever before for job seekers to research potential employers. Employers that value transparency and take a proactive approach to issues or complaints will have a better chance of securing trust and loyalty and maintaining a positive reputation that can strengthen their recruitment and retention strategies."

It seems that job candidates use this as an effective screen for implicit job attributes. If you consistently treat your customers poorly, you probably treat your employees poorly too.

Friday, July 21, 2017

Incentive alignment: Lincoln Electric



I show this video on the first day of class as it is a stark illustration of how difficult it is to align the incentives of individuals with the goals of a company.  At Lincoln, they do it by devoting lots of effort to measuring individual productivity.  When you have a good performance metric, it is much easier to design incentive compensation schemes that (i) give employees enough information to make good decisions; and (ii) the incentive to do so.

Wednesday, July 19, 2017

Declining Barriers to Entry to 'World Music'

The BBC's story on the success of the song "Despacito" (4.6 Billion streams and counting) suggested that this was emblematic of the the growing internationalism of the popular music industry.
Sir Lucian Grainge, [head of Universal Music Group] said ... "The industry has predominantly been English-speaking artists for the last 50 years [but] streaming will continue to open up music from Latin America artists globally.

This reminded me that his observation has been confirmed recently by a more systematic investigation by Fernando Ferreira and Joel Waldfogel, "Pop Internationalism: Has Half a Century of World Music Trade Displaced Local Culture?" They show that the traditional bias in overseas markets toward English language songs has declined toward more home country produced songs in the last decade or more. This is likely due to improvements in information technology: the Internet allows consumers to find new music more easily and IT lowers the burdens for musicians to produce and distribute their music.

This has implications for the how talent scouts will search for the next Luis Fonsi.

Tuesday, July 18, 2017

Money markets and religion

Historical explanation for the religious acceptance of for-profit borrowing and lending:

...When the Catholic Church held a monopoly in Europe, the clergy could ‘sell’ salvation at high prices – including strict prohibitions and purchased ‘indulgences’, which usurious sinners could buy in order to be absolved. But in the 1500s, during the Reformation, theologians such as Martin Luther denounced these practices. They advocated a more direct relationship with God that did not rely on priests as intermediaries, and founded new Christian movements such as Protestantism. The effect was that of a new company undercutting a monopoly. As Christian factions competed for believers, it led to a faith-based ‘race to the bottom’. And to increase their appeal, sects made fewer demands on believers – which meant weakening their stance on usury.
HT: Marginal Revolution

Friday, July 14, 2017

What is the Appropriate Strategic Response to Entry?

Bloomberg has a nice article on how London cabbies have changed their stance to ridesharing. Many taxicabs and municipalities have responded to the entry of Uber with a hard stance including protectionist measures and sometimes violence. Now they seem to be accommodating and imitating this entry.

After resisting everything Uber, the cabbie told me that he and his colleagues are shifting to a more constructive response -- they are adapting. For example, he is part of a syndicate that now uses an app similar to Uber’s to provide riders with an expanded menu to hail and pay taxis, as well as offer them more control and transparency. The sector is a lot more willing and able to accept credit card payments. And it is all part of an effort to improve customer relations.
In a moment of frankness, he admitted that Uber has delivered a much-needed wake-up call. For him, it is no longer about stopping Uber; nor is it just about co-existence. A growing number of traditional taxis cabs are also embracing some of their rival's best practices.

Part of this change is the realization that ride-sharing represents both a competitive threat and a more efficient 'production' technology.
The initial phases of Uber’s technology-led “disruptive innovation” proved particularly powerful because they lowered in a remarkable way the barriers of entry to both the supply of urban transportation services and the demand. Few disruptions influence both sides in such a dramatic and lasting fashion. 
By allowing massively underused assets -- personal vehicles otherwise sitting idle -- to double as taxis, Uber significantly increased the provision of the service. And by measuring client satisfaction in a timely and high-frequency manner, it ensured that the bulk of this additional service would be clean, responsive, accountable, efficient, cost-effective and friendly. 
The revolution on the demand side came from Uber’s understanding -- and use -- of the power of mobility, big data, and artificial intelligence. In doing so, it met the growing digitalization desires of clients (initially, mostly millennials, but increasingly encompassing a larger part of the population) eager to gain greater direct control over activities that had become ill-served, increasingly distanced and, in some cases, alienating. By also making the payments and settlement process more efficient and transparent, Uber further improved the experience for riders -- leading many to substitute the service not just for other forms of public transportation, but also for private cars.

