Why do educated people earn more?

Two answers: education signals your inherent quality vs. education increases your productivity

Crash Course: Monopolies

I recently came across these short videos on various economics topics. I have not seen them all and have some quibbles about the ones I have seen, but over all they seem pretty good at an introductory level. Here is the one on monopolies.

AEI reviews the Big Short

Candidates Kasich and Rubio playing "chicken"

The NY Times uses game theory to analyze the Republican Primary.  Here are the payoffs:

Although Mr. Rubio is the obvious establishment favorite, leading Mr. Kasich in national polls, prediction markets and delegate math, the two are splitting some votes. To have his best chance against Donald Trump and Ted Cruz, Mr. Rubio needs Mr. Kasich to drop out. The longer both candidates remain in the race, the worse it is for both of them. It’s safe to assume neither would like to see Mr. Trump get the nomination.

So Rubio and Kasich would like the other to drop out ("swerve") while they contest the nomination ("go straight"), and each would hate to see Trump win the nomination (they "crash" if each goes "straight"). And both dropping out would likely lead to a Trump victory.

Here are three obvious strategies: commitments, promises, and threats. Here is the obvious promise:

...Mr. Rubio could offer Mr. Kasich [to pick him as a running mate] in exchange for dropping out — provided he becomes the nominee, of course. (A simple Google search of “Rubio Kasich side deals” produces no shortage of opinions on the matter.)

HT:  David

Why do movie theatres charge the same prices for good and bad movies?

An interesting post from our friends at Marginal Revolution, who come up with at least five possible explanations.  My favorite is that it would require higher policing costs as people would buy cheap ticket and then sneak into the more expensive movies.  I suspect that the most likely answer is that once a movie theatre realizes demand is low, they cannot lower the price to reflect demand because doing so would create incentives for patrons to wait past opening week, and then buy a discounted ticket.

Would Warren Buffett buy ever buy an IPO?

Initial Public Offerings are plagued by adverse selection:

The new-issue market...is ruled by controlling stockholders and corporations, who can usually select the timing of offerings or, if the market looks unfavorable, can avoid an offering altogether.  Understandably,these sellers are not going to offer any bargains...Indeed, ... selling shareholders are often motivated to unload only when they feel the market is overpaying. 

--Warren Buffett's Chairman's Letter, in Berkshire Hathaway Report, quoted in Jonathan Shayne and Larry Soderquist, Inefficiency in the Market for Initial Public Offerings, Vanderbilt Law Review, 1995.

In other words, controlling stockholders have private information that indicates the true value of the company.   They sell only when smaller shareholders are offering too much.

Why are real interest rates so low?

Real interest rates (the nominal interest rate minus the inflation rate) have fallen about 450 basis points (4.5%) since 1985.

If we model real interest rates as the "price" of saving, then we can examine changes in the demand for saving and the supply of saving to see whether we can  account for the shift.  The demand for saving is determined by everyone who wants to borrow now (to invest), and the supply of saving is determined by everyone who wants to save now (to consume later).

The supply of savings has increased "due to demographic forces, higher inequality and to a lesser extent the glut of precautionary saving by emerging markets." On the demand side, "desired levels of investment have fallen as a result of the falling relative price of capital, lower public investment, and due to an increase in the spread between risk-free and actual interest rates."

In other words more people want to save (increase in supply) but fewer investors want to invest (decrease in demand).  Both result in a lower "price" of saving.

Because the return to saving is lower, savers should expect to earn less.  This has enormous implications for the defined-benefit pension plans that characterize government pensions.  In particular, these pension assume that they will earn 7-8% (nominal), and make payouts based on this assumption.  If pension funds earn less, then there will not be enough money to go around when the pensioners eventually retire.

Why are landlocked countries poorer?

Because trade is more difficult than to countries located on a body of water.  It is as if landlocked countries pay a higher tariff (tax), and as we all know, taxes destroy wealth by deterring wealth creating transactions.

Dispatches from Venezuela: Price controls destroy wealth, and lives

In Venezuela, stories of economic meltdown, as the socialist policies of President Maduro have had there predictable effects:

 CARACAS, Venezuela—In a hospital in the far west of this beleaguered country, the economic crisis took a grim toll in the past week: Six infants died because there wasn’t enough medicine or functioning respirators.

 Here in the capital, the crisis has turned ordinary life into an ordeal for nearly everyone. Chronic power outages have prompted the government to begin rationing electricity, darkening shopping malls. Homes and apartments regularly suffer water shortages.

....

The National Assembly, now controlled by the opposition, declared a food emergency on Thursday—an attempt to spur the government of President Nicolás Maduro to, among other things, ease price controls that have created shortages of everything from medicine to meat.

 “The people are being left without the ability to feed themselves,” said lawmaker Omar Barboza.

How do all the roses get to us on Valentine's day?

Start with the problem: Then hear the answer: