What do US business schools and Boeing have in common?

Both have products or services sold to foreign buyers:

More middle-class Chinese professionals can afford U.S. tuition these days, said Peggy Blumenthal, senior counselor at the Institute of International Education, a nonprofit group that administers the Fulbright Scholar Program and fosters partnerships among schools world-wide. Meanwhile, American students may have more difficulty finding the funds to cover tuition given the troubled economy, she said.

A rising yuan (falling dollar)

...is helping US exports to China, including education.

Space aliens can get us out of the recession

As part of our on-going coverage of the debate between the Keynesians and the Free Marketeers, we examine the belief that only a stimulus the size of WWII can get us out of the recession.

$4/gallon gasoline makes "chumps" out of pickup owners

Consumers are buying pickup trucks with V6 engines. This is surprising because

V8 engines are almost synonymous with pickup trucks. Only commercial fleets and people on the tightest budgets buy full-size pickups with V6 engines. All the truck-makers offer them, but usually only on low-end, stripped-down versions. Sometimes customers can get V6s only in regular-cab models with two-wheel drive — what one car-company spokesman called “the chump specification.”

But at Ford, the smaller, more economical engines are now outselling big V8s. An economist would say that this change was perfectly predictable due to the negative cross elasticity of demand for V6 engines with respect to the price of gasoline. Note that negative (positive) cross elasticity implies that two products are complements (substitutes).

Volatility is spiking: will stock prices fall?

Colleague Bob Whaley's volatility index is spiking.  It is a measure of risk, and typically as volatility increases, risk-averse investors bid down the price of risky assets, thereby increasing their expected returns.  In equilibrium, investors have to be compensated for bearing risk.  In the graph below, we see that stock prices move counter-cyclically to the volatility index.  The crash of March 2009 corresponded to a peak in the volatility index.

Why has new car leasing grown so dramatically?

In the early 1980s consumer leasing of new cars was almost unheard of, but now roughly one-fourth of new cars are leased. Why has new-car leasing grown so dramatically? An economist has the answer:

Buying new, and then selling a used car exposes the seller to the costs of adverse selection:  since car buyers have worse information about the quality of a used car than does the seller, buyers rationally expect that lower quality used cars will be offered for re-sale.  The result is lower prices.  So sellers suffer a low price when they go to sell a used car.

Leasing has its own problems, both adverse selection and moral hazard:

a leased unit will be inadequately maintained because there is high probability that the consumer will return the unit to the lessor at the end of the lease contract. .... moral hazard also applies to units that are purchased when new because maintenance expenditures are not reflected in the price for which used units sell on the secondhand market.  

But provisions in the leasing contract specifying that repairs be done on problems identified during routine maintenance mitigates the costs of both these problems.  In fact, leased used cars command premium prices over non-leased used cars.

The paper provides explanations for why leasing has become more popular over time:  since the proportion of problems identified during routine maintenance has risen over time, the advantage of using leasing over buying has also risen.

What is Netflix thinking?

Recently, Netflix decided to sever its streaming video and DVD-by-mail services, charging a flat fee for each that would raise prices by 60 percent. Given the success of its streaming service—which now comprises nearly a third of the country’s Internet traffic during peak hours—perhaps Netflix could be trying to "push" content providers to give their customers more streaming content. But this works only if customers value the "right now" over the "right movie."

It’s common knowledge that Netflix’s streaming offerings are patchy and unpredictable, light on new releases and heavy on catalog obscurities, and that a movie or a TV series you’re in the middle of watching can disappear overnight. But what if Netflix wants disgruntled customers? Sandoval speculates that Netflix assumes most customers will drop DVDs in favor of streaming, and studios will be faced with two choices: either make more titles available via streaming, or accept that Netflix’s customers will just watch something else. It’s already trained its members to wait four weeks, during which new movies are available to buy but not to rent, in order to expand its selection of Instant titles. So why not assume they’ll wait forever, or failing that, move on? Search for Drive Angry, and Instant helpfully suggests you watch Kick-Ass instead.

If this is right, it must be that Netflix faces less competition in the "streaming" industry than in the "DVD rental" industry.

Externalities Internalized

When I was a kid, this happened all the time - sans the negotiation part.

A Children's Story for Managers

The original version of the Rainbow Fish


The updated version of the American Rainbow Fish


Hat tip Greg Mankiw

Is the budget deal good for the US?

The answer depends on whether you believe in Keynesian economics or not:

At the heart of these arguments is the question of whether government spending has a positive or negative multiplier, ie create more or less bang for each buck. Keynesians think the former; neoclassicists think the latter. It seems (to this blogger, at least) intuitive that the impact of a stimulus will be dependent on the initial conditions of the economy; factors such as the size of the output gap and the overall level of government debt will play a role. For example, a government will find it easier to finance a deficit if it starts from a low debt-to-GDP ratio; if it starts from 100%, its borrowing costs will rise, offsetting any fiscal stimulus. This study from the National Bureau for Economic Research illustrates the point; it says that factors like exchange rate flexibility and openness to trade play a role. It also finds that

Whither Red Light Cameras

The Los Angeles city counsel voted to remove red light cameras. The decision seems to be purely driven by costs to the city government.

Critics accused the council of hypocrisy, in that the American Traffic Solutions contract was spared from the boycott only because it was believed to be generating income for the city. However, a city audit of 2010 departmental budgets found the program was failing to generate the projected levels of income. In fact, amid a budget crisis, the city was found to be pumping more than $1 million into the program to keep it solvent.

At the same time the most extensive study yet indicates that red light cameras save lives.

"These findings show clearly that red light cameras offer significant safety benefits," said Troy Walden, author of the TTI study. "Most important, they help prevent the most severe and deadly type of intersection crashes."

This may a case of hidden benefits rather than hidden costs. Use of red light cameras is likely to be a cost effective way to save lives and thus make Los Angeles a more attractive place to live. Counsel members are mostly interested in budgets. Any other benefits not directly affecting the decision makers are ignored. Too bad elected officials have perverse incentives when it comes to serving their constituents.