Wednesday, July 12, 2017

How many ways can you price discriminate?

Also in my travels, I got to got to Heidelberg and rode the funicular up to the schloss. Their pricing schedule demonstrates multiple ways in which they price discriminate.

  1. The additional charge for the return down the hill (3 Euro = 12 Euro - 9 Euro) is much less than the  single ride up the hill (9 Euro). Since the stroll down the hill is a closer substitute than the climb up, demand is more elastic coming down.
  2. The "concession" is a catch-all phrase for the elderly, students, and maybe a few others. These folks tend to be poorer and more elastic and so get a discount.
  3. They charge lower average prices for groups of preschool children. This is a form of bundling.
  4. They charge lower average prices for large groups and the rates fall as group size increases. This is more bundling with larger groups being more elastic.
  5. Finally, families get increasingly larger discounts on ever more children. That is, there are quantity discounts on kids.
  6. Did I miss any other dimensions?



Thursday, June 29, 2017

Two-way Bundling

Here is the pricing schedule from a recent trip to Dolmabahçe Palace. Note that the average price per person falls for families and that the price per museum falls as you bundle the Official Part with the Family House.

Monday, June 5, 2017

Swearing as a signal

Signals are convey information only if they are costly to use.  Otherwise, it too difficult to interpret what they mean.

To see this, consider what you learn when you hear someone use the F-word.  Some of my friends use it almost as punctuation, so it means very little.  However, when someone who abhors swearing uses it, I know to pay attention because it is costly for the sender to convey information in this manner.

Analytically, think of the sender as having two potential kinds of information:  crucial information or moderately important information.  Only the sender knows the type of information, and it can be communicated with or without swearing.  It doesn't pay for the sender to incur the costs of swearing to communicate moderately important information.  Rather, swearing is reserved for communicating crucial information.

Sunday, June 4, 2017

Why does it cost more to insure a Tesla?

The AAA is raising rates to insure Tesla's, and Tesla is angry:
The rear-wheel-drive Tesla Model S is involved in 46 percent more claims than average, and those claims cost more than twice the average, it said.

it wasn't clear whether this was due to Adverse Selection (people who buy Tesla's are worse drivers, or more prone to file claims, and the Tesla is expensive to repair) or Moral Hazard (those who buy Tesla's drive more recklessly after they buy).

Remember Adverse selection is caused by hidden information about a person's type, moral hazard is caused hidden information about actions.

Friday, June 2, 2017

Like Growing Wheat on Wall Street


The FCC recently concluded an historical auction. Spectrum licenses have been auctioned off for mobile phone service in the past and licenses to use spectrum within a specific assignment have been exchanged in the past. But this represents one of the few times (only?) that an auction was implemented to move spectrum from one assigned use (TV Broadcast) to another (Mobile Broadband). Broadcasters have a huge chunk of spectrum (most of the light blue in lines 2, 4 & 5 in the chart) but few people still receive TV signals over-the-air. Thus, it is in a low-valued use.

At the same time, users have been demanding ever more bandwidth from broadband mobile providers. Some 145 TV broadcasters (mostly fringe or duplicative channels in large markets) volunteered to go off the air for $10 billion. The mobile broadband providers will pay $19 billion with the difference going to the US Treasury. Just imagine what sort of fancy gizmos this will make available. Just imagine how many more if the US government did not impose such a hefty tax.

The whole episode reminds me of a comment Tom Hazlett made once. "Our Spectrum allocation is less efficient than using Wall Street for wheat farming."

Hat tip: Lisa George

Why are productive people leaving Puerto Rico?

