Friday, May 31, 2019

Why are there so few unicorns in Europe?

Despite a GDP that is about the same size as the US, but with about twice the population, the EU produces relatively few unicorns (billion dollar startups) because the regulatory burden is so heavy.  A recent example is the GDPR,

Controllers of personal data must put in place appropriate technical and organisational measures to implement the data protection principles. Business processes that handle personal data must be designed and built with consideration of the principles and provide safeguards to protect data (for example, using pseudonymization or full anonymization where appropriate), and use the highest-possible privacy settings by default, so that the data is not available publicly without explicit, informed consent, and cannot be used to identify a subject without additional information stored separately.

MarginalRevolution has another great post  that documents the compliance costs, especially for would-be unicorns :

  • Startups: One study estimated that venture capital invested in EU startups fell by as much as 50 percent due to GDPR implementation. (NBER)
  • Mergers and acquisitions: “55% of respondents said they had worked on deals that fell apart because of concerns about a target company’s data protection policies and compliance with GDPR” (WSJ)
  • Scientific research: “[B]iomedical researchers fear that the EU’s new General Data Protection Regulation (GDPR) will make it harder to share information across borders or outside their original research context.” (POLITICO)
  • Microsoft had 1,600 engineers working on compliance. (Microsoft)
  • During a Senate hearing, Keith Enright, Google’s chief privacy officer, estimated that the company spent “hundreds of years of human time” to comply with the new privacy rules. (Quartz)
    • However, French authorities ultimately decided Google’s compliance efforts were insufficient: “France fines Google nearly $57 million for first major violation of new European privacy regime” (The Washington Post)

Why are some prices so high? has a terrific post explaining "Baumol's Cost Disease," or in more polite terms, "the Baumol Effect." It rests on two ideas:

  1. Opportunity cost:  the cost of an activity is what you give up to pursue it; and
  2. Differences in productivity:  some items, like cars, have gotten much easier to produce over time.
 To make this concrete, imagine two goods or services, like education and automobiles.  The first has not had much change in productivity over the past 100 years--it still takes one professor and an army of TA's to deliver a course like Managerial Economics.  But cars can be produced with one tenth the labor as 100 years ago.

This implies that the opportunity cost of producing a Managerial Econ class is now ten times as expensive as it was 100 years ago, in terms of what we give up (cars) to produce it.

This idea is useful as it explains that we can expect the cost of activities without productivity gains to increase, like education, performing arts, and health care.

Thursday, May 30, 2019

HUGE Endorsement!

General Patton on decentralization (and Nike)

Don't tell people how to do things, tell them what to do and let them surprise you with their results. 
--George S. Patton

One of Nike founder CEO Phil Knight's favorite management maxims.  From his well-written and fascinating autobiography, Shoe Dog.

Reading the book makes me realize how Nike's success was driven more by belief in a higher cause or purpose than a concern for making money.

 The villains in the book were those erecting regulatory barriers to success, like Converse and Keds, domestic firms who manipulated customs laws to raise Nike's costs of importing.  Only when Nike hired people familiar with how Washington works (who filed an antitrust counter claim), were they able to resolve their claim. 

For Nike, this kind of "rent seeking" seemed like both a prisoners' dilemma (Nike's optimal response was to do something similar as Keds and Converse), and a tax on innovative activity (it would up diverting Nike's attention from their primary business of designing, producing and importing shoes).

Wednesday, May 29, 2019

Mobile phones save lives--but not in the way that you think

Before the 1990's, gangs created markets for illegal drugs based on location, and used violence to protect their markets ("turf") from entry by outsiders.  This changed with the advent of mobile phones, as it became relatively easy for non-gang members to organize illegal drug transactions over the phone. As a consequence homicide rates fell sharply:
Studying county-level data for the years 1970-2009 we find that the expansion of cellular phone service (as proxied by antenna-structure density) lowered homicide rates in the 1990s. Furthermore, effects were concentrated in urban counties; among Black or Hispanic males; and more gang/drug-associated homicides.

