Friday, December 30, 2022

California just increased demand for econometricians

Senate Bill 1162 will also amend the requirements for employers regarding pay data reporting. For example, a private employer that has 100 or more employees will be required to submit a pay data report covering the prior calendar year to the state on or before the second Wednesday of May each year, beginning May 10, 2023. The required elements of the report will also expand to include the median and mean hourly rate for each combination of race, ethnicity and sex within each job category. 

 The Bill will create a lot of work for econometricians to either find pay differences or explain them away. 

World income distribution

 


Wednesday, December 28, 2022

Another gender gap: compensating differentials for being thin

 From the Economist, The economics of thinness,

Myriad studies which find that overweight or obese women are paid less than their thinner peers while there is little difference in wages between obese men and men in the medically defined “normal” range. 
... research in America, Britain, Canada and Denmark suggests that overweight women do have lower salaries. The penalty for an obese woman is significant, costing her about 10% of her income.
An economist at the BLS offers a partial explanation: “the increasing rarity of thinness has led to its rising premium.”

Monday, December 26, 2022

The zero-sum fallacy explains political orientation

Thomas Sowell noted that the same people often take different sides of seemingly unrelated issues. The zero-sum fallacy--that if one person gains, someone else must lose--may explain this:
[those] who view the world in more zero-sum terms tend to support policies that redistribute income from the rich to the poor ... This includes redistributive policies like taxation, universal healthcare, and affirmative action for women and African-Americans. .

..zero-sum thinking is associated with preferences for liberal economic policies in general and with stronger political alignment with the Democratic Party
HT: MarginalRevolution.com

Sunday, December 25, 2022

Why are bakers adding sesame to their products?

MarginalRevolution.com has the answer:
APNews: A new federal law requiring that sesame be listed as an allergen on food labels is having unintended consequences — increasing the number of products with the ingredient. 
Food industry experts said the requirements are so stringent that many manufacturers, especially bakers, find it simpler and less expensive to add sesame to a product — and to label it — than to try to keep it away from other foods or equipment with sesame.

This is analogous to the infamous Cobra Effect, when a bounty on dead Cobra's was set so high that it became profitable to raise the snakes and then kill them for the bounty.  

Wednesday, December 14, 2022

Uncertainty as a tax on mergers

President Biden's Antitrust leadership wants fewer mergers, but changing merger policy is hard when your decisions can be reviewed by a court and go against 50 years of well-developed case law (See Can the FTC Turn Back the Clock, written by some middling economists). 

 Instead, Biden's regulators are trying to change policy indirectly, by creating what Sokol et al. call "Regulatory Uncertainty,"which acts as a tax on mergers. 

Surprisingly, however, practitioners thought that the harm might be limited:
As the FTC and DOJ continue to focus their attention on resource-intensive enforcement of a few high-profile technology and pharmaceutical companies, practitioners see more deals escaping scrutiny.

So basically, if President Biden's regulators are busy elsewhere, they cannot prevent as many mergers.   

Collusion on how to compete

https://twitter.com/Noahpinion/status/1602753162166665217

HT:  MarginalRevolution.com

Saturday, December 3, 2022

Consult an economist before buying a wedding dress


When Stephanie (her name has been changed to avoid embarrassment) went shopping for a wedding and bridesmaid dresses, she found valuable advice from an unusual source, Chapter 23 of her favorite economics text.  And it was not about sleeve options, figure flattery, or bustles.

She was puzzled that over half of the stores that sell wedding dresses do not permit photos, and do not have tags in the dresses that would identify the manufacturer and style type.  

These retail stores want to prevent customers from "free riding" on their fitting and display services:
I just spoke with someone who had all her bridesmaids sized in the store only to go online and buy them from a discount site. I would assume many of the brides are doing this as well.
Note that this is not just a problem for the store, but also a problem for the dress manufacturer: if stores cannot prevent free-riding, they will invest less in point-of-sales fitting services, and dress sales will suffer.  See our earlier post about golf club manufacturer PING, who faced a similar problem,
The discount retailers were advising consumers to visit a full-service retailer to request a custom-fitting session, and then bring the specifications for custom-made clubs back to the discounter. PING could control this kind of opportunistic behavior only by dropping dealers, a very costly option.
PING wanted to set a minimum retail price (called "retail price maintenance") to address the problem.  The minimum price meant that discount retailers could not undercut full service retailers.  The antitrust laws prevented this until the Supreme Court changed the case law.

For the wedding dresses, the no-photos policy created a problem for Stephanie because she wanted to photograph her bridesmaids in each of the dresses to make sure that they choose the best dresses for the wedding. So she chose to purchase from a large retail chain, like J. Crew, BCBG, Ann Taylor, or Nordstrom’s because they had solved the free riding problem, using exclusives, where only one chain carries the style.

For an economic analysis of resale price maintenance, see the amicii brief of 24 antitrust economists (I am one of the 24.)

UPDATE:  Amazon just made free riding a lot easier.

How did Blockbuster's CEO solve the double marginalization problem?

Hal Varian's (Chief Economist at Google) tells the story of Blockbuster (a video "rentailer") and its distributors who suffered from "double marginalization" or "the double markup problem." In other words, competition between firms selling complementary products results in a price that is too high and output that is too low:
Consider, for example, video tape rental industry. Prior to 1998, distributors sold video tapes to rental outlets, which proceeded to rent them to end consumers. The tapes sold for around $60 apiece, far in excess of marginal cost. The rental stores, naturally enough, economized on their purchase, leading to queues for popular movies.
The old contractual form suffered from double marginalization, which resulted in video rental prices that were too high and output that was too low.

The Blockbuster CEO recognized this as a problem and proposed a solution:
In 1998 the industry came up with a new contractual form: studios provided video tapes to rental stores for a price between zero and $8, and then split revenue for rentals, with the store receiving between 40 and 60 percent of rental revenues.
Although the stores marginal revenue was cut in half, the marginal cost of a video went down by about 90%.  As a result,
.. these contracts increased revenue of both studios and rental outlets by about 7 percent and consumers benefitted substantially. Clearly, the revenue sharing arrangement offered a superior contractual form over the system used prior to 1998.
 This arrangement is subject of course to verification of the downstream revenue by the upstream distributor.  New "smart" cash registers at Blockbuster made this possible:
The interesting thing about this revenue-sharing arrangement is that it was made possible only because of computerized record keeping. The cash registers at Blockbuster were intelligent enough to record each rental title and send in an auditable report to the central offices. This allowed all parties in the transaction to verify that revenues were being shared in the agreed-upon way. The fact that the transaction was computer mediated allowed the firms to contract on aspects of the transaction that were previously unobservable, thereby increasing efficiency. 
More of Hal Varian's insights about economics (there are some good stories here) can be found in his popular columns.  He is most famous to MBA's for saying that "marketing is the new finance," urging the Quants, who used to go into finance, go into marketing instead.

