Thursday, December 2, 2021
Unless the contract grants the franchisee an "exclusive territory," the franchisor may have an incentive to set up more franchisees in the same area. Using a ten year data set of Texas Hotels, Arturs Kalnins find that when new franchisees open up nearby, incumbent franchisees lose 2-3% of their revenue. Interestingly, there is no cannibalization when a new company-owned hotel enters near an existing company-owned hotel (e.g., La Quinta and Motel 6 own most of their own hotels).
If franchisees anticipate that future franchisees will cannibalize sales, this will reduce the amount that they are willing to pay for the franchise. If franchisees do not anticipate cannibalization, they are in for a rude awakening.
Franchisees are powerful politically (easy to organize, common purpose) and often lobby state legislatures to enact franchisee "bill of rights" giving them, among other things, right of first refusal for new franchises. In states with strong franchisee bills of rights, companies with strong brands opt for company-owned stores, which are easier to control instead of the franchisee organizational form..
Thursday, November 25, 2021
If a firm makes a decision that increases costs or reduces quality, there are two immediate consequences: reduced sales as consumers turn to lower-priced, or higher-quality, alternatives; and a higher cost of capital, as lenders and investors turn to more profitable opportunities. Product market competition thus aligns the incentives of a firm with the goals of consumers, and capital market competition, with the goals of lenders and investors.
In contrast, if a government makes a bad decision, one that makes the state a less desirable place to work or do business, residents must wait until the next election, or move. This kind of pressure is weaker and delayed, as it is costly and takes time to start over in a new state. As a result, incentives for state government to better serve its residents are not as strong or immediate.
For example, Illinois has decided to under-fund state pensions for decades. Its taxpayers now face a huge future tax burden, and the prospect of reduced government services, like police protection. Current taxpayers are leaving because they can see a costly and crime-ridden future, and would-be taxpayers are locating in better-run states. This kind of competitive pressure is slowly building and should eventually lead to reform.
However, if Democrats raise the SALT (State and Local Tax) deduction for federal taxes, other states will end up paying for Illinois' mistakes, shielding Illinois from the full consequences of its bad decisions. This can only delay reform because governments, like children, do not learn from their mistakes, they learn from the consequences of their mistakes.
Wednesday, November 24, 2021
1. Unbundling services, lowering product quality and devaluing reward programs
2. Shrinkflation and the quantity surcharge
3. Disappearing deals and coupons
4. The sunk costs of memberships
5. From good to better and from better to best
Monday, November 22, 2021
- Inertia and mission creep make government hard to pare back. Voters and lobbyists who benefit from a regulation or item of spending have every reason to work hard at preserving it, ...
- The second force is a fact of life. Prices of the services welfare states provide, such as health care and education, grow faster than the economy because of their high labour intensity and low rates of productivity increase. ...
- The third force is that governments today have more things to get done. As voters became richer over the 20th century they demanded more education and more of the expensive health care that takes advantage of the latest science. ...
- One task is to maximise the role of markets and individual choice. Climate change should be fought with a price for carbon, ... not by rationing flights, promoting green national champions or enlisting central banks to distort financial markets.
- The welfare state should focus on redistributing cash and letting those in need choose what to do with it, not setting up new bureaucracies such as President Joe Biden’s proposed federal child-care system.
Saturday, November 20, 2021
eBay used to pay Google about $50 million annually for ads by search terms that included the company name, such as eBay or eBay shoes. To determine whether this was worth the money, they ran an experiment, turning Google ads on and off, and tracking the traffic coming to eBay from Google ads (paid) vs. traffic coming from organic search (unpaid). They discovered that paid advertising was cannibalizing traffic from organic search:
...the experiments found that in markets where the company didn’t advertise, it got a spike in traffic from unpaid organic links. “Evidently, users who Googled ‘eBay’ (or another eBay-related search term), who had been clicking on the ad because they saw no reason to scroll down to the organic link just below it, were now instead clicking on the first organic search result.
Progressives say the only way to achieve their climate goals is to raise the price of fossil fuels. Their problem is that consumers don’t want to pay more for energy, and as the latest proof behold Connecticut Gov. Ned Lamont’s retreat this week from a Northeast state climate pact. ...
