FB/Insta/WhatsApp

Dozens of State's AGs and my former employer, the FTC, claim that breaking up Facebook, Instagram and WhatsApp is in the social interest. Common ownership of these multiple social media platforms is said to stifle competition. But are these platforms substitutes or complements?

How do they compete? Users pay nothing; advertisers pay to reach these consumers. The job of these two-sided platforms is to package groups of users to potential advertisers. Who uses the platforms and how they use them differ across users. Advertisers, seeking ever narrower customer niches, benefit from their ability to target the distinctiveness of each platform. A commonly owned FB/Insta/WhatsApp has an incentive to maintain these distinctions. Competing platforms would tend to position themselves to "steal" users from each other by seeking a product position with more in common with rivals (and could fail by doing so). Even for users on all three platforms, their use of one over another for a specific task could indicate to potential advertisers that they are more receptive to the ad message. And consumers benefit both from platform variety and from being better targeted in ads. Of the over 200 social networking services, the ones that seem to succeed do so by differentiating themselves and appealing to niche audiences.

Casinos Profit with Game Theory

Say you are playing in a poker tournament at a casino. The initial buy-in is $65 and gets you 2,500 chips (2.6 cents a chip). You also have the option of buying an additional 500 chips for $5 more (1 cent per chip). None of this additional buy-in money, however, goes into the prize pool - it goes straight to the casino. Do you buy the additional chips? If your opponents are buying the extra chips, you better buy as well to keep up. And, if they are not buying, you should buy to get a chip advantage. So, everybody has an incentive to buy. But, if everyone buys, no one has an advantage. Everyone is worse off from spending the $5. The casino, however, makes a nice profit by placing the players in a Prisoners' Dilemma. Nice. HT: Mind Your Decisions blog

RIP: Walter Williams

His iconoclastic consequentialism will be missed. RIP Walter.

Incentive conflict between McDonalds and its Franchisees

The incentive conflict between franchisees and franchisors is well known.  Franchisors want to protect their brands, and want franchisees to invest in building a better retail experience.  However, because franchisees earn only a fraction of the returns from these brand-building investments, they are reluctant to to make them.

The conflict between McDonalds and its franchisees has come out into the open (2018 WSJ, 2019 Fortune, Twitter feed from a franchisee):

But traffic has waned in recent quarters, leading franchisees to voice concerns that the money they were being asked to invest in their stores for initiatives like remodels, self-serve kiosks, fresh beef, delivery, and all-day breakfast were not paying off.

“McDonald’s can set the direction of the brand, but you need the franchisees to buy into it,” says Senatore. “Franchisee alignment is so important to these systems.”

One way to manage this incentive conflicts is with:

1. Contracts to reward actions that are easily observable and contractible; and 
2. Vertical restraints, like exclusive territories, for actions that are not.  

Vertical restraints that restrict intra-brand competition among franchisees (e.g., with exclusive territories) give franchisees a profit stream that they are more eager to protect, i.e., with brand-building investments and higher-quality service.

Note that franchisees on freeways don't have much repeat business, so they can make more money by free riding on the brand reputation (e.g., by shirking on service or quality).  This incentive conflict is so costly to manage that McDonalds finds it easier to own and run their restaurants on the freeway.

HT:  Kaitlyn W.

Uh, Oh, ...

Amazon has made it much easier to defeat international price discrimination schemes, (like the one used by me.)

Managerial Economics (Hardcover) by Luke M. Froeb,Brian T. McCann,Michael R. Ward,Mike Shor

	United States		United Kingdom		Germany		France		Canada
	USD	USD	GBP	USD	EUR	USD	EUR	USD	CAD	USD
Item price	$194.61	$194.61	£105.00	$150.10	€230.34	$256.30	€227.10	$252.70	C$259.95	$188.33
Shipping per item	Free	Free	£2.99	$4.27	Free	Free	€1.90	$2.11	C$1.99	$1.44
Sub-total	$194.61	$194.61	£107.99	$154.37	€230.34	$256.30	€229.00	$254.81	C$261.94	$189.77
Cost per shipment	Free	Free	£3.99	$5.70	€14.00	$15.58	€9.00	$10.01	C$7.99	$5.79
Total	$194.61	$194.61	£111.98	$160.08	€244.34	$271.88	€238.00	$264.83	C$269.93	$195.56
	Buy at Amazon.com		Buy at Amazon.co.uk		Buy at Amazon.de		Buy at Amazon.fr		Buy at Amazon.ca