Similarly, the ease of online shopping through the Internet has caused brick and mortar retailers to respond to the shrinking of their "physical" marketplace, see, e.g.,

Saturday, May 25, 2019

Antitrust laws are dangerous in the wrong hands

Exposé of how Huawei stole IP from Nokia, and then China used their competition authority to hold up Nokia's merger to thwart any kind of retribution:
Chinese regulators approved the sale of Motorola’s network arm in April 2011—one week after Motorola publicly agreed to make peace with Huawei. Motorola and the ministry didn’t respond to requests for comment.

Is this the reason for the trade war with China?

To protect US intellectual property?
Amid soaring U.S. concern about China’s infiltration in Western scientific research, Emory University has found that two of its researchers did not disclose money they were taking from Chinese sources, ... The two are no longer working at Emory.

The move comes one month after The Houston Chronicle reported that the M.D. Anderson Cancer Center forced out three senior researchers in connection with concerns about Chinese attempts to steal research.  

HT:  Ed

UPDATE:  WSJ EXPOSE:  Huawei "Spent All Their Resources Stealing", Stunning New Exposé Shows
Huawei had built spy-proof secure rooms that were off-limits to American employees, according to current and former U.S. officials.
Counterintelligence officials believed the discovery indicated Huawei was handling information more like a state intelligence service, with regimented tiers of secrecy, while relying on a protected communications channel with Beijing.

Friday, May 24, 2019

Who gets "affordable" housing?

When the government fixes prices of affordable housing below market rates, there is excess demand, i.e., more people demand the apartments at the low prices than are available for supply.  So how do the apartments get allocated?

"Insiders" use influence to grab the valuable apartments:
But for years, Brooklyn DA Eric Gonzalez charges, the top three execs of the Luna Park Housing Corp. conspired to “sell” units — accepting five- and even six-figure bribes in exchange for faking documents so that a new tenant could “inherit” an apartment as a supposed relative of the old one.

Prosecutors “believe that this was the norm, not the exception,” Gonzalez reports. The 14,000-strong waiting list was a joke.

Corruption this brazen surely isn’t “the norm” at all Mitchell-Lama projects, but it’s hardly cynical to suspect that insiders are pulling scams all across the city’s vast and varied affordable-housing landscape.

An apartment that by law has a rent well below market rate is a valuable commodity; gatekeepers can cash in big by quietly selling access. Not always for actual money: Political or even family connections can be enough.

Similarly, would-be tenants regularly have to pay someone (a broker, a landlord, some fixer) a hefty fee up front to score a rent-regulated apartment.

Anytime the government fixes prices below (or above) what the market price would be, it also creates incentives to circumvent the prices.  What is most damaging, however, is that these bribes are paid by those who want apartments (demand) but the rewards go to people who manage the apartments, not to those who build (supply) them.  As such they reduce supply (as they have done in Nashville), creating "shortages."

Next time you hear a politician complain about a "shortages of affordable housing" ask him or her if she thinks there is a "shortage of affordable Rolls Royce automobiles."

More posts on the effects of affordable housing.

Monday, May 20, 2019

Governments create wealth

To see this, look no further than Venezuela, where the absence of government has lead to a 10% drop in population and a 62% drop in GDP since 2013.
So what is causing the tremendous drop in economic activity? Ironically, it’s not too much government but too little. Outside of the capital, the government has practically abandoned its most basic responsibility of providing law and order. The result has been widespread looting. Ordinary theft is about stealing money or valuable “final” goods like diamonds or art works. In theory, the thief receives more or less what the owner loses. Looting, however, is a special kind of theft. Looting is theft plus destruction. The person who steals a candy bar is a thief. The person who breaks a store front window and steals a candy bar is a looter. Looters destroy intermediate goods and infrastructure and gain far less than owners lose. Looting is the worst kind of theft.

However, signs of economic activity are returning as law and order return:

Local shopkeepers are repairing power lines, feeding public workers and taking over the power of the state. Awesome! ¡Viva la maquinaria de la libertad! 