The economy is contracting and productive people can earn two to three times more on the US mainland than in Puerto Rico.
“I had to choose for my family,’’ said Aledie Amariah Navas Nazario, 39, a pediatric pulmonologist who left behind young asthma patients when she, her husband and two small daughters moved to Orlando, Florida.

Puerto Rico should serve as a canary in the coal mine for US states and municipalities with unsustainable levels of spending, pensions, and debt.  

Wednesday, May 31, 2017

Portland taxes excessive CEO pay: what could go wrong?

Portland placed an extra 10% tax on excessive CEO pay:

"When I first read about the idea of applying a higher tax rate to companies with extreme ratios of CEO pay to typical worker pay, I thought it was a fascinating idea," said Commissioner Steve Novick, who championed the bill after seeing similar efforts in Arizona and California. "[It was] the closest thing I'd seen to a tax on inequality itself."

Price Discrimination in Internet Usage

Former Chief Economist at the US DOJ has estimated demand for Internet usage by looking at how much consumers cut back when they are near their monthly limits. Here are the intuitive findings:
  • We find that subscribers’ willingness-to-pay for speed is heterogeneous, which is intuitive given the different ways in which people use the internet.  
  • marginal content has relatively low value. 
  • On the other hand, the infra-marginal value of content is high.  ["inframarginal" is econ speak for other uses]
These conditions suggest that price discrimination would be a good way for providers (like Google Fiber) to make sure that low value uses do not crowd out higher valued uses, and to earn enough to build capacity where demand is high:
  • We find that usage-based pricing is effective at lowering usage without reducing subscriber welfare significantly, relative to a world with just unlimited plans. This is driven directly by our finding that marginal content is not very valuable and that subscriber welfare is mainly driven by infra-marginal usage.

Monday, May 29, 2017

Do Taxes deter innovation?

Superstar inventors, those in the top 1% of patent production (weighted by patent citations), leave higher-tax countries in favor of lower-tax countries.

For instance, if the average country decreased the top tax rates by 10 percentage points, it would be able to keep 1 percent more of its domestic superstar inventors and attract 26 percent more foreign superstar inventors.

Friday, May 26, 2017

Housing Codes Cause Homelessness - Dallas Edition

A heart-wrenching drama is being played out in West Dallas. The neighborhood is mostly full of 70+ year old homes rented to mostly poor folks. These were built before the neighborhood was even annexed by Dallas. For decades, the structures had been 'grandfathered in' from keeping up with the ever-improving building code. The area had been isolated from the city by the Trinity River until a landmark bridge opened a few years ago. That brought developers and new enforcement of housing codes. The houses are so out of code, that the owner, HMK Ltd., would rather shutter them:
“Not just impractical but it’s impossible. No matter how much money, you cannot throw enough money into these houses and make them compliant.” 

Some of the tenets have been living in these homes for three or four decades and pay a paltry $300-$400 a month in rent. HMK has offered to sell them the houses they currently rent for $65,000, their next best offer. Fine if these poor folks could find the $65,000. The idea originally was that vertical integration by the occupant into ownership would evade the housing codes. But no, the city will require the new owners to bring them up to code.

Previously, the renters and landlord had been content exchanging low rent for poor quality homes. Everyone knew these were poor quality homes and were fine with that. But nanny-state enforcement of the housing code will soon keep this value creating transaction from being consummated.

Wednesday, May 24, 2017

What caused the Great Depression?

Marginal Revolution University has another good short video, documenting its various causes, including some of the self-defeating efforts to fix it.

Monday, May 22, 2017

Of course not, sunk costs don't matter

The headline in this New York NBC affiliate news story is "Large Milk Spill Closes Roadway; No Crying Reported." The truck driver must have read our favorite textbook.