HT:  Vlad Mares

Noisy ESG metrics lead to moral hazard and adverse selection

 

Noisy performance metrics lead to moral hazard (firms shirk on ESG efforts), and adverse selection (ESG investors more likely to invest in firms who are not ESG). 

 Link: AEA 

Friday, December 2, 2022

The cobra effect in software development

When software developers are given a bounty to find bugs, they pay fellow developers to create bugs that they then find and claim a bounty.  This is an old problem, called the "Cobra effect."

From Wikipedia:

The British government, concerned about the number of venomous cobras in Delhi, offered a bounty for every dead cobra. Initially, this was a successful strategy; large numbers of snakes were killed for the reward. Eventually, however, enterprising people began to breed cobras for the income. When the government became aware of this, the reward program was scrapped. When cobra breeders set their now-worthless snakes free, the wild cobra population further increased.[5]

Other examples:

  • In 2005 the UN Intergovernmental Panel on Climate Change began an incentive scheme to cut down on greenhouse gases. Companies disposing of polluting gases were rewarded with carbon credits which could eventually get converted into cash. The program set prices according to how serious the damage the pollutant could do to the environment was and attributed one of the highest bounties for destroying HFC-23, a byproduct of a common coolant,HCFC-22. As a result, companies began to produce more of this coolant in order to destroy more of the byproduct waste gas, and collect millions of dollars in credits.
  • The United States Endangered Species Act of 1973 imposes development restrictions on landowners who find endangered species on their property.a While this policy has some positive effects for wildlife, it also encourages preemptive habitat destruction (draining swamps or cutting down trees that might host valuable species) by landowners who fear losing the lucrative development-friendliness of their land because of the presence of an endangered species. In some cases, endangered species may even be deliberately killed to avoid discovery. This same perverse incentive has also been observed in other countries, including Canada and various European countries.

Why doesn't insurance cover floods, earthquakes or bed bugs?

Planet Money has another episode that is making me rethink my opposition to government subsidies for public broadcasting.  In The Fine Print, a reporter reads his homeowner's insurance policy.  In it, he discovers that the policy does not pay for:
  • Floods: because floods hit all the homeowners in an area at the same time, so insurers cannot diversify the risk (called "correlated risk") so insurance companies become more risk averse, so there is less of a gain from insurance
  • Earthquakes: adverse selection costs are high (only the homeowner knows if they are close to an active fault) and how likely it is that their house would withstand an earthquake; and
  • Bedbugs: moral hazard costs are high (once consumers buy bedbug insurance, they engage in riskier activities, like picking furniture off the street).

Tuesday, November 29, 2022

A business plan built on screening out bad risks

If you can find a way to signal that you are a safe driver, you should be able to get better rates.  Here is how Progressive screens out bad drivers:

You, the consumer, agree to allow Progressive to install a monitor that plugs into your car's onboard diagnostic system. Progressive then monitors how you drive: how far, how fast, how many hard brakes and so on. If Progressive likes what it sees, you can get your bill knocked down by as much as 30% after 30 days. Six months later, you mail the device back and have the opportunity to lock in the discount — permanently. If, on the other hand, Progressive puts you in the naughty category, sorry, no discount.

HT: Micah

Which governments can get out of the way of growth?

John Cochrane reminds us to keep our eyes on the prize:
In the long run, nothing else matters. GDP buys you health, advancement of the disadvantaged, social programs, international security, and climate if you are so inclined. Without GDP, you get less of all.  Economic policy should have one central goal -- get productivity growing again, or (in my view) get out of the way of its growth. This is the one little hope that has not been let out of the policy Pandora's box, focused on everything else right now.

Macroeconomists classify two basic types of growth:  

  • More inputs (labor, capital) lead to more output (GDP)
  • Technological progress (Total Factor Productivity) increases output for the same level of input.





And here is the change in Total Factor Productivity across countries.  




We have blogged about the dearth of unicorns in the EU,
  Infographic: The Countries With the Most Unicorns | Statista 
Total Factor Productivity seems to be telling the same story.


Will Resale Price Maintenance Return?

[Orignally posted in 2007], the Supreme Court removed the blanket prohibition against retail price agreements between manufacturers and retailers. PING (the golf club manufacturer) submitted an amicus brief in the case that detailed how difficult it is to prevent discount retailers from free riding on the custom fitting services of full service retailers. 

The discount retailers were advising consumers to visit a full-service retailer to request a custom-fitting session, and then bring the specifications for custom-made clubs back to the discounter.

PING could control this kind of opportunistic behavior only by dropping dealers, a very costly option. [For an economic analysis of resale price maintenance, see the amicii brief of 24 antitrust economists--full disclosure: I am one of the 24].

Now PING has another option, minimum resale price maintenance. The federal legality of these agreements will now be determined under a rule of reason. However, it is likely that those states more inclined towards regulation, like California and New York, will try to "repeal" the Supreme Court decision with state legislation, setting up a conflict between state and federal antitrust laws.

This just in:  some manufacturers are suing retailers who sell merchandise on eBay at a discount.

Sunday, November 27, 2022

tit-for-tat in the New Congress

In a repeated prisoners' dilemma, [play coauthor Mike Shor's online game against 5 different players], the best strategies exhibit the following characteristics: 
  • Be nice--no first strikes 
  • Be provokable--retailiate immediately if your rival cheats 
  • Be forgiving--don't punish cheating too much 
  • Be clear--make sure your rival can interpret your moves 
  • Dont be envious--focus on only your slice of the profit pie

Tit-for-tat is the winning strategy (examples)

The WSJ reports that new Republican House Speaker is doing exactly what the previous Democratic House Speaker did, in order to deter future abuses of power:

Republicans believe that if they don’t play tit-for-tat like this, Democrats will feel empowered to keep escalating. Maybe if Democrats get the same ill treatment, the GOP thinks, Democrats will revert to better form the next time they’re in the majority.
Of course, this works only in an evenly divided Congress. If one party gains the majority for a long time, it need not fear retaliation.