Price discrimination

Economists take care to differentiate between direct price discrimination (where you set different prices to different groups by identifying members of each group and charging them different prices) and indirect price discrimination (where you offer products or packages tailored to each group at different prices and have buyers self-select).

Admittedly, I'm not sure which one this is.

Hospital Cost Containment Gone Awry

Or installment #753 on unintended consequences. In a new paper in the Journal of Political Economy, Diane Alexander studies how physicians responded to a new bonus program for reducing total hospital costs. From her abstract:

Doctors respond to the bonuses by becoming more likely to admit patients whose treatment can generate high bonuses and sorting healthier patients into participating hospitals. Conditional on patient health, however, doctors do not reduce costs or change procedure use. These results highlight the ability of doctors to game incentive schemes and the risks of basing nationwide health care reforms on pilot programs.

Designing an appropriate incentive scheme is difficult.

Removing a noisy signal improves decision making: Army removes photos from promotion sheets

 From The Army Times:

The Army will no longer include official photos for officer selection boards, beginning in August, to help eliminate unconscious biases in the promotion process...

To their credit, the Army first ran an experiment to determine the consequence of the change and found that when the photo was removed:

...there was less variance between voters’ scoring, meaning voters ranked candidates more similarly across the board. After removing the photo, voters also took less time to make decisions on each individual file, and the outcomes for minorities and women improved.

A similar change, Ban the Box, a ban on employers asking about criminal background, saw some employers turn to race as a proxy for criminal background.  The difference seems to be in the value of the signal:  removing a noisy signal results in better decisions; but removing a valuable one does not.  

One student uses questions about criminal background to screen for honesty, which results in better hiring decisions at his firm.  Unsurprisingly, honesty seems like a valuable signal.  

HT:  Evan W.

Did Warren Buffett finally read Chapter 9?

He is applying the "indifference principle" to criticize high tax states with unfunded pensions.  From Zero Hedge:

“If I were relocating into some state that had a huge unfunded pension liability, I’m walking into liabilities. . . And those are big numbers. Really big numbers. . . They will come after corporations. They will come after individuals. . . They’re going to have to raise a lot of money.”

BOTTOM LINE:  A mobile asset, like labor, will move to where it can earn the most.  Consequently, young, wealthy, and productive people will be drawn to states like Tennessee, Texas and Florida (which have low income taxes and relatively healthy pensions).  

I am sending the Pope a copy of my textbook

From the Pope's Encyclical "Fratelli Tutti" ("Brothers All"):

The Pope also makes no secret of his opposition to the global capitalist free market economy. He proposes instead that wealthy countries form a seamless bond with the have-not peoples of the global south. ... The problem with redistribution, of course, is, as Margaret Thatcher famously said, "Soon you run out of other people's money." After everyone has been made equally medium-poor, then where, without incentives for hard work and production, are further disbursements supposed to come from?  

Hopefully, the Pope will at least read Chapters 1 and 2 as he makes the implicit assumption that no one will respond to the perverse incentives he proposes, but I am not hopeful.  When I sent a free copy of the 3rd Edition to President Maduro (I even signed it), his country went into freefall (past posts about Venezuela).

Nice summary of the affordable housing crisis

in the Stanford Law Review:

[the cause of the affordable housing crisis] is uncontroversial among urban economists but not broadly understood by low-income families, advocates for low-income families, housing activists, and their allies in academia, policy, and government—in short, the housing advocacy community. In the face of higher housing costs, the housing advocacy community tends to argue for a “kludgy” set of policies that can actually prevent new development and end up increasing housing prices— campaigns to impose building moratoria, for example, or downzonings, community benefits agreements and other exactions, lengthy approvals procedures that disadvantage developers relative to NIMBYs, various forms of rent control, and a focus on affordable housing to the exclusion of other types of development. …. 