Hat tip: Alex

Advice for debating NIMBY's

Anti-development forces (Not In My Back Yard) are waking up to the evidence that zoning restrictions reduce income, increase inequality, and reduce mobility.  Here is a post from Ground Zero in the NIMBY wars (San Francisco) that offers advice on debating NIMBY's:
1. Econ 101 supply-and-demand theory is helpful in discussing these issues, but don't rely on it exclusively. Instead, use a mix of data, simple theory, thought experiments, and references to more complex theories. 
2. Always remind people that the price of an apartment is not fixed, and doesn't come built into its walls and floors. 
3. Remind NIMBYs to think about the effect of new housing on whole regions, states, and the country itself, instead of just on one city or one neighborhood. If NIMBYs say they only care about one city or neighborhood, ask them why. 
4. Ask NIMBYs what they think would be the result of destroying rich people's current residences. 
5. Acknowledge that induced demand is a real thing, and think seriously about how new housing supply within a city changes the location decisions of people not currently living in that city. 
6. NIMBYs care about the character of a city, so it's good to be able to paint a positive, enticing picture of what a city would look and feel like with more development.
I especially like suggestion #4:
...Imagine destroying a bunch of luxury apartments in SF. Just find the most expensive apartment buildings you can and demolish them.  
What would happen to rents in SF if you did this? Would rents fall? Would rich people decide that SF hates them, and head for Seattle or the East Bay or Austin? Maybe. But maybe they would stay in SF, and go bid high prices for apartments currently occupied by the beleaguered working class. The landlords of those apartments, smelling profit, would find a way around anti-eviction laws, kick out the working-class people, and rent to the recently displaced rich. Those newly-displaced working-class people, having nowhere to live in SF, would move out of the city themselves, incurring all the costs and disruptions and stress of doing so.  
If you think that demolishing luxury apartments would have this latter result, then you should also think that building more luxury apartments would do the opposite. Price should think long and hard about what would happen if SF started demolishing luxury apartments. 

HT:  Marginal Revolution

Tuesday, May 9, 2017

Missing from the advice

Motley Fool recently provided "3 Tips for Investing in Apple Inc. Supplier Stocks." Essentialy, they are:

  • Look for companies with rare, differentiated technologies
  • Look for high barriers to entry
  • Look for technologies that clearly affect the user experience
Would they same advice hold for Apple investing in these suppliers? That is, should they vertically integrate by purchasing a supplier with these characteristics? After all, these are the characteristics that tend to make a firm profitable. I see two problems.

1. EMH: An invester does not want a profitable firm; he wants a more profitable firm. That is, the purchase price already reflects the present value of the expected future profits. In order for the purchase to be profitable, the present value of the expected future profits must be made to be more than the purchase price. Your average Joe investor usually will typically not know if this can happen nor can he make it happen.
2. Synergies: Apple could possibly make it happen. It could possibly do this if it sees that the current arrangement prevents some efficiencies and that vertical integration would solve them.

But do not purchase a company merely because it is profitable.

Wednesday, May 3, 2017

Why don't restaurants give rejected food to hungry servers?

When you order a meal and what you receive isn't what you expected, you can either suffer through it or send it back. If food gets returned, many restaurants have rules to prevent the cooks and servers from eating it.  On its face, this seems inefficient, as good food is discarded.

QUESTION: Why do restaurants have these rules? (Hint:  incentives, Chapter 1)

ANSWER:  To answer the question we consider all the benefits and costs that vary with the consequence of the rule (Chapter 3).
  • The obvious benefit of giving food to hungry servers and cooks is that you increase the attractiveness of working at the restaurant, which allows you to reduce their wages (the "compensating differentials" of Chapter 9).  
  • However, the hidden cost of giving rejected food to the staff is that you create incentives for hungry staff members to deliberately mess up orders so they can get free food.  
If a restaurant has rules preventing staff from eating rejected food, one could infer that the costs are bigger than the benefits, and that the agency cost (Chapter 21) of trying to control this kind of perverse behavior are large.

HT:  Jake

Copyright 2017, Froeb (if the publishers let me, I will stick this question into the fifth edition)

Friday, April 28, 2017

Origin based vs. destination based taxes

Follow up to Greg Mankiw article on taxes:

ORIGIN-BASED VS. DESTINATION-BASED TAXATION: The corporate tax system is now origin-based. If we change to a destination based taxation (where it is consumed instead of produced), this would encourage US exports and discourage imports. But then the exchange rates would adjust:
...Americans would supply fewer dollars in foreign-exchange markets, and foreigners would demand more dollars. As a result, the dollar would appreciate, making foreign goods cheaper for Americans, and American goods more expensive for foreigners. The movement in the exchange rate would offset the initial impact on imports and exports.