Play the repeated prisoners' dilemma

By playing against one of five types you learn how to sustain cooperation:

  1. Be nice--no first strikes
  2. Be provokable--retailiate immediately if your rival cheats
  3. Be forgiving
  4. Be clear--make sure your rival can interpret your moves
  5. Dont be envious--focus only on your slice of the profit pie
HT: Jordan

Friday, November 25, 2022

When are between group differences evidence of discrimination?

WSJ: Disparity doesn't necessarily imply Racism 

To measure the effects of discrimination, one has to rule out skills, education, or other factors that could explain between-group differences. 

To understand this, go to LearnRegression.com and click on the "Differences between groups" page.  Then click on the X,Y graph to create data that shows two things:  (i) a  statistically significant mean difference in Y for the blue and black groups:And (ii):  once we account for the differences in X, the between-group differences lose statistical significance:
 
The author finds the same pattern in data for "unemployment, teen pregnancy, incarceration and other outcomes."
The solution isn’t to look away from discrimination. It does exist. But we also can’t point at every gap in outcomes and instantly conclude it’s racism. Prejudice must be measured rigorously. Statistically. Disparity doesn’t necessarily imply racism. 

Housing bubbles in Australia, Canada, and Sweden?

House prices are now starting to fall after years of vertiginous growth. And it is overheated markets, overheated markets, like those in Australia, Canada and Sweden, that are facing some of the sharpest drops. A mortgage binge fuelled by rock-bottom interest rates has left each country with enormous quantities of household debt. As a share of disposable income, such debt sits at 185% in Canada, 202% in Australia and 203% in Sweden. By contrast, debt levels have shrunk in countries that bore the brunt of the last crash, including America, Ireland and Spain (see chart).
ver·tig·i·nous: /vərˈtijənəs/ adjective, causing vertigo, especially by being extremely high or steep.

Mercedes "crimps" its electric vehicles

Mercedes is degrading the acceleration of some electric vehicle models in order to offer two products, at different prices, to appeal to high and low value consumers.  Classic indirect price discrimination:

Mercedes-Benz is the latest auto manufacturer to unveil a subscription fee to unlock perks, such as the ability to boost acceleration. 
The $1,200 yearly subscription is called "Acceleration Increase" and can be found on Mercedes' online store. 
"COMING SOON - Accelerate more powerfully: increase the torque and maximum output of your Mercedes-EQ," reads the description on the online store. It's available for all upcoming EQ electric models that will "improvement in acceleration of 0.8 to 1.0 seconds (0-60 MPH)."

Similar to what Tesla's does with range (Tesla "Crimping?")

Tesla "Crimping?"

Alex Tabarrok over at Marginal Revolution thinks Tesla may have unwittingly committed a marketing faux pas. As Hurricane Irma bears down, they expedited an over-the-Internet update to the cars' software to extended battery life.
Tesla owners in Florida may be grateful for this mileage boost as they escape the ravages of Irma but I suspect that some of them will be upset when they have more time to reflect. How could Tesla increase the mileage at the flick of a switch? The answer is that owners of the Tesla 60kWh version of its Model S and Model X actually have the same battery as the 75kWh vehicles but the battery has been purposely limited or “damaged” to provide only 60KWh of mileage. But why would Tesla damage its own vehicles?

The idea of offering both premium and discount versions is common, as is purposely 'damaging' the product one so as to make the discount version perform more poorly than the premium version (i.e. "Crimping").

In this case though, there may have been no deception. There is a report that owners may have opted not to pay for the better battery life.

The real meaning of Thanksgiving

Peter Klein gives us the story of the first Thanksgiving that you never learned in school:
Faced with potential starvation in the spring of 1623, the colony decided to implement a new economic system. Every family was assigned a private parcel of land. They could then keep all they grew for themselves, but now they alone were responsible for feeding themselves. While not a complete private property system, the move away from communal ownership had dramatic results.

 This year I am giving thanks for private property. 

 Related:  Good short video on the how private property saved the Pilgrims, China and Vietnam from our friends at MarginalRevolution University

Friday, November 18, 2022

Netflix's decentralized organizational form

https://jobs.netflix.com/culture
  1. encourage independent decision-making by employees
  2. share information openly, broadly, and deliberately
  3. are extraordinarily candid with each other
  4. keep only our highly effective people
  5. avoid rules
We can put this "culture" into the taxonomy of our textbook (decision rights, performance metrics, reward schemes):
  1. Decision rights are decentralized (employees have tremendous freedom)
    • There are virtually no spending controls or contract signing controls. Each employee is expected to seek advice and perspective as appropriate. “Use good judgment” is our core precept.
    • Our policy for travel, entertainment, gifts, and other expenses is 5 words long: “act in Netflix’s best interest.” We also avoid the compliance departments that most companies have to enforce their policies.
    • Our vacation policy is “take vacation.” We don’t have any rules or forms around how many weeks per year. Frankly, we intermix work and personal time quite a bit, doing email at odd hours, taking off weekday afternoons for kids’ games, etc. Our leaders make sure they set good examples by taking vacations, often coming back with fresh ideas, and encourage the rest of the team to do the same.
    • Our parental leave policy is: “take care of your baby and yourself.” New parents generally take 4-8 months.
    • Each employee chooses each year how much of their compensation they want in salary versus stock options. You can choose all cash, all options, or whatever combination suits you. You choose how much risk and upside you want. These 10-year stock options are fully-vested and you keep them even if you leave Netflix.

  2. Subjective performance metrics designed to identify the highest performer
    • We focus on managers’ judgment through the “keeper test” for each of their people: if one of the members of the team was thinking of leaving for another firm, would the manager try hard to keep them from leaving? Those who do not pass the keeper test (i.e. their manager would not fight to keep them) are promptly and respectfully given a generous severance package so we can find someone for that position that makes us an even better dream team.

  3. Rewards are set at the highest level (including a "risk premium" to compensate employees for the risk of getting fired)
    • To help us attract and retain stunning colleagues, we pay employees at the top of their personal market. We make a good-faith estimate of the highest compensation each employee could make at peer firms, and pay them that maximum. Typically, we calibrate to market once a year. We do not think of these as “raises” and there is no raise pool to divide up. The market for talent is what it is. We avoid the model of “2% raise for adequate, 4% raise for great”. Some employees’ market value will rapidly rise (due both to their performance and to a shortage of talent in their areas) while other employees may be flat year-to-year, despite doing great work. At all times, we aim to pay all of our people at the top of their personal market.