Mr. Lamont finally gave up trying to pass the scheme this week. “Look, I couldn’t get it through when gas prices were at historic lows. So I think the legislature has been pretty clear it is a tough rock to push when gas prices are so high,” he said. Massachusetts GOP Gov. Charlie Baker then threw in the towel too, causing the climate pact to effectively combust.
...This summer the Swiss rejected higher taxes on driving and flying in a referendum. (link)
Right now, interest rates (mortgages) are 3% and inflation is 5%. This cannot last because those who lend are getting paid back with dollars that cannot buy as much as the dollars they lent. If inflation stays at 5%, interest rates have to rise to compensate lenders, e.g., to 8%.
MarginalRevolution.com has an answer:
“I think the inflation will last two to three years, and it will be bad,” Cowen said. But really grim hyper-inflation à la Carter-era, he thinks is unlikely. It could only happen if the Federal Reserve decides it’s too risky to trim the sails of cheap money. “I’d put it at 20% chance that the Fed will think, ‘Trump might run again, and we don’t want Biden to lose . . . history’s in our hands, so we’ll wait to tighten.’ And then it just goes on, and then it’s very bad.”
But a recession is also bad. It’s hard to sort it all out. “As the saying goes, ‘If you’re not confused, you don’t know what’s going on,’” Cowen told me.
Thursday, November 18, 2021
Why does De Beers' sell bags of uncut (and unappraised) diamonds for a single take-it-or-leave it price?
Yoram Barzel, writing in 1977, argued... “Had the contents of a particular bag been available for appraisal by all buyers,” Barzel explained: “[E]ach would have spent resources to determine the properties of the diamonds. …
In other words, because buyers were spared the costs of evaluating individual stones, they were willing to pay De Beers more for the average stone. (link)
Tuesday, November 16, 2021
Monday, November 15, 2021
In 1975 Arthur Okun, an American economist, argued that societies cannot have both perfect equality and perfect efficiency, but must choose how much of one to sacrifice for the other.However, political views on this tradeoff diverge:
Views of income inequality are divisive. Leftists blame uneven distribution on outside factors, such as poor education and corporate misconduct. Conservatives, meanwhile, tend to view these differences as a fair consequence of an individual’s choices and abilities.Views on income inequality diverge across countries as well.
Today, Americans seem far more willing to tolerate inequality than people in most rich countries. “In the United States”, reflects Mr Monks, “nobody minds Bill Gates making $49 billion. He is an American hero. There's no sense of the virtue of a homogenous culture.”Bottom line:
Countries, like companies, will remain free to engineer greater or lesser degrees of equality. But there will be a price—as Sweden is discovering, and as Germany has already noticed. As the market for top talent grows more international, so it may force greater tolerance for inequality on countries that have spent half a century trying to root it out.HT: Bill Wilson
Thursday, November 11, 2021
Tuesday, November 9, 2021
Some 28 shipments were diverted from African countries to Paris and Brussels, then moved to Antwerp, where the customs officers noticed something was amiss. The drugs then moved into the normal wholesale chain and were sold at European prices - up to £3.80 a tablet instead of the 50p Glaxo charges in Africa.If Glaxo cannot prevent this kind of arbitrage, they may move to a uniform price which would price much of Africa out of the market.
Thursday, November 4, 2021
South Korea’s washing machine exporters to the US, Samsung Electronics and LG Electronics, on Wednesday said they will start operations of their new plants in the US as early as possible to minimize the possible impact of a likely sanction on their products.So, while the tariffs harm consumers with higher prices (for both washers and dryers), they have also increased domestic demand for labor, at least in this one industry.
Samsung and LG on Wednesday expressed concerns about the US International Trade Commission’s recommendation to the Donald Trump administration to impose a 50 percent tariff rate on large residential washer imports that exceeded a quota of 1.2 million units for a duration of three years in addition to the current rates of duty.
Friday, October 29, 2021
Chapter 9 suggests that people have to be compensated for taking harder jobs, e.g., undertakers earn a premium for the work they do. But the obverse of this is also true, that if you take more pleasant jobs, e.g., because they are close to home, you pay a penalty. Marginal revolution reports on evidence of what they call "mobility shocks" on kids who were forced to move from a town where a third of the houses were covered by lava:
...estimates suggest that being induced to move by the “lava shock” dramatically raised lifetime earnings and education.However, parents who were forced to move were slightly worse off.