In the suburbs, the politics of exclusionary policies are hopeless: the cartellike interests of suburban “homevoters” are well-served by current exclusionary policies, state and federal courts for the most part won’t intervene, and there is very little interest among state legislators to impose regional or state-wide solutions.11 The picture is less bleak in exclusionary cities: renters, who would directly benefit from lower housing prices, are a majority in many of these cities, and advocates for affordable housing already form a politically influential bloc—but they use their power to ends that are often counterproductive.12 While there are other serious obstacles to expanding housing supply, the housing advocacy community could and should become an important part of the fight against urban land use regimes that systematically privilege a city’s wealthiest and most powerful residents. … 

A city’s ability to remain affordable depends most crucially on its ability to expand housing supply in the face of increased demand. Among the people who care most about high housing costs there is a lack of understanding of the main causes and the policy approaches that can address them. The central message of this Article is that the housing advocacy community—from the shoeleather organizer to the academic theoretician—needs to abandon its reflexively anti-development sentiments and embrace an agenda that accepts and advocates for increased housing development of all types as a way to blunt rising housing costs in the country’s most expensive markets.

HT: Campbell

How quickly will the economy come back?

From CalculatedRiskBlog.com, a great site for macro and real estate.

No free lunch: insurance premiums go up in response to lower insulin co-pays

News from Colorado:

A new law, signed by Gov. Jared Polis earlier this week, caps co-payments of the lifesaving medication at $100 a month for insured patients, regardless of the supply they require. 

Insurance companies will have to absorb the balance. 

 While the Colorado out-of-pocket caps will likely provide financial relief for diabetes patients, she noted "the costs will kick back to all of the insured population" whose premiums are likely to go up as a result. 

"Nothing is free," Hernandez said.

The saying "there is no free lunch," refers to the the economic idea of opportunity cost.  When Colorado tries to make life better for insulin patients, they also raise the cost of offering health insurance, reducing the number of people with insurance.  

HT:  Thomas B.

The etiology of Chinese yuan

Chinese is a tonal language, and the pronunciation sounds more like yoo-en than yoo-aan. The only people who say R-M-B (renminbi) are bankers who can’t wrap their mouth around a foreign word and refuse to try.  

The pronunciation sounds pretty similar to the Japanese currency, yen, because it is.  The Japanese aristocracy originally borrowed written Chinese and many of its words, including 元 (yuan, yen).  Both still use the same character for pricing. 

In Chinese, yuan holds the closest translation with the word dollar. If you are talking colloquially you would use the word kuai (块, pronounced kwai and translated as fragment, shard or piece). This would be similar to using buck or quid in American or British English respectively. 

RMB is the romanized abbreviation of the word renminbi (人民币) which translates as “the People’s Currency” which has that distinct socialist flavor. The last part of the word, bi, is an older word meaning currency, for instance like the old Chinese coins with the square hole in the middle. Despite the perception of China as an overbearing communist country, in many ways its domestic economy functions with far less regulation and interference than you find in the West.  

The American dollar in full is called meiyuan (美元, which translates literally as beautiful dollar). This not a reverent description, but rather the United States in Chinese is called meiguo (beautiful country) which works as a loose transliteration of the name. The “beautiful” is transferred as a national descriptor for the currency, however feel free to assume the literal, poetic meaning. 

HT:  Jake K.

CDC data on TN Covid hospitalization and death rates (17 day lag)

 Hospitalizations

Red line is over age 65 years of age

Dark blue is 50-64 years

Light blue is 18-49 years

Deaths

Why are house prices climbing?

Two obvious answers:  cheaper borrowing is increasing demand; or consumers want a better place to work-at-home.  The bigger price increases in lower density (lower virus risk) areas suggest that it is the latter:

Phoenix, Seattle and San Diego reported the highest year-over-year gains among the 19 cities (Detroit excluded from report due to virus-related reporting constraints). Chicago and New York reported the weakest YoY gains.