Tuesday, November 15, 2022

I love this interview question

 

Tell me a time when you went around your manager to make a decision. Why did you do it, and what was the outcome?
The question is so good because the answer reveals so much. 
  • If you has never done this, does it mean that you are not very experienced, or that you are a corporate sheep, going along to get along. 
  • If you have done this, does it mean that you are following your own agenda rather than trying to implement your company's strategy.  
Using the idea of incentive alignment,(make sure employees have enough information to make good decisions and the incentive to do so), it becomes clear what a good answer might be:

I have gone, and would go, around my manager if I thought I had better information than she did. But if I thought she had considered my point of view, I would defer to her judgement, as she may be trying to achieve goals or have concerns that do not occur to me.   

From Amazon (link)

Friday, November 11, 2022

11/22: Is the stock market over-valued?

Price of a stock is supposed to go close to its value in the long run. But how does one determine value? We have talked about Shiller's P/E ratio. From your Finance class, you know that the "value" of a stock is its discounted future earnings. But cannot observe future earnings, so Shiller used a moving average of past earnings and found that stock prices seem to revert to about 17 times earnings.
The current Shiller P.E Ratio for the S&P 500 is 39.89. Last month the ratio was at 38.68, and a year ago was at 34.51. In fact, the ratio is now at its highest level in the last 20 years.
Another value metric is the total capitalization of the stock market relative to GDP (From Zerohedge).  

Wednesday, November 9, 2022

How higher interest rates bring down inflation.

 

The above graph shows a sharp drop in mortgage applications (to buy houses).  This is how the Federal Reserve is trying to reduce inflation:  by raising interest rates, they reduce demand for capital spending, e.g., equipment, cars, and houses, where you typically borrow to make the purchase. 

As demand for goods and services falls, their prices start falling as well.  From CalculatedRisk.com

Recently we've seen used car prices down over 10% and framing lumber prices down 33% 

Currently inflation is running close to 9%, and many expect the Fed to keep raising interest rates until the rate of annual price increases drops to around 2%. 

WSJ: EU Doubles Down on Big Government

WSJ reports:

Unlike during the financial crisis, the eurozone crisis and the pandemic, free-spending governments are on a collision course with the [European Central Bank], which has raised interest rates at its fastest-ever pace to cool inflation. The eurozone’s inflation rate rose to 10.7% in October, a fresh high, while price growth in the U.S. slowed to 8.2% in September.
...The IMF last month urged Europe to cut state spending to support central banks in the fight against inflation
As interest rates go up, firms' cost of capital increases, and fewer investments are made, e.g., in capital equipment, in houses, cars. As spending decreases, incomes also decrease because one person's spending is another's income (this is the "Keynesian Multiplier" in your Macroeconomics class).

Friday, November 4, 2022

Benefits of inflation?


The only other time in US history that our debt/GDP ratio was as high as it is today was after WWII (link).  High inflation in the following three years (8.5%, 14.4%, and 7.7%, link) reduced the real amount (in deflated dollars) that we had to pay back. Lenders (debt holders) lost, but borrowers (the US govt) won.

HT:  Cramer

Wednesday, November 2, 2022

Bidenomics: US turning into France

 You know the President's in trouble when the left-leaning Economist goes off on him:

Joe Biden’s colossal economic stimulus in early 2021 first set inflation on its feverish trajectory, before Russia’s invasion of Ukraine sent prices spiralling further. Voters may soon punish him for it, among other perceived excesses....
Mr Biden has signed three landmark bills, on infrastructure, semiconductors and the environment, which together contain plans to spend $1.7trn. With his executive actions, these amount to full-blown industrial policy. The result is unlike anything seen since Congress threw its weight behind America’s car- and chipmakers in the 1980s. The government will dole out $180bn in subsidies and tax credits to local firms over the next five years. At 0.7% of gdp, that is more than supposedly dirigiste France.
Dirigisme: an approach to economic development emphasizing the positive role of state intervention. The term dirigisme is derived from the French word diriger (“to direct”), which signifies the control of economic activity by the state.

Bank strategies are changing in response to Fed Policy

Wells Fargo, the bank most reliant on Home Mortgages is laying off employees:
The ranks of mortgage loan officers, who mainly earn commissions from closing deals, is expected to drop to under 2,000 from more than 4,000 at the start of the year, according to one of the people. Many salespeople haven’t closed a single loan in recent weeks, this person said. 

And changing strategy:

Among the six biggest U.S. banks, Wells Fargo has historically been the most reliant on mortgages. But that has begun to change under CEO Charlie Scharf, who has said that the bank is looking to shrink the business and focus primarily on serving existing customers.

What happens next in Russia?

From The Economist:
questions that weigh heavily these days on the minds of the Russian elite, its bureaucrats and businessmen, as they observe the Ukrainian army advancing, talented people fleeing Russia and the West refusing to back down in the face of Vladimir Putin’s energy and nuclear blackmail. “There is a lot of swearing and angry talk in Moscow restaurants and kitchens,” one member of the elite says. “Everyone has realised that Putin has blundered and is losing.”
To fill this power vacuum, those who provide support to President Putin's regime may soon re-focus their energies (and armies) on fighting for power in a post-Putin world. 

This is analogous to what happens in a prisoners' dilemma: self interest (struggling for power in a post-Putin world) trumps group interest (supporting Putin's regime).

Monday, October 31, 2022

Truth in Education: which majors go into which jobs?

Research from Conlon & Patel showing that "many more students expect to attain their major’s stereotypical career than actually work in that job: 

  • 65% of prospective art majors expect to be artists (only 17% are), 
  • 63% of biology majors expect to be doctors(23% are), 
  • 42% of communications/journalism majors expect to be writers or journalists (4% are), 
  • 62% of psychology majors expect to be counselors (21% are), 
BOTTOM LINE:
  • Majors more likely to end in disappointment:  "—e.g., fine arts, humanities, communications, psychology—have both rare stereotypical careers and low-paying alternatives." 
  • Majors less likely to end in disappointment: "STEM, business, education, and nursing, either because these majors’ stereotypical careers are objectively quite common or because wages are high even for those who end up in non-stereotypical careers."
Related Information on choice of majors (past blog posts)

Friday, October 28, 2022

What happens when you reduce a wealth tax?

