Monday, November 11, 2019

Does a sense of fairness make us better bargainers?

Most ultimatum games, in which one player makes a take-it-or-leave-it offer to another, result 60-40 splits.  This occurs because the player making the offer knows that their offers will be rejected if seen as too "unfair." Some hypothesize that this notion of fairness makes us better bargainers so there might be some evolutionary basis for passing on a sense of fairness.

See how monkeys behave when they get an unfair payoff.

Friday, November 8, 2019

The benefits of being WEIRD (Western, Educated, Industrialized, Rich, Democratic)

Reputation and trust can solve a lot of business problems, like post-investment hold-up or free riding. It turns out that WEIRDo's (about 12% of the planet) have been successful, in part, because they manage to build and maintain reputations and trust more easily than others. 

 WEIRDos are more individualistic and independent, less conformist and obedient, more likely to favor “impersonal prosociality” — the idea that one set of moral rules should govern how you treat everyone, from the most distant stranger to your nearest kin. This seems normal to them, but in a global context, WEIRD people really are extremely weird. And as modernity erodes the last vestiges of traditionalism, they are probably getting WEIRDer and weirder by the day.  
 …More specifically, Western Christianity; the number of years that one’s ancestors were exposed to the medieval Catholic Church correlates pretty nicely with things like social trust, creativity and willingness to do things like donate blood — and correlates negatively with traits such as nepotism.

The world abounds in spurious correlations, of course. But the authors of “The Church, intensive kinship, and global psychological variation” propose a very plausible mechanism: the Catholic Church’s extreme obsession with incest, which isn’t found in the Eastern Orthodox branch. The church kept banning marriages between more and more distant relations, up to sixth cousins, which smashed the tight kin-based networks common to agricultural cultures.


Thursday, November 7, 2019

What is the cost of marriage?

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

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

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

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

The costs of fighting inequality

Following up on an earlier post, Why are there so few unicorns in Europe?, Bloomberg suggests an answer straight out of Chapter 1:  the EU limits on incentive pay, particularly on stock options, make it difficult for innovators to align the incentives of employees with the profitability goals of the company:

"...when you’re not highly profitable, you have to incentivize employees on the promise of the upside.”  

Onerous rules and taxation make this difficult to do.  Examples of EU limits on incentive pay:
  • The Dutch capped bonuses for bankers, money managers, and other financial professionals at 20% of base salaries. 
  •  Entrepreneurs must navigate onerous tax rates and restrictions that often make equity sharing and options more trouble than they’re worth. 
  • When employees in Germany exercise options, they have to pay income tax on the difference between the fair market value and the strike price, that runs from 14% to 47.5%. They also pay a 25% capital-gains tax on additional profits when they sell their shares.
In contrast, American employees typically pay a 0% to 20% rate on capital gains when options are redeemed, ...

Chatterbug's COO, sums it up: “I wish we had the same system as the U.S.,” she says. “But they don’t want us to get rich in Germany.”

HT:  Gus B.

ADDENDUM:  when I ask my EU colleagues about the disparity, they point to other factors as well, like bankruptcy codes that discourage risk-taking.

Wednesday, November 6, 2019

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.

RELATED:  DOJ loses predatory pricing case against American Airlines

Tuesday, November 5, 2019

What happens if we reduce drug prices by 70%?

Senator Warren's proposed policy fails a benefit-cost test:

Between 1982 and 2015, for example, the US saw the launch of 719 new drugs, the most of any country in the sample; Israel had about half as many launches. By looking at the resultant change in each country between mortality and disease, Lichtenberg calculated that the years of life lost before the age of 85 in 2013 would have been 2.16 times as high if no new drugs had been launched after 1981. For a subset of 22 countries with more full data, the number of life-years gained in 2013 from drugs launched after 1981 was 148.7 million.

Monday, November 4, 2019

How does Google auction ads?

Note the analogy to second price auctions--the highest rejected bid determines the price.  Because advertisers do not pay what they bid, they are willing to bid their values.

Fight in the Eurozone about negative interest rates

New EU Bank Head Christine Lagarde, pushing for lower interest rates and a weaker euro, said "We Should Be Happier To Have A Job Than To Have Savings," appealing to voters as producers, not consumers. 

Lagarde's direct attempt at shaming Europe's fiscal conservatives was nothing short of shocking: normally ECB officials avoid naming individual countries in public statements, because their mandate is to act in the interests of the eurozone as a whole. But when Lagarde made her speech she had not yet officially taken over at the Frankfurt-based institution — she succeeds Mario Draghi on Friday.

We somehow doubt this "explanation" will fly with the German population, which sees itself as funding peripheral Europe's profligate ways for the past decade, even as it benefited from the weak euro to supercharge the German export machine.

Lower interest rates weaken the Euro because fewer people want to keep savings in euros at such low rates (they sell euros and, e.g., buy dollars to invest in the US), and more people want to borrow in euros (the carry trade), change euros to, e.g., dollars to invest in the US.  This weakens the euro relative to the dollar, which increases employment in the EU via an increase in export demand.  But EU consumers are hurt by higher import prices.


Sunday, November 3, 2019

Switzerland vs Sweden

NY Times on Sweden:
Die-hard admirers of Scandinavian socialism overlook the change of heart in countries such as Sweden, where heavy government spending led to the financial crises of the 1990s. Sweden responded by cutting the top income tax rate from nearly 90 percent to as low as 50 percent. Public spending fell from near 70 percent of G.D.P. to 50 percent. Growth revived, as the largest Scandinavian economy started to look more like Switzerland, streamlining government and leaving business more room to grow.

Same article on Switzerland:
Capitalist to its core, Switzerland imposes lighter taxes on individuals, consumers and corporations than the Scandinavian countries do. In 2018 its top income tax rate was the lowest in Western Europe at 36 percent, well below the Scandinavian average of 52 percent. Government spending amounts to a third of gross domestic product, compared with half in Scandinavia. And Switzerland is more open to trade, with a share of global exports around double that of any Scandinavian economy.


Friday, November 1, 2019

Never start a land war in Asia (or a price war)

Competition has brought pizza prices down to $0.75/slice in a midtown Manhatten, with a predictable response:

... [One of the competitors] Eli Halali made it clear that 75 cents was a temporary price point. He said he could not make money at that level and eventually would return to $1. He said that if Bombay/6 Ave. Pizza went back to $1, he would as well.

This public statement seems like what the FTC called an "invitation to collude" in its suit against Vlassis who made a similar offer to end a price war with News America:

If News America continued to compete for Valassis customers and market share, then Valassis would return to its previous pricing strategy, and the price war would resume.

..., Valassis made the foregoing proposal with the intent to facilitate collusion and without a legitimate business purpose. ... Valassis’ statements described with precision the terms of its invitation to collude to News America. If the invitation had been accepted by News America, the result likely would have been higher FSI prices and reduced output

FSI refers to newspaper inserts, the product in question.

HT: Greg Mankiw