Wednesday, October 27, 2021
- 38% of beer consumers—the largest segment—are Loyalists. These are the core beer drinkers; they do a lot of their imbibing on premise and tend to socialize around beer and sports
- 25% are Experimenters. These are people who have a passion for beer and are less price sensitive. They’re looking for unique taste profiles and variety and gravitate toward craft brews
- 15% are Aspirers. Ethnic groups are more dominant in this segment and they tend to drink imported beers
- 12% are Trend Seekers. These consumers are all about creating memorable events around social occasions. Food/beer pairings are a popular way for this group to connect
- 10% are Sippers. There’s a skew toward females in this group, and beer is usually not their first beverage of choice. Sippers are spurring the growth of sweeter, fruity beers.
Monday, October 18, 2021
- Each ton of burned coal produces 2.5 tons of carbon dioxide.
- A coal mine sells for about $1/ton of coal reserves.
- It costs about $100/ton to take the resulting carbon dioxide out of the air and sequester it.
So, rather than burning coal and paying $100/ton to sequester the resulting CO2, why not buy the coal mine and close it, for only $0.40/ton of CO2.
Am I missing something?
Chapters 19 and 20 talks about the problems of adverse selection and moral hazard caused by asymmetric info. This makes car insurance difficult to buy because you know whether you drive carefully, but the insurance company does not. Better information, e.g., by letting your insurance company monitor your driving via your cell phone location, will reduce prices for good drivers and raise them for bad ones.
In lieu of good information about driving, insurance companies use proxies like credit score: those with higher credit scores pay lower car insurance rates.
Now Allstate is leading an industry-wide group who wants track your driving to determine your insurance rates:
With telematics, insurers monitor policyholders’ driving behaviors either through smartphone applications or devices embedded in their vehicles. Insurers slice the tracking data to tailor individual rates.
While a switch could be unsettling to many people with privacy concerns, it would hold out the possibility of lower rates for vehicle owners who are excellent drivers or don’t drive that much, and who might now be overpaying for the risk they pose.
Bottom line: delivering this kind of info to insurance companies reduces the information asymmetry (drivers know more about their expected risks than do insurance companies) which can mitigate the effects of adverse selection and moral hazard.
Wednesday, October 13, 2021
Over 40 years ago, Sam Peltzman studied the behavioral changes from the 1968 adoption of a mandatory seat belt law. Before then, seat belts were an option that many new car owners had forgone (like the original owner of my first car, a 1964 VW bug). Engineers had estimated thousands of lives would have been saved had crash victims only been restrained. Their estimates were high. They had not accounted for the additional crashes. Once drivers were safer given a crash, they could drive a little faster and a little more recklessly and still be just as safe as without the seat belt. The net effect of more drivers surviving crashes, but more of them, was a smaller reduction in auto fatalities than had been predicted.
Peltzman's findings were controversial at the time but spawned a slew of research into how safety regulations affect behavior. The story goes that at one presentation, Walter Oi noted that car crashes also cause negative externalities. That is, often you crash into someone else causing harm to them as well as to yourself. The usual remedy for negative externalities is to make the reckless behavior more expensive, not less. Oi suggested that instead of seat belts, we should include a sharp spike on the steering column. The possibility of impaling oneself on "The Peltzman Spike" would focus the mind on avoiding crashes.
Monday, October 11, 2021
This year's Nobel prize in econ goes to three economists who developed methodologies for identifying correlation from causality.
We have blogged extensively about why causality is important to business and how to design experiments or analyses to identify it. In particular, use the web app to teach regression to understand the two mistakes you can make: Type I (mistakenly inferring causality) and Type II (mistakenly inferring no causality) errors occur. Try the learning exercises in this paper:
A Simple Way to Teach Regression
Sunday, October 10, 2021
As China enters what many economists say is the final stage of one of the largest real-estate booms in history, it is confronting a staggering bill: More than $5 trillion in debt that developers took on when times were good, according to economists at Nomura Holdings Inc.
That debt is nearly double what it was at the end of 2016 and is more than the entire economic output of Japan, the world’s third-largest economy, last year.