 Evidence from Switzerland:

...1 percentage point drop in a canton's wealth tax rate raises reported taxable wealth by at least 43% after 6 years.  
Wealth reported to the government goes up because: 
  • Less tax evasion as the benefits of evading the wealth tax decrease (Ch03); 
  • Wealthy people migrate to lower-tax areas (Ch02); and 
  • House prices rise, increasing wealth, as the benefit of living in a lower-tax area increase housing demand (Ch09).
BOTTOM LINE:  markets discipline governments.

Thursday, October 27, 2022

zan, zindiqi, azadi (women, life, freedom)

From The Economist:

At the funeral women ripped off their headscarves. Police shot back with tear-gas, sparking protests that quickly spread. In scores of cities across an array of provinces they chanted Amini’s name, crying “Death to the dictator!”—the same cry that had toppled the shah in 1979. Could it happen to the ayatollahs? ...
For the first time in the Middle East, women have been leading the protests. They have had enough of men in turbans controlling how they must dress, travel and even work. By law, they still need male guardians to go between provinces or stay in hotels. If they have no male relative, a local mullah may have them married off. ...
Many religious Iranians are appalled by the corruption as well as the violence perpetrated in the name of their faith. They fume at the sight of ayatollahs’ sons driving Ferraris or Porsches. ...
What is certain is that Mr Khamenei and the Islamic regime are both in deeper trouble than at any time since the shah was toppled in 1979. They are dithering, unsure whether to repress more brutally or give ground. The protests could yet fizzle out, as they have before. But this time there is at least a chance that they will persist. The beginning of the end of the Islamic regime must surely be in sight. ■

Evidence that Chinese are "running for the exits"

To exit, they sell their renminbi to buy dollars, increasing the supply of yuan, driving down its price (in terms of dollars).  Note that the vertical axis runs from a high of 6.2 yuan/dollar (16.1¢) to a low of 7.2 yuan/dollar (13.8¢).  

See earlier post, Time to run for the exits in China?, where I pre-register these hypotheses.
If this article is right, look for a devaluation of the yuan, and an appreciation in Bitcoin. 

Bono mugged by reality

MR Revolution reports:
...I thought that if we just redistributed resources, then we could solve every problem. I now know that’s not true. There’s a funny moment when you realize that as an activist: The off-ramp out of extreme poverty is, ugh, commerce, it’s entrepreneurial capitalism. I spend a lot of time in countries all over Africa, and they’re like, Eh, we wouldn’t mind a little more globalization actually.

Wednesday, October 26, 2022

Who won the PA senate debate last night?

 Talk is cheap, lets ask a prediction market.

Time to run for the exits in China?

The Financial Times reports that wealthy Chinese are trying to:
“Now that ‘the chairman’ is firmly in place . . . I have already received three ‘proceed’ instructions from various ultra-high net worth Chinese business families to execute their fire escape plans,” Lesperance said. ...
China’s rich, he said, are not only worried about rumours of an official wealth tax that would replace informal “common prosperity” donations. They are also increasingly concerned for their personal safety, even once they have left. ...
“The family motto has always been: ‘Keep a fast junk in the harbour with gold bars and a second set of papers’. The modern equivalent would be a private jet, a couple of passports and foreign bank accounts,” Lesperance says. “That is the world we are in . . . it is tough stuff.”
Gold bars show up on scanners at the airport. Maybe use crypto instead. 

BOTTOM LINE: If this article is right, look for a devaluation of the yuan, and an appreciation in Bitcoin. 

 RELATED: China’s property crash: ‘a slow-motion financial crisis’
...the slumping property market, the sputtering investment engines of local governments and a hefty burden of national debt signals the end for a model of growth that has not only transformed China but also been the biggest generator of global economic expansion for well over a decade. ...
In the free markets of the west, financial crises can erupt suddenly, taking governments and investors by surprise. But in China’s state-driven economy, infirmities metastasise more slowly as Beijing deploys political and financial capital to battle against the turning tide. This gives proceedings a more stately aura, but it does not mean that underlying problems are any less severe, analysts say.

Tuesday, October 25, 2022

How likely is a Red Wave on Nov 8?

Ask the prediction market that President Biden is trying to shut down. [The CFTC withdrew its "no-action" letter to PredictIt in August.]  

The contract which pays $1 if Republicans win the Senate is trading at $0.64 (in RED), implying a 64% probability.  The market is also predicting an 89% chance of a Republican House.  

Note that these kinds of prediction markets are easy to set up and can help Firms make more accurate predictions about their industry, and about their own strategies.

Why men pay to stay married

Steven Landsburgh's classic article

In the year following a divorce, women's living standards fall by 27 percent while men's living standards rise by 10 percent. What explains this?
...A 30-year-old woman who wants a family is getting close to the point where she has to choose the best of her available suitors. A 30-year-old man can always choose to wait another five or 10 years till someone better comes along. In general, the longer you spend searching for something—be it a car, a house, or a life partner—the happier you're going to be with the one you end up with. So—again, with myriad exceptions—a woman's optimal strategy is to settle for an imperfect mate and then try to change him. A man's optimal strategy is to search until he finds someone close to perfect. It's therefore no surprise that women, more often than men, should end up regretting their choices. 
In hindsight, it all makes sense. Once you realize there's a biological clock, you should be able to predict that men (having searched long and hard for the perfect partner) would make financial sacrifices to preserve their marriages, and that women who stay married to imperfect partners would be kept in their marriages by financial rewards—or, to say the same thing another way, that women who leave their marriages would make financial sacrifices. (And you should also be able to make a lot of auxiliary predictions, such as this one: Wives try harder to mold their husbands than husbands try to mold their wives—because husbands wait until they've found wives who need relatively little molding.) Fairness never had anything to do with it.

Monday, October 24, 2022

Book Review: Chaos Monkeys:

 Chaos MonkeysObscene Fortune and Random Failure in Silicon Valley is an autobiography of a Physics PhD from Berkeley who:

  • Went to Goldman Sachs to model credit derivatives; 
  • Founded a startup to be the Goldman Sachs of online ads:  instead of moving companies to their highest valued uses it moved ads to the best content .  
  • Created FBX (Facebook Ad Exchange) that allows advertisers to bid for targeted users.