If the exchange rate adjusted completely, the so called "border tax" would become equivalent to a Value-added tax, with all the attendant benefits:  low rates over a broad base (non distortionary, i.e., people would not spend lots of effort trying to avoid it), and shifts taxes to consumption rather than income (encourages production/income).

Wednesday, April 26, 2017

Should we be worried about discrimination based on party affiliation?

Via MarginalRevolution:
In the marketplace, consumers are much more likely—almost two times as likely—to engage in a transaction when their partisanship matches that of the seller. In our survey experiment, three quarters of all subjects forego a higher monetary payment to avoid helping the other party.

Original paper suggests that partisan affiliation is a strong potential source of discrimination:
To date, few social norms are in place to constrain it, as they are with respect to unequal treatment along other social divides (e.g., race and gender). Our analysis suggests that partisan-based discrimination may occur even in the most basic economic settings, and as such should be the subject of more systematic scrutiny.

Tuesday, April 25, 2017

Internet publishing jobs are on the coasts


As newspapers are being replaced by internet publishing, the new jobs are clustering, in a way that was not true of newspaper jobs, on the coasts:
As Enrico Moretti, a University of California, Berkeley, economist who has studied the geography of job creation, points out, the tech entrepreneurs who drive internet publishing could locate their companies in low-rent, low-cost-of-living places like Cleveland, but they don’t. They need the most talented workers, who tend to move to the clusters, where demand drives wages higher. And it’s the clusters that host all the subsidiary industries a tech start-up craves—lawyers specializing in intellectual property and incorporation; hardware and software vendors; angel investors; and so on. 
The online media, liberated from printing presses and local ad bases, has been free to form clusters, piggyback-style, on the industries and government that it covers. New York is home to most business coverage because of the size of the business and banking community there. Likewise, national political reporting has concentrated in Washington and grown apace with the federal government. Entertainment and cultural reporting has bunched in New York and Los Angeles, where those businesses are strong.
The result? If you look at the maps on the next page, you don’t need to be a Republican campaign strategist to grasp just how far the “media bubble” has drifted from the average American experience. Newspaper jobs are far more evenly scattered across the country, including the deep red parts. But as those vanish, it’s internet jobs that are driving whatever growth there is in media—and those fall almost entirely in places that are dense, blue and right in the bubble.
HT:  Cramer

Monday, April 24, 2017

French election results cause VIX to crash

In chapter 9, we learn that, in the long run, risky assets must return enough to compensate shareholders for bearing risk.  So when the risk suddenly declines, current stock prices increase to reduce expected return.

Colleague Bob Whaley's VIX index (previous blog posts on VIX), which measures risk in terms of the implied volatility, declined suddenly in both the US and EU as it became likely that the pro-EU candidate would win the French election.

Best selling textbook author describes principles for tax reform

In a NY Times article, Greg Mankiw demonstrates the ability that has made him a best-selling-econ-textbook author by simplifying a confusing debate down to four principles:

  • WORLDWIDE VS. TERRITORIAL: Most nations aim to impose taxes on economic activity that takes place within their borders 
  •  INCOME VS. CONSUMPTION: Many economists have argued that taxes should be levied based on consumption rather than income. 
  •  ORIGIN-BASED VS. DESTINATION-BASED TAXATION: The corporate tax system is now origin-based. 
  •  DEBT VS. EQUITY: Now, firms can deduct interest payments to bondholders, but they cannot deduct dividend payments to equity holders.
Mankiw thinks that Congress is moving in the right direction in all four dimensions.  