Global markets are braced for a possible wave of defaults, with warning signs flashing over the debt of about two-fifths of development companies that have borrowed from international bond investors.
Chinese leaders are getting serious about addressing the debt, with a series of moves meant to curb excessive borrowing. But doing so without torpedoing the property market, crippling more developers and derailing the country’s economy is quickly turning into one of the biggest economic challenges Chinese leaders have faced in years, and one that could reverberate globally if mismanaged. ...
Some prospective home buyers are balking, forcing the companies to cut prices to raise cash, and potentially accelerating their slide if the trend continues.
Thursday, October 7, 2021
On why men are more likely to major in economics:
One of the problems that we have, as a field, is that when students — before they even come into their freshman year, and they’re asked what do they want to major in, women will — if they want to major in the social sciences — will put down psychology, and men will put down economics, so we lose them before they even unpack their suitcases.
...people recenter their happiness. You can be in a place in which, if you were plunked down there from somewhere else, you’d be miserable, and yet, you’re there, and you recalibrate yourself, just like people recalibrate themselves when they have a bad health event. It takes a while.
On single-sex education:
...I had girlfriends, but I enjoyed being around the boys a lot more. I went to Bronx Science, which was about two-thirds boys. When I applied to college, I just could not imagine going to an all-girls school. Now I know the arguments in reverse, and I respect them, but it was certainly not for me.
On some for-profit education:
[e.g., students who want a quick business degree at a for-profit university] are not as aware as they should be of what they’re getting themselves into. They are often very needy. They’re low-income. They’re first-generation college. Someone is dangling in front of them something that they really want. They desperately want something that’s going to get them out of the hole that life has put them in. That person who’s dangling it is not giving them sufficient information and sufficient amount of time to get out of this contract. ...
The for-profits that give short courses that give a one-year certification in, let’s say, medical technicians — what we’ve shown in our work, those are not the big problem.
Saturday, October 2, 2021
Good post from Merle Hazard on the difference between Value and Price:
Simply put, price is what you pay for an investment, and value is what you get. ...Given that "price" and "value" are different, it is possible that the market quotation for an investment, its price, may be higher or lower than value.
...Investors tend strongly to fall into one of two camps.
Most primarily see publicly traded stocks, for example, as something akin to baseball trading cards. They are focused on price, not the underlying economics. ... If you have to sell in a hurry, it is impossible to deny that you are in the hands of others.
On the other hand, value believers see stocks as real pieces of real businesses, with an intrinsic worth independent of what others say. ... ...the "value" perspective yields the wisdom that a stock represents a real piece of a real business. As an owner, you have certain rights, like voting, electing directors, and getting your share of a dividend or liquidation. In the very long run, shareholders necessarily earn what the business earns.
Thursday, September 30, 2021
Rep. Cicilline says, “you can be one or the other. You can't set all the rules, control the marketplace, and also sell on it.” What he forgets is that vertical integration benefits consumers and businesses alike. If America followed Cicilline’s way, this new law would drive up the prices of everyday goods. In fact, it would be illegal for CVS to sell generic over-the-counter medications, leaving low-income Americans with fewer options and higher prices.
And don't forget the beneficial effect that private brands have on competition within a store:
And most consumers like having these generic brands as options because they’re cheaper, force prices down of name brands, and can even push companies to improve their quality.
So who benefits from this? Rival brands.
BOTTOM LINE: Antitrust laws protect competition, not competitors.
TRUTH IN BLOGGING DISCLOSURE: I wear only Kirkland.
Monday, September 27, 2021
|The Effects of DNA Databases on the Deterrence and Detection of Offenders|
|Anne Sofie Tegner Anker, Jennifer L. Doleac and Rasmus Landersø|
|This paper studies the effects of adding criminal offenders to a DNA database. Using a large expansion of Denmark's DNA database, we find that DNA registration reduces recidivism within the following year by up to 42 percent. It also increases the probability that offenders are identified if they recidivate, which we use to estimate the elasticity of crime with respect to the detection probability and find that a 1 percent higher detection probability reduces crime by more than 2 percent. We also find that DNA registration increases the likelihood that offenders find employment, enroll in education, and live in a more stable family environment. |
|Full-Text Access | Supplementary Materials|
Saturday, September 25, 2021
Reading Amazon Unbound by Brad Stone, his second bio of Jeff Bezos and Amazon, which picks up where The Everything Store left off. In the book, Bezos punishes managers for wasting time on small incremental--and successful--projects.