The NY Times begrudgingly gave it a good review (they were able to look past the self-interested behavior the book celebrates and satirizes) because of its "educational value."  The book teaches readers:

1.  To anticipate opportunistic behavior caused by the incentive conflicts between entrepreneurs, angel investors, and venture capitalists.  

2. To understand how ad exchanges (i) find the highest-value ads for each piece of content, and (ii) find the highest-value content for each ad.  

3. How (not) to navigate the internal politics of Facebook, as it moves from a small startup ("move fast and break things") to a mature bureaucracy (self-interested bureaucrats), in a fast-changing environment.  

Useful tips for those working at startups:

  • Acquisitions are mainly about people, not ideas or technology.  Any acquired technology will require continuous updating, so the people who can do that are more valuable than technology they create.
  • Negotiate your stock bonus vesting schedule:  the longer it is, the less value it has because it "locks you in" to one company, regardless of whether that is your highest valued use  
  • Facebook's "one ask" policy on office romances.  To avoid creating a hostile work environment for the few women who worked at Facebook, it allowed employees only one time to ask another employee out.  If (s)he says "no," and you ask again, HR comes knocking.  

I found the book informative, a fun read, and loved the surprising ending.   Highly recommended.


How to choose a mate in Kansas

The Kansas State House of Representatives recently added language to a bill to include the option of covenant marriage. If the bill is passed into law, Kansas will join Arkansas, Arizona and Louisiana as the only states with covenant marriage laws

You can learn something about your potential mate if he or she wants a "traditional" rather than a "covenant" marriage:
...under the "traditional" marriage, a couple is entitled to a no-fault divorce after a six-month separation.
When a couple opts for the "covenant" marriage, they agree to waive their right to the no-fault divorce. In the event that the marriage does fall apart, only adultery, abuse, abandonment or a lengthy separation will allow a divorce to take place.
See The Contractual View of Marriage on how relationship-specific investment differentiates marriage from a series of meaningless spot market transactions.

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 [originally posted in 2007], I wonder why the price is so low.

If you subsidize homelessness, you get more of it

This article
The Way Los Angeles Is Trying to Solve Homelessness Is ‘Absolutely Insane’ misses the big picture in two ways:
  1. It ignores the simple idea that if you subsidize anything, like homelessness, you get more of it; and
  2. The NIMBY wars over zoning that raise the price of housing is one of the causes of homelessness.  
On the plus side, it describes the costs of the NIMBY wars in LA in ironic detail:
When do Angelenos want affordable housing? Now! Where do they want it? Not here!
And it documents the added cost of the zoning which reduces supply.
“If you look at the inflated cost [$500,000/unit] that comes along with all of the regulation and rules and restrictions and limitations,” Galperin said, “then basically all of this money is going to feed the beast of covering the cost of the regulations. ... We’ve created an absolutely insane system.”
PREDICTION: Nothing will get done, despite Homelessness being voters' #1 concern: "The politics of the affordable housing crisis are terrible. The politics of what you’d need to do to solve it are even worse."

Former student Mike Saint (deceased) said as much a while ago in his book NIMBY Wars: The Politics of Land Use

HT: MarginalRevolution.com

Tuesday, October 18, 2022

Get rich quick: turn a brown company green

The WSJ has a get-rich-quick scheme on their editorial page.  Since green companies carry a 300-basis-point equity-valuation premium over brown ones, buy a brown one, turn it green, and then sell it. 

Here is an example: 
According to Cushman & Wakefield, midmarket offices with LEED certifications carry a 77.5% premium over noncertified offices. Upgrading buildings from “brown” to “green” would generate significant financial value.

If you could do this in a year, put 20% down and borrow the rest from a bank at 5%, you would generate a 167.5% return.


WARNING:  Correlation is not causality.  It could be that valuable companies are the ones that go green because they are the only ones that can afford it.  If so, do not try this, unless of course the government pays you to do it.

Teacher's note:  Quick is an adjective, not an adverb.  See Hold on Loosely by 38 Special.

 

What President Trump got right: Regulatory Reform

 from Discourse:

  • ...Trump instituted the first federal regulatory budget. He imposed caps on the amount of cost federal agencies could impose on Americans with their rules. Joe Biden dismantled the budget, but a cap is an idea that’s making waves in the states and is sure to make a comeback at the national level. States like Ohio and Virginia have both adopted a version of the regulatory budgeting idea and they are even setting aggressive reduction goals on the order of 25 to 30%. 
  • Trump’s most famous regulatory policy was probably his “one-in, two-out” program where for every new rule two had to be eliminated. Intellectuals hated this simple policy, calling it a “gimmick” in the media. However, its simplicity also makes it useful as a communication device. This helps explain why Idaho, Arizona, Texas, Ohio and Oklahoma have all adopted some version of this policy since Trump took office. 
  • Trump, and populists generally, have a reputation for being anti-science. A lot of people don’t know this, but the data behind some of the U.S. Environmental Protection Agency’s most expensive air pollution regulations is not accessible to researchers. So the studies that justify billion-dollar regulations can’t be replicated because no one can access the data. The Trump administration created a requirement for the Environmental Protection Agency to give greater consideration to studies whereby the underlying health data is publicly available and reproducible. So, who in fact is anti-science here? 
  • The Trump administration was, in other ways, also more sensible on energy and climate issues. Trump instituted a National Environmental Policy Act reform to accelerate the approval of energy and infrastructure projects. Biden scaled back Trump’s reforms, but permitting reform will be critical to the implementation of the Inflation Reduction Act, a Biden priority. The progressive dream of a clean energy future won’t be possible if solar and wind farms, along with the transmission lines to connect them to the grid, can’t be built because permitting requirements and lawsuits drag projects out for years.
HT:  MarginalRevolution.com

TRUTH IN BLOGGING:  I served as Chief Economist of the FTC and DOJ/Antitrust during the Bush and Trump administrations.  

Friday, October 14, 2022

Does it matter that ESG goals are hard to measure?