Should gig economy jobs should be regulated by the state?

NO: Stossel

YES: Unions

Airlines are Sunk Costs

Demand for air travel fell during the pandemic, like a lot. It fell to about 5% of the previous year in early March and is still at 30%. And it won't get back to 100% for at least a year, maybe two or three. Assets are going to have to leave this industry.

The physical assets are very industry specific. There is little else you can do with an airplane but fly it. This is a risk one takes when one invests in airlines. Subsidizing these does not help since these assets are sunk costs.

Human capital is also very industry specific. There is little use for most pilot, flight attendant, and airplane mechanic skills for a years. For many, this human capital is now worthless. Fortunately, humans are more fungible than airplanes. They can acquire new human capital. Perhaps we want to help them out until then. How much?

The bailout in March was $25 Billion and the industry employed ~634,000 full-time workers. This comes to ~$40,000 per worker for six months. Unfortunately, a stipulation was to prevent layoffs - that is, keep people from acquiring new human capital. They say they need another $25 Billion to keep these workers employed over the next six months. Perhaps, instead, we allow the airlines to shed these workers but give these laid-off workers retraining subsidies.

HT: Tim Wunder

When will enough doses of FDA-approved COVID-19 vaccine(s) to inoculate 25 million people be distributed in the United States?

 From GoodJudgement.io:  

Book recommendations

 Everybody Lies

Randomistas

Algorithms to Live By

Factfulness 

More book recommendation HERE

Book Recommendation: The Art of Strategy

 Just started reading The Art of Strategy, and am already hooked.  The first chapter alone is a great intro to how game theory can inform strategic decisions, where payoffs depend not only on what I do but what my rival does.  Really well written! 

Are workers being compensated for living in Minnesota?

 

It appears that the higher real wages (adjusted for the cost of living) reflect the cold, unpleasant climate.  

Reducing leverage hurts options buyers

Financial options on funds are bets that, e.g., a fund's price will increase up to a specified strike price.  Leverage tends to make a fund more risky, and more likely that the fund price will hit the strike price at which the option pays off.  

So far so good.  But for every person who buys an option (long) hoping that the price will increase to the strike price, there is a seller on the other side (short), who hopes that it doesn't.  

Colleague Bob Whaley has pointed out that changes in leverage of the fund can reduce its volatility which would make it less likely to pay off (link).  Using data from 2018, Whaley gives an example:

...ProShares had reduced its leverage ratios in Ultra VIX Short-Term Futures fund (UVXY) and its Short VIX Short-Term Futures ETF (SVXY). The combined market value of options on the two names fell more than $116 million, ... 

These types of corporate events, not accounted for properly, result in “windfall transfers of wealth from outstanding long to outstanding short option holders,” Whaley concluded. 

BOTTOM LINE:  Beware of buying options on funds that can change their own volatility.  (I wonder if anyone sold options on the stock who had had control of the fund's leverage.  If so, it is a textbook example of Moral Hazard!)

Van Halen's Patent

Necessity is the mother of invention, RIP Eddie.  

HT:  Danny Sokol

Nobel for figuring out how best to tie pay to performance

One of the enduring themes of out textbook is that to give employees enough information to make good decisions--and the incentive to do so--what we call "goal alignment," you have to tie pay to performance.  The not only attracts the most productive workers (adverse selection) but also motivates them to work hard once they arrive (moral hazard).  The tradeoff is that you expose the employees to risk, for which they have to be compensated.

The Nobel in Economics was just awarded to two economists who have figured out how best to do this.  Our friends at Marginal Revolution wrote a nice essay summarizing their contributions:

• Use all signals of productivity to better measure performance ("informativeness principle").
• Put greater weights on the best measures (least noisy).
• Use a higher base salary when employees are risk averse (to compensate them for bearing risk).
• Use relative performance metrics ("tournaments") when employees have similar abilities.
• Use absolute performance metrics when employees do not (otherwise, employees with the most ability will easily win the tournament--without working hard).

