Germany's North-South divide

The latest evidence about the superiority of markets (over government planning) seems to come from Germany, people go to better schools, get jobs more easily, earn more and live longer to enjoy it. Crime is also lower. I say "seems to" because inferring causality from correlation is notoriously difficult.

In 1960 Bavaria was the poorest part of West Germany. Like its neighbours, it lacked natural resources and had to find work for millions of Germans who had fled central Europe from 1945 and settled in rural areas. So successive governments limited bureaucracy and offered incentives for investment not just in big cities but also in smaller-scale production in towns and villages. This suited economic traditions: the hilly south had generally been farmed in small patches by self-sufficient families, while the flatter north lent itself to larger, more class-stratified agri-businesses. ... Bruno Hildenbrand, a sociologist, even suggests that the relative autonomy of the southern farming families gave the region a more entrepreneurial and pragmatic mentality.

HT: MarginalRevolution.com

Fake Eclipse Sunglasses

Like many, I will stop my day to experience the solar eclipse on Monday. Many will regret it. As the WSJ reports, they will have stared up at the sun thinking their eyes were protected by special sunglasses that "can filter out tens of thousands of times as much light from the sun as sunglasses." Instead, they will be exposing their eyes to potential harm from counterfeits.

Mr. Jerit said some dealers on Amazon have created copycat versions of his company's Soluna brand of eclipse glasses, sold by GSM Sales LLC. He says the knockoff Solunas are replicas down to the logo, design and product information printed on the frames, and often are sold at much lower prices. A pack of 10 legitimate Soluna eclipse viewers cost $39.95 on Amazon as of Aug. 4

This is a case of a very large and very temporary expansion in demand. Supply cannot increase fast enough making price rise temporarily. But even more, the new temporary demanders are not as discerning about quality as the traditional customers. These are the characteristics that permit moral hazard. With a higher price, there is room low cost producers to enter temporarily with sub-standard products.

I am predicting that ophthalmologists will be busy over the next few months.

Sheldon Chooses a Console

I use this youtube video in class to get a discussion going of all the instances of opportunity costs. The writers did a good job making it accessible even to non-gamers and in carrying a gag as far as they could.

Game theory applied to extreme view protests

In light of events in Charlottesville over the weekend, I am reposting from a story in the WSJ. Germans pledged money to an anti-nazi group for every meter that nazis marched. You cannot help but smirk when watching the video.


I suggest that the next time an alt-right, nazi, or KKK rally is planned, a similar campaign is launched. I know many would pledge money for every hour that the speeches are made and their protest lasts if donations went to a suitable organization that peacefully counsels these folks back into the mainstream. Then hand out lozenges so they could continue as long as possible. Have a signboard with a running total so they could see how much they have raised.The media would eat it up.

The Dark Side of Incentive Pay?

The Financial Times recently published a thoughtful commentary by Jonathan Ford arguing that performance pay in the financial sector has been bad for financial market consumers. He extolls the virtues of the post-war, pre-liberalization banking system where a particularly industrious bank manager might get rewarded with a letter of commendation from the bank president. Ford notes that there were flaws.

The system was not perfect: it could entrench snooty managers and make credit hard to come by.

In contrast to these halcyon days, today's financial managers face constant competitive pressure and are constantly rewarded for increasing profits. We hope that profits are generated by delivering ever increasing value to customers. But, especially during the financial crisis, there were many examples of bankers fleecing customers. He notes that the bad acts are a result of bad incentives and suggests a remedy for these bad acts.

But there is of course a simpler way to avoid offering bad incentives. That is simply to pay employees a salary based on what the job is worth.

On net, was the move to market liberalization, and incentive pay as a consequence, worth it?

I will note that, over the past four decades, the financial sector has seen nearly as much innovation as the IT sector. Spreads between interest rates to borrowers and savers and in stock market transactions have shrunk dramatically. More consumers have access to more financial instruments than ever before in part because more financial instruments are available at cheaper rates than ever before. Ask your grandparents if they diversified their retirement fund into international equity funds when they were your age and you will probably get a blank stare. This innovation is also a result of market liberalization. Would de-liberalization and a reduction in banker incentive pay also put a halt to further financial market innovation?

The Simpson's Mister Burns sells outsourcing to his workers.

Non-Standard Real Estate Commissions

The relationship between home sellers and their realtors represents a classic principal/agent problem. Realtors are engaged in many activities related to selling the property such as photographing it, listing it, coordinating with home buyers' agents, holding open houses, and so on. Since realtors have traditionally earned a 6% commission on sales they have an incentive to engage in these costly activities. But realtors know much more about how the market is likely to shake out than do their clients. All else equal, they would recommend dropping the price so that the house will sell faster and without all that effort since 94% of the lower sales price is born by their clients. What happens when they bear the full 100%? Levitt and Syverson showed that when realtors sell their own homes, on average, they keep them on the market longer and sell them for higher prices.

So maybe a 6% commission is not enough to eliminate shirking. How do you provide stronger incentives without giving away too much? Alina Dizik at the WSJ reports that owners of high priced houses are getting creative.

[Mr. Mahller's] agent would earn a 2% commission, and the buyer's agent would get a 2.5% commission on the home's sale price. The sweetener: Mr. Mahller's agent also pocketed an extra 5% commission on the difference between the asking price of $2.7 million and the final sale price, which was $2.85 million.

Why I can't buy a Tesla

Well, besides not being able to afford one.

Because the state of Texas does not allow Tesla to sell me one. Reason TV documents this form of auto dealer protectionism. Tesla has chosen to only sell direct to consumer, or has vertically integrated into retailing. The state of Texas prohibits automobile sales that do not go through a dealer, or they require manufacturers to outsource the retailing function. It is hard to imagine how this regulation benefits consumers. Don't let Bubba tell you that Texas is a bastion of free markets.

Nukes as Sunk Costs

Two South Carolina utilities have plans to abandon two nuclear reactors that are still under construction. The two reactors have cost the utilities roughly $9 billion and are less than 40 percent completed. They were expected to begin generating electricity after 2021 at cost of $25 billion — more than twice the initial $11.5 billion estimate. At the same time, demand growth has not materialized and the costs of alternative energies, such as natural gas and wind, have fallen substantially.

Scana Corporation, the project's owner, said in a statement,“Ceasing work on the project was our least desired option, but this is the right thing to do at this time.” This beats throwing more money at an increasingly unviable project.

Splitting the check? There's an app for that

Do you have to pay for other people's drinks if you didn't order any? Do you chip in for an appetizer you didn't eat? How do you split tax and tip?

So starts the CNN story about splitting the check (without losing friends). The social etiquette of group dinning may be evolving due to  the advent of smartphone payment apps like Venmo and Square Cash that allow funds transfers among friends. Moreover, apps such as Tab or Plates are specifically designed to split the check using these funds transfer apps.

It used to be that when I initiated the invitation, I expected to pick up the tab. Often, there was an expectation of later reciprocal invitations which helped facilitate the development of longer term relationships. Sometimes though, it encouraged free-riding as they ordered from the top-shelf. But if it is easy settle-up after each shared meal, both reciprocation and free-riding are reduced.

Paying only for what you ordered -- particularly down to the cent -- used to feel stingy. But the apps help reduce the pressure to round up or kick in a little extra.