More from a terrific post from Marginal Revolution

Friday, May 17, 2019

"Consumer testimonials are not reliable scientific evidence"

...In the initial immersion week of classes, a Luke Froeb-led lecture and discussion touched on a project at work and changed his decision making process. When he returned to the office, he changed course on how he was putting a bid proposal together. The revised bid added $400,000 to the bottom line, far more than the investment Vulcan was making in his Executive MBA degree. ... After just one class, Vulcan’s MBA investment was in the black,” he recalls with a chuckle.  (link)

Consumer testimonials that mention a number are one of the most effective forms of advertising for two reasons:
  1. People read the testimonial and think that they can do better than whoever gave the testimonial, a form of "availability bias";
  2. People do not understand that testimonials are drawn from a selected sample.  

These ads are so powerful and effective that the FTC suggests a disclaimer to accompany them.  So here it is:
 “... testimonials are based on the experiences of a few people and you are not likely to have similar results."

I hope this disclaimer can undo the misperceptions may have been given to potential consumers of a Vanderbilt education.

Greedy capitalists save lives in Africa

Venture backed is saving lives in Africa by using Unmanned Aerial Vehicles (UAVs) to deliver blood to African hospitals that can’t stock all the necessary blood types. They have two bases which cover a 100 mile flight range and a drop zone the size of only two parking spots. The drones are pre-programmed, and fly 65 mph which results in 15-20 minute average delivery times.

Sunday, May 12, 2019

If Lectures and books don't work; try this instead

Books and lectures are remarkably bad at conveying information.  Try this instead:
If pressed, many lecturers would offer a more plausible cognitive model: understanding actually comes after the lecture, when attendees solve problem sets, write essays, etc. ... Listeners’ attention wanders after a few minutes, so wouldn’t we want to interleave the problem-solving sessions with the lecture?... to understand something, you must actively engage with it.

Thursday, May 9, 2019

Wednesday, May 8, 2019

Concentration Increasing?

There have been reports that industry concentration has been rising in the US. If so, firms will tend to have more market power that allows them to set higher margins. If so, those lazy antitrusters need to wake up and protect competition.

But it all turns out how you define the market. As my students all know, markets can be defined in relation to three dimensions: product characteristics, level of geography, and unit of time. A new paper by Rossi-Hansberg, Sarte, and Trachter examines the data at a more local level. While national concentration measures are rising slightly, more local measures are declining. This is consistent with ever more competition (although there have been claims that product differentiation is increasing). 
Perhaps the antitrust bureaucrats can go back to their naps.

Hat tip: The Grumpy Economist

Addicts respond to incentives

Great post from

I always get excited when people surprise me by acting against their self interest.  In this case, when Purdue Pharma replaced their OxyContin drug with a new, anti-abuse version that was more difficult to turn into an injectable, demand fell precipitously.

The addicts whose demand fell were aided and abetted by about 40% of physicians, who switched patients to more easily abused opiates.

BRAVO to Purdue Pharma!

Self promotion

Economics Blogs 2019

Why don't insurers try to mitigate risk?

Allison Shrager's terrific book, An Economist Walks into a Brothel, contains all sorts of innovative risk mitigation strategies pursued by people in all walks of life (see earlier blog post, How are Jet Skis like Financial Derivatives).  So why don't insurance companies spend more time figuring out how to mitigate risk?

The answer is simple:  Risk mitigation is not a source of "sustainable competitive advantage:"
Argument #4: mitigation is easy to copy. Underwriting risk selection is much less tangible and secrets can be a protected source of advantage. People can reverse engineer a dongle but not underwriting strategy. Once copied mitigation provides a one-off benefit to the market, changing the rate level but not the profit level (bit of a negative inventive because lower claims means lower premium and so less float!).

 Instead, insurers spend most of their time classifying risks (classification strategies are proprietary) which offers the benefits of diversification:

Argument #3: Improved classification allows for stratification and so diversification. Insurers are diversifiers. If you can segregate genuinely distinct classes of risk, portfolio volatility will drop.

Friday, May 3, 2019

Marketing in China is different [updated]

Article documenting US/Chinese differences in marketing:
  • China merchants have access to consumers over many different media:
  • ... most notably, Baidu, Alibaba, and Tencent, which together are known by the acronym BAT. To put this in a Western context, imagine if Amazon, Bank of America, Google, Facebook, Activision Blizzard, CNN, and ESPN were all owned by one company. That’s essentially how the big conglomerates work in China, with the BAT companies controlling most of the digital content across industries. 
    [This kind of consolidation allows for data collection that most westerners would find objectionable; but consolidation makes it possible for cross-platform programs to engage consumers seamlessly on a variety of media.]
  • Chinese companies have low discount rates
  • “Chinese companies have a growth mindset,” explained Hai Ye, a partner at McKinsey & Company. “Many of them can tolerate relatively low profitability in order to scale up quickly. This difference—driving market share versus bottom-line profit—gives the Chinese companies an advantage because they are willing to make big investments and take short-term losses to achieve long-term dominance.”

  • Speed-to-market is a huge priority:
  • Danielle Jin of Visa recalled how she approached her job when she worked as a marketer in the U.S. consumer packaged goods industry. “We would sit down with Walmart one to two years in advance and think about what seasonal promotion we would want to have,” she said. “We would have a thought-out calendar that centered primarily on price promotions—a system and process created over decades that was based on a somewhat rigid planning process.” By contrast, she explained, “a marketer with a Chinese mindset would talk about creating seamless content that cut across multiple platforms and was temporally relevant" [weeks, not years].

  • Bottom Line: Certainly US marketers could learn a lot from China.  But it is not clear that these techniques would work in the US, for at least three reasons
    1. Privacy concerns would prevent much of the data collection and sharing that is prevalent in China.  
    2. Antitrust Laws would likely prevent the kind of media consolidation that makes much of this possible 
    3. Older (mature) firms in the US where the struggle is to steal share rather than grow the market, mean that speed and growth may not be as important as profit [think Prisoners' Pricing Dilemma] 
  • Up until the last few years, the cost of capital/ loans was low.  Competitors that couldn’t beat you on quality and profit margins would go for scale and top line numbers. This results in everyone going opting for the top line. Contributing to this are state owned enterprises who are in every industry and tasked with top line growth, not profit margins.
  • China is also really new at marketing. Most of the big sales companies are distributors who have only sold existing, western brands so they don’t have experience building brands themselves. If you think about the biggest Chinese brands, they are known for their size, not their crafty branding. 
  • There is also a thing in China about “face.”  You can call it honor, prestige, or ego. Whatever it is, the biggest is seen as the strongest. I am working on launching a brand in China right now and I just had dinner two nights ago with my friend / distributor. We both agree that we would prefer to launch in tier 2 & 3 cities and get a bigger margin than fight it out in the more competitive tier 1 cities and lose money. As a Chinese guy once told my dad, “Sometimes we save face, but lose ass.”

What do jet skis have in common with financial derivatives?

They are both safety devices:  just as jet ski's make it possible for surfers to ride 80-foot waves in relative safety, so too can financial derivatives make it possible for investors to make big investments by offloading some of the downside risk.

This analogy was taken from An Economist Walks into a Brothel: And Other Unexpected Places to Understand Risk. The best part about the book are the interviews with people like prostitutes, big wave surfers and professional photographers who discuss ways they manage risk:
In An Economist Walks into a Brothel, Schrager equips readers with five principles for dealing with risk, principles used by some of the world's most interesting risk takers. For instance, she interviews a professional poker player about how to stay rational when the stakes are high, a paparazzo in Manhattan about how to spot different kinds of risk, horse breeders in Kentucky about how to diversify risk and minimize losses, and a war general who led troops in Iraq about how to prepare for what we don't see coming.

It starts off slowly, but stick with it.  Highly recommended, and not just for finance students.

Reason podcast discussing book