We can use this analusis to critique executive pay:

...executive pay often violates the informativeness principle. In rewarding the CEO of Ford for example, an obvious piece of information that should used in addition to the price of Ford stock is the price of GM, Toyota and Chrysler stock. If the stock of most of the automaker’s is up then you should reward the CEO of Ford less because most of the gain in Ford is probably due to the economy wide factor rather than to the efforts Ford’s CEO. For the same reasons, if GM, Toyota, and Chrysler are down but Ford is down less then you might give the Ford CEO a large bonus even though Ford’s stock price is down. Oddly, however, performance pay for executives rarely works like a tournament. As a result, CEOs are often paid based on noise.

Management matters

in exactly the way that economists would predict, both across countries:

Income differences between rich and poor countries remain staggering, and these inequalities are in good part due to unexplained productivity gaps , ..., US productivity is more than 30 times larger than some sub-Saharan African countries. In practical terms, this means it would take a Liberian worker a month to produce what an American worker makes in a day, even if they had access to the same capital equipment and materials.

and across firms within a country:

This huge productivity spread between countries is mirrored by large productivity differences within countries. Output per worker is four times as great, and TFP twice as large, for the top 10% of US establishments compared to the bottom 10%, even within a narrowly defined industry like cement or cardboard box production (Syverson 2011). And such cross-firm differences appear even greater for developing countries (Hsieh and Klenow 2009).

A new survey relates these differences to management practices:

we rated companies on their use of 18 practices, ranging from poor to non-existent at the low end (for example, “performance measures tracked do not indicate directly if overall business objectives are being met”) to very sophisticated at the high end (“performance is continuously tracked and communicated, both formally and informally, to all staff using a range of visual management tools”)...

The large, persistent gaps in basic managerial practices that we document are associated with large, persistent differences in firm performance. Better-managed firms are more productive, grow at a faster pace, and are less likely to die. 

HT: marginalrevolution.com

What is the best warfighting strategy?

It is interesting to compare the allied strategy in Libya:

But the first shots fired didn’t appear to produce an immediate collapse in the rule of Qadhafi, who has surprised his enemies with his resilience. Qadhafi’s tenacity, both in his present circumstance and as evidenced over decades of survival in a very tough neighborhood, begs the question of what happens if this self-consciously limited allied response does not succeed in chasing him from power.

Allied leaders so far haven’t provided defining answers; in fact, quite the contrary. In a series of comments and communiques over the weekend, American, British, and French officials stressed that they aren’t attacking Qadhafi’s forces to achieve “regime change” – while at the same time maintaining, as British Prime Minister David Cameron insisted, that Qadhafi “needs to go.”

...to the US Marine warfighting manual. One of my colleagues uses this to teach MBA's how to formulate succesful business strategy.  Starting out with lack of a clearly defined goal leads to what the manual calls "frictions."

The very essence of war as a clash between opposed wills creates friction. It is critical to keep in mind that the enemy is not an inanimate object but an independent and animate force. The enemy seeks to resist our will and impose his own will on us. It is the dynamic interplay between his will and ours that makes war difficult and complex. In this environment, friction abounds.

Friction may be mental, as in indecision over a course of action. Or it may be physical, as in effective enemy fire or a terrain obstacle that must be overcome. Friction may be external, imposed by enemy action, the terrain, weather, or mere chance. Or friction may be self-induced, caused by such factors as lack of a clearly defined goal, lack of coordination, unclear or complicated plans, complex task organizations or command relationships, or complicated communication systems. Whatever form it takes, because war is a human enterprise, friction will always have a psychological as well as a physical impact.

While we should attempt to minimize self-induced friction, the greater requirement is to fight effectively within the medium of friction. The means to overcome friction is the will; we prevail over friction through persistent strength of mind and spirit. While striving to overcome the effects of friction ourselves, we must attempt at the same time to raise our enemy's friction to a level that destroys his ability to fight. 

Which organizational forms can best adapt to change?