Friday, April 21, 2017

Sports teams do better in states without income taxes

In theory, one would expect higher after tax salaries to attract better players.  The forces behind this are the same that lead to compensating differentials in labor markets.  Evidence supports theory:
The income tax rate effect varies by league, with the largest effect in professional basketball, where teams in states without income tax win 4.5 more games each year relative to high-tax states.

Wednesday, April 19, 2017

Minimum wage hurts poor people in a new way

new working paper from HBS finds that for every $1 increase in the minimum wage, the probability of restaurant failure increases by 4-10%.  Moreoever, as zerohedge points out, the restaurants most likely to fail are those that serve lower-income workers:
... low-income workers don't just lose their jobs when minimum wages are hiked...they also lose access to cheap casual dining options as lower-rated, cheaper restaurants are much more likely to fail when their costs are artificially raised.

Friday, April 14, 2017

How to get employees to stop smoking?

Make them pay.
Employees were randomly assigned to one of three groups. The first was “usual care,” in which they received educational materials and free smoking cessation aids. The second was a reward program: Employees could receive up to $800 over six months if they quit. The third was a deposit program, in which smokers initially forked over $150 of their money, but if they quit, they got their deposit back along with a $650 bonus. 
Compared with the usual care group, employees in both incentive groups were substantially more likely to be smoke-free at six months. But the nature of the incentives mattered. Those offered the reward program were far more likely to accept the challenge than those offered the deposit program. But the deposit program was twice as effective at getting people to quit — and five times as effective as just pamphlets and Nicorette gum.

People hate losing money ("loss aversion")

Thursday, April 13, 2017

Why are business people more important than the ideas they have?

Because ideas evolve into profit only if the people are clever and motivated.  Groupon is a case in point:

Andrew Mason [Groupon's founder] had played in punk bands, and the company he started, originally called the Point, was intended to help people organize around social causes. Early on, though, its users realized they could band together to save money, so Mason reoriented the company around that purpose. Eventually he realized he could just go directly to other companies to ask for discount deals, then sell those to groups of users. “Before I knew it,” Judge recalled him saying, “I was selling coupons.” Judge sympathizes with members of the tech world, he explained, because they’re not like Wall Street guys — they actually build things people use. “They don’t seem to get into it for the purpose of pure greed and trying to make money,” he said. “They end up there.”

From NY Times profile of Mike Judge.

Whole Foods reacts to competition from grocery stores

Whole Foods practically invented the PNOS segment (Premium-Natural-Organic-Supermarket), "transforming health food from a niche market into a booming retail sector attracting millions of urbanites, soccer moms and baby boomers. Whole Foods became a Fortune 500 company, and Mr. Mackey, a wealthy, foodie celebrity."

But now, competition has caught up to Whole Foods, as Kroger pushes their own in-house organic store brand and discount rivals like ALDI and LIDL expand at the low end. In response, activist investors are pushing Whole Foods start behaving more like a normal grocery store:
Jana [activist investor] ... wants Whole Foods to more quickly adopt standard grocery-industry practices it long had eschewed: loyalty cards that would allow it to target shoppers with coupons based on their buying habits; centralizing product purchasing to improve efficiency; and advertising sales and discounts.

Whether these changes cause Whole Foods to lose its foodie cachet (where else can you buy organic tofu tikka masala from a social justice warrior with a neck tattoo?) will determine its long run viability.

BOTTOM LINE:  it is not the strongest who survive, but those willing to adapt.

Wednesday, April 12, 2017

CFA Exam Price Discrimination

An effective way of sorting high willingness-to-pay from low willingness-to-pay consumers is by using the time to the event. The CFA Institute has learned this trick comon to airlines. By registering for exams early enough, you can save about half the fee. For example, here is the schedule for the December 2017 exam.

Early registration fee US$ 650 (15 Mar 2017)
Standard registration fee US$ 930 (16 Aug 2017)
Late registration fee US$ 1,380 (13 Sep 2017)

It is likey that there are negligible costs involved with the late regestrations.

Suggested by Sameer Sathe

Monday, April 10, 2017

What can cities learn from Buffalo?

