Screening out ethical partners

In China, business people cannot rely on traditional mechanisms, like the rule of law, to facilitate wealth-creating transactions:

In a society where trust of strangers is minimal, contract law is fragile, contracts themselves regarded more as guidelines than binding commitments, and the civil courts largely swayed by personal influence rather than legal right, the shared fraternity of the night out is one route to trust between partners. It may not, as businessmen admit, be a particularly effective or reliable way, but it’s all they’ve got to work with.

So business people share alcohol, drugs, or prostitutes as a way of screening out partners who may not be trustworthy.  If the acts are illegal, it may give businesses "mutual hostages" to ensure cooperation; if not, it may screen out partners with "moral qualms about future dealings."

...It tells both sides that they’re playing by the same rules. ... Refusing to play the game, on the other hand, comes at a sharp cost. Businessmen who convert to evangelical Christianity and make a commitment to avoid vice or bribery describe sharp business losses as a result, as former partners turn away from them, fearful of their newfound probity.

The alternatives to agreement determine the terms of agreement

Rhode Island is using this principle to reduce its pension obligations:

Rhode Island officials then took the rare step of passing legislation that put bondholders ahead of other creditors and pensioners in the event of a municipal bankruptcy. Since cities and pensioners were bargaining in the shadow of bankruptcy law (if the parties did not reach agreement, a bankruptcy court would decide who gets what) the alternatives for pensioners deteriorated.

In Central Falls, Rhode Island, this shifted the bargaining advantage to the city and away from the workers, who had to get in line behind the bondholders:

After the 2011 bankruptcy, an event that received national attention amid predictions of widespread municipal failures, retirees agreed to 55% cuts because they feared facing even deeper cuts later. ... The concessions helped Central Falls emerge from bankruptcy in 2012 and create a “rainy day fund” that now holds $2 million.

Network effects work in reverse as well

Investors are worried about the future of Facebook and Twitter:

...No product is more reliant on network effects than social media...

Think of a product that doesn’t have much in the way of network effects — say, a 2018 Nissan Rogue. Now, maybe you’d like it if a bunch of other people bought the same car, because it would be easier to find after-market parts, and you could give each other knowing waves as you drive past yet another “Roguey” on the highway. But if no one else buys the car, you’re still going to be able to make your morning commute just fine.

Compare that with how you’d feel if your friends started leaving Facebook. Probably you’d check the site less often, giving the company less opportunity to sell ads against your news feed. And maybe eventually you’d decide to delete your own account.

Blockchain prediction markets

Prediction markets decentralized to avoid regulation.

NGDP #1 Will the growth rate of U.S. nominal GDP (NGDP) from Q1 2018 to Q1 2019 be above 4.5%?  

Augur predicts: 60% 

Will Democratic Socialists give us "a humane social order?"

A news story about Democratic socialism rising in the age of Trump, most notably 29 year old Alexandra Ocasio-Cortez:

the group’s constitution describes its members as socialists who “reject an economic order based on private profit” and “share a vision of a humane social order based on popular control of resources and production, economic planning..."

OK, they obviously ignored all of lessons of Chapter Two, showing the incentive aligning effects of private property and profit, and how incentives lead to inequality because they reward productivity.  

What happens when you pay excavators by the ton?

The Army Corps of Engineers found out when the paid contractors to tear down homes burned by the 2017 fires.  Not only were the sites four times as costly to excavate, as contractors over-excavated each home, removing concrete pads, and foundations that could have been re-used.  So now the Governor of California launched a program to refill the holes left by the contractors. 

HT: Marginal Revolution

Can Blockchain Tech. Resolve this Principal-Agent Conflict?

PROBLEM FACED BY ADVERTISERS:  how to figure out whether their ads are viewed by real people, not computer-generated bots, and how much of their spending is siphoned off by middlemen.

SOLUTION PROVIDED BY BLOCKCHAIN:  Marketers sometimes can manually audit digital ad campaigns, but proponents of blockchain say the technology offers a faster, more reliable way to track spending and reconcile discrepancies with suppliers...  The technology can also help track whether ads are running on websites with real traffic and on portions of them visible to ordinary users. That type of campaign information can be included in stored “blocks” along with pricing information.

SOURCE:  Article from WSJ

Netflix vs. HBO: a tale of two strategies

From the Atlantic:

HBO’s current profit model is simple but effective. People pay a fee (something like $15 a month) to subscribe; HBO uses that money to license movies and produce TV for subscribers to watch. Because of the company’s longtime reputation for high-quality, Emmy-winning shows like Game of Thrones and Big Little Lies, plenty of people subscribe, and HBO makes a lot of money. 

Netflix’s business approach, again, is about scale and is underwritten by investors. The company has focused on getting more worldwide users and hiking its subscription fee to increase revenues. But producing more original shows means Netflix burns through more money—a March 2017 report found Netflix had a negative free cash flow of $2.1 billion. A few months later, the company said in a letter to shareholders that it would remain in the negative for years, but that the investment would crucially help the company spread across the globe.

Now that HBO has been acquired by ATT, it is being pushed to mimic the Netflix strategy:

In this age, as Stankey made clear, “hours of engagement” are what matter most. Executives have long factored viewing data extracted from subscribers into their programming decisions, but online services can mine our viewing preferences much more minutely. The more data, the easier it is to understand what people want—at least that’s been Netflix’s guiding principle as it makes hits like House of Cards and Stranger Things, which are calibrated to play on audience nostalgia. But the idea that numbers alone will drive good or popular art is ludicrous; Netflix has made plenty of shows that haven’t hit the mark with audiences, like any other network.

Bubble-ology: "A Crisis of Beliefs"

Beliefs caused the credit bubble and subsequent bust (slides on the 2008 Financial Crisis)

1. Excess optimism, excess lending and investment 
2. Correction of expectations (due to bad news or waning of optimism) 
3. Recession (impaired intermediation or excess pessimism) 

==>Crises are due to non-rational beliefs, which may be amplified by traditional mechanisms.

"Change is inevitable, if you try to stop it, you will kill the economy"

Nice articulation of the gains from trade. 

Prevalence bias

Here is the essence of the experiments that document it:

…When blue dots became rare, purple dots began to look blue; when threatening faces became rare, neutral faces began to appear threatening; and when unethical research proposals became rare, ambiguous research proposals began to seem unethical. This happened even when the change in the prevalence of instances was abrupt, even when participants were explicitly told that the prevalence of instances would change, and even when participants were instructed and paid to ignore these changes.

Here is a public policy implication:

… When strong sexism declines, for example, … what was once not considered sexism at all (e.g. “men and women have different preferences which might explain job choice“) now becomes violently sexist. 

I am thinking about how this kind of bias might appear in a business setting.   For example, as particular kinds of accidents become less prevalent (rarer), if consumers overestimate the probability of these accidents, then consumers will be willing to pay much more than the cost of the insurance [probability of an accident times the cost of an accident].