One of the themes in this blog is that it is not necessarily the strongest firms that survive, but the most adaptable.  Kodak once dominated the film industry but now it is bankrupt.  How did this happen?

Part of the fault lies with Kodak's centralized structure which was slow to react to the expiration of its patents, and the advent of digital photography.  Colby Chandler, former CEO of Kodak, admitted as much at the 1984 annual meeting:

Like many companies, we are not used to working in an environment where there is rapid technological transfer from laboratory to the marketplace. But we know that will be important in our future.

In 1984, in the hopes of encouraging innovation, Kodak decentralized decision making to 17 different business units with profit and loss responsibility.  However, the decentralized decision making was not accompanied by incentive pay.  Instead, small bonuses were doled out by officious bureaucrats, according to office politics. 

As a result, Kodak continued its slow decline, and in 1993 the board of directors fired its CEO for not holding its managers accountable for failure.  This year, Kodak entered bankruptcy.

The moral of the story seems clear to me:   decentralized decision making is better for adapting to technological change, but only if accompanied by strong incentive pay.  This may be the reason that much of certain types of innovation is done by small firms:  owner/operators have the strongest incentives to perform. 

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.

Should you buy from sweatshops?

PRO:  Sweatshops are better than the alternatives:

When workers voluntarily take a job they demonstrate that they believe the job is the best alternative available to them – even when that job is unsafe and the pay is very low compared to wages in the United States. That’s why economists with political views as divergent as Paul Krugman and Walter Williams have both written in defense of sweatshops.

Sweatshop jobs are often far better than the vast majority of jobs in the countries where they are located.

CON:  6 minute video showing Harvard students protesting "exploitation."  

NOTE:  President Trump is on the other side of this issue.

When American Airlines forgot about Moral Hazard and Adverse Selection?

American Airlines should read chapters 19 and 20. They sold 64 lifetime AA passes for $350,000 that allowed passengers to fly first class, anywhere, at any time.  This was a big mistake:

• Adverse selection:  only extremely travel-inclined passengers purchased the tickets; and
• Moral Hazard: since the marginal cost of travel was zero, they used to fly to any destination where the marginal benefit was greater than zero.  

Bottom Line:  The passes ended up costing AA over ten times as much as they sold them for.

HT:  Don Marron

Screening for honesty

A student told me how his company used the felony box (previous posts) to screen out bad applicants

Being a felon did not rule you out from being hired to work for my company.  Instead, we used the box to see if the job applicant was truthful about their felony past.  We did not hire those who (i) had a felony record and didn’t disclose it; or (ii) lied when filling out the explanation of the charges.  

However, we did hire those who disclosed truthfully (except for certain crimes), and found them to be good employees.

Satire of economists' belief in markets

From the Atlantic, "The Market as God," by a Divinity professor:

A few years ago a friend advised me that if I wanted to know what was going on in the real world, I should read the business pages. Although my lifelong interest has been in the study of religion, I am always willing to expand my horizons; so I took the advice, vaguely fearful that I would have to cope with a new and baffling vocabulary. Instead I was surprised to discover that most of the concepts I ran across were quite familiar. 

Expecting a terra incognita, I found myself instead in the land of déjà vu. The lexicon of The Wall Street Journal and the business sections of Time and Newsweek turned out to bear a striking resemblance to Genesis, the Epistle to the Romans, and Saint Augustine's City of God. Behind descriptions of market reforms, monetary policy, and the convolutions of the Dow, I gradually made out the pieces of a grand narrative about the inner meaning of human history, why things had gone wrong, and how to put them right. Theologians call these myths of origin, legends of the fall, and doctrines of sin and redemption. But here they were again, and in only thin disguise: chronicles about the creation of wealth, the seductive temptations of statism, captivity to faceless economic cycles, and, ultimately, salvation through the advent of free markets, with a small dose of ascetic belt tightening along the way, especially for the East Asian economies. 

Are we in a stock market bubble?