That parking minimums increase the supply of parking which drives down the price which creates traffic jams, pollution, sprawl, and segregation.  (Parking minimums are zoning requirements to add parking to buildings.)
...if you know you can park free wherever you go, why not drive? The ever-growing supply of free parking in America is one reason why investments in public transport have coaxed so few people out of cars, says David King of Arizona State University. In 1990, 73% of Americans got to work by driving alone, according to the census. In 2014, after a ballyhooed urban revival and many expensive tram and rapid-bus projects, 76% drove.

This kind of inefficiency exacts a huge toll on a city:
Free parking is not, of course, really free. The costs of building the car parks, as well as cleaning, lighting, repairing and securing them, are passed on to the people who use the buildings to which they are attached. Restaurant meals and cinema tickets are more pricey; flats are more expensive; office workers are presumably paid less. Everybody pays, whether or not they drive. And that has an unfortunate distributional effect, because young people drive a little less than the middle-aged and the poor drive less than the rich. In America, 17% of blacks and 12% of Hispanics who lived in big cities usually took public transport to work in 2013, whereas 7% of whites did. Free parking represents a subsidy for older people that is paid disproportionately by the young and a subsidy for the wealthy that is paid by the poor.

Buffalo, by the way, has realized this, and eliminated parking minimums.

Who could have predicted this?

Housing prices are climbing in Nashville, while supply dwindles.
As the supply of homes declined, the listing price climbed — especially in the trade-up and premium markets. The median listing price of trade-up homes rose 52 percent to $221,597 between early 2012 and 2017, while Trulia's data also showed the price of premium homes rose 44 percent to $437,967. Meanwhile, the median listing price for starter homes increased 36 percent to $108,783.

Supply is limited by strict zoning laws that make it difficult for supply to increase.  Since Nashville is getting about 80 new residents/day, the only thing that can adjust is price.

HT:  Campbell

FCC Chairman uses management theory to improve agency decision-making

FCC Chairman Ajit Pai wants to increase the quality of economic analysis done by the FCC staff:

...he explained that economic analysis, primarily in the form of cost-benefit analysis, is largely ignored. Actually, it is probably worse than that: Those types of analyses aren’t even done. For example, significant areas of the agency’s work in recent years ... contained nothing that would pass as economic analysis.

So how to do this?  Chairman Pai wants to change the organizational structure from an M-form (with economists mixed in with attorneys) to a functional organization, with economists in their own division.

Some middling economists had suggested exactly this in an article titled "The Economics of Organizing Economists."

... a functional organization has a couple of advantages over a divisional form. First, a functional organization is more likely to keep up with new methodologies and so be able to apply them to enforcement questions. Second, since the staff economists and attorneys produce information, not traditional goods or services, there is an advantage to the independent analyses done by attorneys and economists. Without two separate memos, the decentralization of decision making in a divisional organization is likely to result in less information reaching the ultimate decision makers.

Sunday, April 9, 2017

Post Hospital Merger Product Repositioning

An interesting presentation by Joanna Piechucka at the IIOC this weekend examined how French hospitals re-positioned the offerings of the merged firms to minimize cannibalization. Moreover, they also re-position away from third-party non-profit hospitals. This occurs even in a highly regulated environment.

Tuesday, April 4, 2017

What Nashville can learn from Seattle

How to break up a homeowner cartel that raises prices by blocking new entry:
In large and small ways, these homeowners, who tend to be white, more affluent and older than the average resident, have shaped neighborhoods in their reflection — building a city that is consistently rated as one of the nation’s most livable, as well as one of its most expensive. ...
The homeowner-dominated neighborhood councils have typically argued against land use changes that would allow more density (in the form of townhouses and apartment buildings) in and near Seattle’s traditional single-family neighborhoods, which make up nearly two-thirds of the city. Including more renters and low-income people in the mix could dilute, or even upend, those groups’ agendas.

In other words, the neighborhood councils act like cartel managers who prevent lower-priced entrants (higher density apartments) from serving lower-income, would-be homeowners and renters. The result is higher prices that benefit the cartel members (homeowners).

What would it take to break the cartel-like function of Nashville's zoning process?