From Steve Hayward:
If businessmen do have a social responsibility other than making maximum profits for stockholders, how are they to know what it is? Can self-selected private individuals [management] decide what the social interest is?
In other words, if managers can pick their own vague performance metrics, expect them to shirk or follow objectives of their own choosing.  One would think that management consultants would recognize this, but look at PwC:
...PricewaterhouseCoopers published a “sustainability survey” of 140 major U.S. corporations, arguing that “companies that fail to become sustainable–that ignore the risks associated with ethics, governance and the ‘triple bottom line’ of economic, environmental and social issues–are courting disaster.” The triple bottom line, PwC concluded, “will increasingly be regarded as an important measure of value.”
To be fair, PwC's Guide to Key Performance Indicators, seems to recommend clear performance metrics: 
Key performance indicators (KPIs), both financial and non-financial, are an important component of the information needed to explain a company’s progress towards its stated goals,
... in addition to "management accountability," and "corporate transparency." But pursuing ESG, with the conflicting "triple bottom line" makes it harder to hold managers accountable. Claiming to be Green is easy.  Doing it is much harder.  And no one wants to talk about the tradeoffs which, as Hayward notes, may be substantial:
Despite its flexible criteria, the DJSI (Dow Jones ESG Index) lagged the Dow Jones Industrial Average significantly. Over the last decade it has achieved an annual return of 5.2 percent, while the DJIA has returned 15 percent per year, and the S&P 500 14.8 percent.
And don't you violate your Fiduciary duty if you follow ESG goals at the expense of profit? 

Here are past blog posts on performance measurement. 

BOTTOM LINE: If you cannot measure it, you cannot control it.

Wednesday, October 12, 2022

What do markets say about Democratic Chances in the midterm elections?

 

PredictIt.org trades contracts that payout $1 if the event occurs, so the prices can be interpreted as probabilities.  The graph above shows that the probability of a Democratic win has fallen from about 68% to 52%.

Below, the probability that Republican's will win the House has risen to about 81%.

Tuesday, October 11, 2022

Marketing to influencers

Are central banks in a prisoner's dilemma?

...A rate rise in one country may attract money from investors elsewhere, causing the currency to strengthen. This means a reduction in import costs, which may help to cool domestic inflation. But other economies then face higher import bills, which exacerbates their inflation problems. Uncoordinated policy tightening can become its own sort of currency war, in which each country works to shift the burden of inflation elsewhere, with the net result being too much tightening.

Source: The Economist 


Monday, October 10, 2022

Is EU headed for recession because of US?

When the Pope called on the US to stop raising interest rates because it would force the rest of the world into recession, he must have been reading my previous post, What happens when US Interest Rates Rise?  

Now the The FT reports that the EU is saying the same thing, that US efforts to fight inflation by raising rates will lead to recessions in other countries:

The Federal Reserve is leading a worldwide rush of central bank rate rises that risks tipping the world into a recession, the EU’s top diplomat said, as he warned the union is not fighting its corner in the world. 
Josep Borrell, the high representative of the 27-member bloc, said central banks were being forced to follow the Fed’s multiple rate rises to prevent their currencies from slumping against the dollar...

Friday, October 7, 2022

Can negative bond yields last?


If bond yields are less than inflation ("negative real interest rates"), there is an arbitrage opportunity: borrow money in the bond market (at 3% in the graph above) and invest it in an asset (stocks, housing, gold) whose price will increase with inflation (8%).

This kind of arbitrage increases demand for borrowing, driving up the price of borrowing (the yield), until bond yields are driven above the inflation rate.  

You can probably make money if you know when this will happen.  

 

Thursday, October 6, 2022

Its getting more expensive to die

Demand for funeral services is increasing as death rates climb, but supply is hampered by staffing problems caused by silly licensure requirements:
...the primary reason students reject a funeral career is the embalming requirement.
Fortunately, there is an easy solution: replace licensure with voluntary certification. Give consumers the option of paying for the embalming training.  If they want it they will pay for it.  

Historically, licensure was adopted as a barrier to entry that raised prices (a dirty way of creating a sustainable competitive advantage).  

HT:  KM

What happens when US interest rates rise?

A rise in US interest rates puts less developed countries with $ denominated debt in a dilemma: 
  • If they don't raise rates, their currencies devalue as the US becomes a more attractive place to invest.  This resulting $ appreciation makes it harder to pay back $ denominated debt.
  • If they do raise rates, their currencies don't change, but high interest rate slows their domestic economies.
Reuters reports that countries are raising rates to keep their currencies strong which means low inflation, but at the cost of lower incomes, and unemployment.
   
HT:  Cramer

Tuesday, October 4, 2022

Effects of gender preferences

 NBER working paper:

Currently, women are 3-15 times more likely to be selected as members of the AAAS [American Academy of Arts and Science] and NAS [National Academy of Science] than men with similar publication and citation records.

Saturday, October 1, 2022

China directing banks to sell $ to buy ¥

Article: Such an increase in the supply of $ would reduce the price of a dollar, the exchange rate. This would help Chinese consumers by making domestic goods, including imports, less expensive; but hurt Chinese firms by making their exports look more expensive to Americans.

Friday, September 30, 2022

Good MRU video on Prinsoners' Dilemma

Will markets thwart Xi's plans for China?

Economist lead article on President Xi's "rejuvenation," and efforts to  "maintain authority",

When Mr Xi took over in 2012, China was changing fast. The middle class was growing, private firms were booming and citizens were connecting on social media. A different leader might have seen these as opportunities. Mr Xi saw only threats.
[Xi has] reasserted state control over the economy and hobbled some of China’s most successful firms. His plan to tame the property market lies in tatters and bad loans weigh perilously on the economy.

Ironically, he is forgetting the lessons of Xiaogang village, and harming his own economy much faster than he is harming ours (see post below).

Is Chinese Capitalism an oxymoron

I begin my management course by telling students how Xiaogang villagers defied their Communist rulers in 1978 by secretly instituting a system of private property.  By the time the authorities found out, it was too late as the system had already spread to neighboring villages due to its tremendous success.

China adapted and allowed the institution of private property to spread.  At the time, many people predicted China would continue to reform and they were let into the WTO. However, "...as even the most ardent defenders of China’s WTO accession now acknowledge, that did not happen." Today we are left with an integrated world with two very different systems. To explain the effect, we can use the metaphor of A/B testing:
...imagine that the Department of Justice randomly assigns half of U.S. corporations to be A-corps and half to be B-corps. For A-corps, nothing changes. But B-corps now enjoy special privileges and rules. They are exempt from laws governing intellectual-property theft. They receive more-favorable tax incentives. They are recipients of sizable subsidies, including some to buy their A-corp rivals. They are able to enlist the DOJ to win capricious legal claims against A-corp rivals.
The result of such an experiment would be dire: The best, most innovative A-corp firms would lose market share; A-corps would be loath to invest in research and development, given that B-corp rivals would be able to purloin it; and there would be massive waste as inefficient B-corp firms expanded more than market forces required. Now extrapolate that to the global economy and you get a sense of the harms the Chinese system has imposed on capitalist economies.
I did a search on all my posts in China and I came across this one from 2007: "Market Socialism" and China's new antitrust laws  in which I argued that unless China developed "... the kinds of Democratic institutions that provide checks and balances on state power," their economy could stagnate under the what i called "regulatory miasma."  It turns out that, I needed the caveat I closed with:
But China's oxymoronic "socialist market economy" has surprised us before. In the words of Deng Xiaoping, "I don't care if the cat is black or white as long as it can catch mice."

Thursday, September 29, 2022

Is the Inflation Reduction Act, "False and Misleading Advertising?"

FROM WSJ:  

President Biden touts the Inflation Reduction Act, which lowers deficits by $240 billion over a decade, he has also signed into law increased spending on veterans benefits, infrastructure and semiconductors, while taking executive actions that vastly expand food stamp and Obamacare benefits and cancel student debt worth $400 billion to $1 trillion.

Increased Govt. spending increases Aggregate Demand for US Goods and Services, which increases price (inflation).

Someone tell the FTC.

Wednesday, September 28, 2022

How will the rise in interest rates affect Corporate Borrowers?

 


From the Economist:

...in aggregate the West’s corporate debt load looks manageable ... American public companies’ earnings before interest and tax are a healthy 6.7 times the interest due on their debts, up from 3.6 times in 2000. 


But 3 types of loans may be in for a "reckoning:"
  • The first comprises businesses that have come to rely on less orthodox sources of credit, which are often those with the diciest prospects.
  • The second area of vulnerability involves so-called zombie firms: uncompetitive enterprises, kept alive by cheap debt and, during the pandemic, government bail-outs.
  • The third and biggest area of concern involves firms that are merely unfit rather than undead.

Monday, September 26, 2022

What happened when Oregon decriminalized drugs?

More evidence that Demand Curves slope downward: when you reduce the "price" of taking drugs (the expected penalty), quantity will increase. From AP:
“If there is no formal or informal pressure on addicted people to seek treatment and recovery and thereby stop using drugs, we should expect continuing high rates of drug use, addiction and attendant harm,” said Keith Humphreys, an addiction researcher and professor at Stanford University and former senior adviser in the White House Office of National Drug Control Policy.
Of 16,000 people who accessed services in the first year of decriminalization, only 0.85% entered treatment, the health authority said.

HT:  MarginalRevolution.com 

Why did Martha's Vineyard homes increase from $700K to $1M in 2021?

NIMBYism restricts development (supply), so that the only thing that can adjust to an increase in demand (induced by the pandemic) is the price. From a 2021 NY Times letter to the editor
In the end, what really reads in this strange piece is that this gentleman didn’t like the Water Street apartments in Vineyard Haven for some reason, and is nervous about the Lambert’s Cove development. To this, there is of course an argument to be expressed and heard. But when it takes the form of such cynical bloat, it becomes a mockery of its own argument. It makes clear that the spirit of “not in my backyard” is as much of an obstacle to continuing to preserve the Island’s community as some self-interested folks, such as those who are pretending to oppose the housing bank out of supposed “environmental” issues. 
 ... I am also absolutely and constantly baffled when people complain about the one, sole affordable housing developer on the Island, a developer which takes great pains to protect the environment and build in accordance with what natural environment and cultural environment exists there, such as preserving and occasionally building around trees and trying to tear down as little as possible — and then conveniently miss the fact that every other building in Edgartown, for instance, has been torn down and turned into a McMansion over the past three years. If this attitude doesn’t come from self-interested hypocrisy, it comes from an extreme level of blindness.

Why is the $ appreciating against the £?

The $ will appreciate against the £ for trade or investment reasons. Either US exports to Great Britain begin to look more attractive than Great Britain's exports to the US, or investing in the US looks starts to look more attractive than investing in Great Britain. 
 

After the UK government unveiled plans to fund new tax cuts by ramping up borrowing, investing in Great Britain suddenly looks riskier.  As a result, investors sell £ and buy $ to invest in the US, increasing the demand for dollars, and driving up the price of a $ (the exchange rate).

The result of the $ appreciation is that producers in Great Britain are helped (because their exports look cheaper to Americans) but consumers in Great Britain are hurt, because prices for goods sold in Great Britain (including imports) increase.  

Is there a bubble in higher education?

The returns to education to those who finish a degree (especially in a STEM major) are huge.  The high price of college easily pays for itself several times over.

HOWEVER, if you major in a non-STEM subject it may not.  Similarly, if you drop out without a degree (a quarter to a half of all students), you will have smaller debt but also a smaller salary which makes paying off the debt much harder.  

The big increases in tuition seem to track the increases in subsidies offered by the government.  

Most of this info is taken from Marginal Revolution Blog Posts on Higher Education.

Friday, September 23, 2022

More evidence that cooperation works--but only in repeated games

In our textbook, we talk about the tradeoff between conflict and cooperation in a prisoners' dilemma. In a repeated game [play coauthor Mike Shor's online game], the best strategies exhibit the following characteristics:
  1. Be nice--no first strikes
  2. Be provokable--retailiate immediately if your rival cheats
  3. Be forgiving
  4. Be clear--make sure your rival can interpret your moves
  5. Dont be envious--focus only on your slice of the profit pie
Now we have more evidence that punishment is not a good strategy.
In Nowak's experiment, the students played more than 8,000 games of prisoner's dilemma, using dimes to reward and punish. The normal game of prisoner's dilemma gives two players two options: cooperate or defect. If both cooperate, each ends up winning a dime. If both defect, each gets nothing. If one cooperates and the other defects, the cooperative player loses 20 cents and the defector wins 30 cents. Nowak then added a "costly punishment" component. A player could choose to punish someone who didn't cooperate. That penalized the non-cooperative person 40 cents, but the other player had to pay a dime to mete out the punishment. When Nowak compared how much money people earned or lost in the long run, there was a noticeable correlation between punishment and overall money. The players who punished their opponents the least, or not at all, made the most money. Those who punished the most made the least money.