 

The graph above plots Prof Robert Shiller's cyclically adjusted price/earnings ratio or CAPE. Shiller is the bubbleologist who predicted the 1999 stock market bubble using a graph like the one above as well as the 2007 housing bubble.  The price/earnings ratio is a measure of the value of a stock, and we see that when it goes above 20, we generally see subsequent declines.  However, we have been above this value for the past decade.  

DISCLAIMER:  If I really knew, I wouldn't be teaching school.  

HT:  ZeroHedge.com

Are we in a housing bubble?

 

Chapter 9 tells us that, in the long run, we should be indifferent between renting and owning.  In the above graph, the price of a housing is 40% higher than the price of renting.  I suspect Prof. Robert Shiller (famed bubbleologist who predicted both the 1999 stock market bubble and the 2007 housing bubble using a graph like this) would say we are in a bubble.  Here is a piece I found on the web:

'It would suggest declining home prices in the near future,' Shiller, who teaches at Yale University, told Bloomberg Television on Thursday. 'I wouldn't be at all surprised if house prices started falling.'

Strong Chinese yuan hurting Chinese recovery

Over the past six months, the dollar has depreciated relative to the Chinese yuan (the price of a dollar has fallen), falling from 7.1 yuan to only 6.85 yuan, a 3.5% decline.  It may be that Chinese citizens (who have high savings rates) are more reluctant to invest in the US (a fall in demand for dollars).

The strong yuan is hurting China's recovery:

China’s currency has climbed more than 5% from this year’s low in May, the best performance in Asia. A strong yuan is an obstacle when the nation’s economy is recovering from the coronavirus pandemic and confronted with escalating tensions with the U.S. because it could undermine the attractiveness of exports.

The yuan’s gain versus its trading partners’ currencies is smaller compared with its move against the dollar. The Bloomberg CFETS RMB Index Tracker, which measures the yuan versus 24 peers, has risen just 2.4% from a record low last year. The gauge currently stands at 92.95.

V-shaped recovery?

 

RIP Paul Michael Saint

I fondly remember Mike as the rare student who cared not about grades, but rather about ideas and how to apply them.  Generations of students will know him through the Chapter Four textbook story of how he (the CEO) designed a successful incentive pay scheme.

4.5 Tie Pay to Performance Measures That Reflect Effort

Measuring performance is a critical part of any organization, as the following story illustrates. In 1997, a 50-year-old chief operating officer (COO) with a bachelor’s degree in journalism and a law degree managed a consulting firm with 10 account executives. The COO was in charge of keeping clients happy and ensuring that the account executives were working in the best interests of the company. The COO earned a flat salary of $75,000.

After taking classes in human resources, economics, and accounting, the CEO recognized that the usual accounting profits were not motivating the COO to work harder. He sat down with his COO, and together they designed a new metric. All revenues counted toward the COO’s “profit” goal. But only the expenses that the COO controlled directly—like compensation and office expenses—were “charged” against his profit metric. All overhead items, like rent, were placed in another budget because the COO could not control them; that is, they were “fixed” with respect to his effort.

The CEO and the COO both agreed that, without much effort, the COO could earn4 $150,000 each quarter. But earning more would take extraordinary effort. To motivate the COO, they agreed on an incentive compensation scheme that paid the COO one-third of each dollar that the company earned above $150,000.

After making the change, the COO’s compensation jumped to $177,000— an increase of 136%—but the firm’s revenues also jumped from $720,000 to $1,251,000—an increase of 74%. A good economy certainly contributed to the increase, but the compensation plan also helped. Revenue increased because the COO pushed hard to make and exceed earnings goals and, for the first time, he worried about expenses. For example, he attempted to contain costs by asking why phone bills were so high.

Along with changing the COO’s compensation scheme, the CEO also moved to a system of incentive pay for the account representatives. This had equally dramatic effects on the account representatives—except for one employee who was going through a divorce. The incentive pay scheme did little to increase his marginal incentives because half of everything he earned went to his estranged wife. In other words, the marginal benefit of extra work for this employee was half as much as that of other employees, and he responded by working less hard.

Micro econ videos from Marginal Revolution University

Course Outline

1 Introduction

• Introduction to Microeconomics

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