It is as if Bezos recognizes the perverse incentives created by ordinary managers, who punish employees for making the more-visible Type I errors (doing something that they shouldn't), rather than the less-visible Type II errors (failing to do something they should). Typically this kind of reward asymmetry leads to fewer Type I errors but more Type II ones.
But in an innovative environment, Type II errors typically have bigger costs, so it is incumbent on managers to find a way to avoid them. So Bezos rewards managers who fail spectacularly in pursuit of something big and punishes those who succeed at timid, incremental change.
Thursday, September 23, 2021
Health insurance costs about $20,000, 3/4 of which is paid by your employer. One way to keep costs down is to raise deductibles. This reduces costs is two ways:
- By reducing consumption of low value care (moral hazard); and
- By giving consumers an incentive to shop for lower price and higher quality care
Because insurance companies use monthly payments as a screen. By offering a big discount if you pay for six months, you screen out bad drivers, who cannot afford to do that.
This screen works for the same reason that screening on credit scores works, there is a positive correlation between credit scores and expected costs of insuring a driver.
- Credit scores effectively predict ... the total cost of [auto insurance] claims.
- Credit scores permit insurers to evaluate risk with greater accuracy, which may make them more willing to offer insurance to higher-risk consumers ... . [note: this is why you can call up GEICO, let them look at your credit report, and get an auto insurance quote over the phone].
- ..as a group, African-Americans and Hispanics tend to have lower scores than non-Hispanic whites and Asians.
- ...scores effectively predict risk of claims within racial and ethnic groups.
- The Commission could not develop an alternative scoring model that would continue to predict risk effectively, yet decrease the differences in scores among racial and ethnic groups.
Theory tells us that in states which ban the use of credit scores to price insurance (California and Massassachusetts) insurance companies would find it more costly to distinguish high from low risks, so they may lump them together (called "pooling"), and price insurance at the average risk. Or they may be concerned that only high risks would be willing to buy high-priced insurance (what economists call "adverse selection") and price high or, if price controls prevent high prices, exit the market.
I would be curious if any of our readers know of novel uses of credit scores as a screening mechanism, or if they have developed better predictors (point 5) in a particular application, like pricing insurance or screening job applicants.
Everybody Lies offers fascinating, surprising, and sometimes laugh-out-loud insights into everything from economics to ethics to sports to race to sex, gender and more, all drawn from the world of big data. What percentage of white voters didn’t vote for Barack Obama because he’s black? Does where you go to school effect how successful you are in life? Do parents secretly favor boy children over girls? Do violent films affect the crime rate? Can you beat the stock market? How regularly do we lie about our sex lives and who’s more self-conscious about sex, men or women?
I particularly liked the metaphors that Stephens-Davidowitz uses to describe his results. For example, in describing why it is easy to come up with variables that correlate with the stock market, but hard to find ones that can make accurate predictions, he uses the metaphor of coin flipping:
Suppose your strategy for predicting the stock market is to find a lucky coin -- but one that will be found through careful testing. Here's your methodology: You label one thousand coins - 1 to 1,000. Every morning, for two years, you flip each coin, record whether it came up heads or tails, and then note whether the Standard & Poor's Index went up or down that day. You pore through all your data. And voila! You've found something. It turns out that 70.3 percent of the time when Coin 391 came up heads the S&P Index rose. The relationship is statistically significant! Highly so! You have found your lucky coin!
Just flip Coin 391 every morning and buy stocks whenever it comes up heads. Your days of Target T-shirts and ramen noodle dinners are over. Coin 391 is your ticket to the good life!
Every statistics user should know that when running 1000 hypothesis tests, on average 50 of them will show statistically significant results, even when there is no relationship. This is the size of Type I error (5%) in classical hypothesis testing.
Instead, split your sample in two and use half the data to "find" (estimate) one lucky coin; and the other half to test it.
BOTTOM LINE: the more tests you run, the more likely it is that at least one of them will show a statistically significant relationship, even if there is none. This is likely behind what has become known as the replication crisis, that has hit the field of psychology particularly hard as only one third of the results from the most cited articles could be replicated. It is likely that academics are testing lots of hypotheses and publishing the few that turn out to be statistically significant. This is analogous to finding a lucky coin, as it only appears to be lucky. Once you test it outside the sample, the luck disappears.
TRUTH IN BLOGGING: the field of economics has its own replication crisis, only two thirds of top results could be replicated.
Wednesday, September 22, 2021
Newsom previously had shaken up single-family zoning by signing legislation that allowed more homeowners to build in-law units on their properties. SB 9 takes that further, allowing property owners to build up to two duplexes on what was once a single-family lot.However, the usual suspects [we hypocrites] are opposing density that reduces sprawl, pollution, and traffic:
Slow-growth group Livable California, which has pushed back against SB 9, called it a “radical density experiment” and worried developers would use it to remake neighborhoods without community input.In case I have to translate, "community input" means "no new supply" which raises the price of housing which benefits older, richer homeowners who are likely to vote; and hurts younger, poorer would-be homeowners who are less likely to vote.
...a recent 10-country study showing the fears of young people about climate change. Four in 10 are afraid to have children. Almost half said that fears about climate change caused them stress and anxiety in their daily lives.
Its estimated effects will be different for different regions:
...the hottest regions in South America, Africa, India and Australia experience welfare losses of 15% and the coldest regions in Alaska, Northern Canada, and Siberia undergo welfare gains as high as 14%. On average, the world is expected to lose 6% in terms of welfare...
The net estimated effect is negative but very uncertain:
One recent estimate suggests that climate change is likely to destroy about 10% of global welfare ... by the year 2200. To the economist, that is a truly significant quantity of resources. Furthermore, the distribution of those losses may [will] be unfair ...
But the future belongs not to the strong, but rather to the adaptable.
Tuesday, September 21, 2021
To communicate ideas, we need metaphors. Greg Mankiw has a good one in this mornings NY Times, Can America Afford to Become a Major Welfare State?
Providing a social safety net is like using a leaky bucket to redistribute water among people with different amounts. While bringing water to the thirstiest may be noble, it is also costly as some water is lost in transit.
In the real world, this leakage occurs because higher taxes distort incentives and impede economic growth. And those taxes aren’t just the explicit ones that finance benefits such as public education or health care. They also include implicit taxes baked into the benefits themselves. If these benefits decline when your income rises, people are discouraged from working. This implicit tax distorts incentives just as explicit taxes do. That doesn’t mean there is no point in trying to help those in need, but it does require being mindful of the downsides of doing so. ...
most European nations use that leaky bucket more than the United States does and experience greater leakage, resulting in lower incomes. By aiming for more compassionate economies, they have created less prosperous ones. Americans should be careful to avoid that fate.
Wednesday, September 15, 2021
Like many universities, some researchers at mine have sensitive data. Since a data breach would be calamitous, all university computers, laptops and desktops, must be encrypted. We just changed vendors for our encryption software. The new vendor requires a new version of the operating system. This requires backing up all of the data on a computer, installing the new OS and encryption functionality, and then reinstalling the backed up data (more on this in a later post). The process requires each computer user to bring their computer to our IT department and be present to provide log in credentials multiple times. If all goes smoothly (more on this in a later post), the process takes 2-3 hours of both the user's time and the techie's time. They estimate that this must be done for 7,000 university computers.
It will take 14,000 to 21,000 hours of just techie time, or 7 to 10.5 person-years at 2,000 hours per work-year to accomplish this task. I think this means that about half of the IT department's staff will be working on just this task full-time for a year. Suppose the average of techie's and staff/faculty salary is $80,000 to $100,000. This means that for a 2,000 hour work year, each hour is worth $40-$50 not counting benefits. The total value of lost time could easily be in the $1.1 million to $2.1 million range. I strongly suspect these costs were not fully taken into account when selecting the new vendor. I strongly suspect that this is greater than the marginal benefits from the new vendor.
Tuesday, September 14, 2021
Sunday, September 12, 2021
Thursday, September 9, 2021
I spent the morning searching for an old Economist article on this topic, and came up with these citations: