2010

Year: 2010

Can Cities Shrink Their Way Back to Greatness?

In a recent NYTimes Economix blog entry, Edward Glaeser argues that we should watch Detroit under mayor David Bing and see if the answer is yes.  Bing, former NBA all-star guard, has formulated a plan to downsize Detroit; that is, identify policies that will help Detroit generate a sustainable comparative advantage by reducing and removing those policies that are destructive.  It’s an intriguing and very politically challenging idea.  See what you think.

http://economix.blogs.nytimes.com/2010/03/16/shrinking-detroit-back-to-greatness/

Vive la Freshman Studies

Leave it to reality television to resurrect the Stanley Milgram experiments in front of a live studio audience.

The game involved contestants posing questions to another “player”, who was actually an actor, and punishing him with 460 volts of electricity when he answered incorrectly.

Eventually the man’s cries of “Let me go” fell silent, and he appeared to have died.

Not knowing that their screaming victim was an actor, the apparently reluctant contestants followed the orders of the presenter, as well as chants of “Punishment” from a studio audience who also believed the game was real.

The programme’s producer and a team of psychologists recruited 80 volunteers, telling them they were taking part in a pilot for a new television show.

Well, I think that speaks for itself.

Econometric Madness

A lot of people have been stopping me in the halls asking, Is there any way we could somehow use a Markov-Chain model to help with March Madness tournament picks?

Well, folks, it’s your lucky day.

Paul Kvam and Joel Sokol out of Georgia Tech  published a piece in Naval Research Logistics a few years back explaining a simple three-parameter model. (In the event that the Mudd doesn’t have an old copy laying around, you can read it here).

For those of you without time to crunch the numbers yourself, you might check out the handy LRMC Information Page.  Last year I went with the “Pure” LRMC, but this year I’m feeling a little Bayesian.

The authors claim — and there appears to be something to their claim — that their model does a better job than the experts and competing methods (e.g., seeds, RPI, rankings).   And here’s a shocker — they have Kansas over Duke in the final (like it took a genius to come up with that).  On the other hand, they have BYU as their #4 team, so I will bet the farm on that one watch that game with interest.

Hidden in Plain Sight

Last week’s report by Lawrence Alum Anton Valukas on Lehman Brothers reveals that the actions taken by Lehman were assumed to be legitimate and above board. Transparency was evident. But as Andrew Ross Sorkin opines in the linked New York Times story below,  which matches Michael Lewis’s view, the incentives were wrong, and regulators did not look in the obvious places.

http://www.nytimes.com/2010/03/16/business/16sorkin.html?adxnnl=1&ref=business&adxnnlx=1268751826-n8L9ylXvRETjzarAOCJirg

The Big Shorts for Spring, Introducing Michael Lewis

Michael Lewis is one of our generation’s most influential business writers, having penned the Wall Street classic Liar’s Poker (even I read that one), the professional sports classic Moneyball (hey, I read that one, too), along with assorted other gems on the would-be masters of the universe (here’s a page-turner about Iceland ).

Why am I telling you this?  Well, because his new book, The Big Short has arrived, and with it the obligatory lengthy excerpt at Vanity Fair.

Please let me know what you think.

Oh, for good measure, here’s what he reads.

Take a Deep Breath

Good news on the clean air front — it’s getting cleaner.   In fact, it’s been getting cleaner for a long, long time.   Don’t believe me?  Well, then go check out the new EPA Air Quality Trends that was released earlier this week.  Of the six criteria pollutants (NOx, SOx, CO, PM, O3, and Pb), the trend is continually downward.  Hazardous air pollutants (HAPs) are also on their way down.  That’s despite a growing population, growing vehicle fleet, and (until recently) a growing economy.

Almost makes me want to go out and eat a big hand full of dirt.

Almost.

The Times They Are A-Changin’

I just made my way over to Briggs because I have a 20-page paper due, and I am, like, totally stressed out about it.**  I was wondering why there were students milling around outside, and it turns out that they were victims of the time change — the building is supposed to open at 1, but evidently security didn’t push its clock forward yet.

At any rate, this brought to mind some calculations my colleague Paul Fischbeck and I made about the changes in pedestrian risks associated with daylight savings. The moral of the story — watch yourself crossing the street, especially when it’s dark outside.

There are some interesting regulatory policy implications of the time change. If you are interested, here are my thoughts posted at the Organizations & Markets blog last year.

**Well, not, like, totally.

Happiness is a Scarce Resource

You new majors have probably been wondering why you have been a little more cheerful, had a bit more bounce in your step, a little extra rational exuberance, so to speak.

The answer, my friend, is that economics students are generally a happy bunch.

At least in Germany:

Justus Haucap, of Heinrich Heine University of Düsseldorf, and Ulrich Heimeshoff, of the University of Bochum, surveyed 918 students of economics and other social sciences in 2005, then estimated how studying each of the different fields affected individual life satisfaction…. The news is good — for economics students, anyhow… [T]he researchers identified a positive relationship between the study of economics and individual well-being.


Read all about it.

For those of you looking for a boost of good cheer, look no further than right here.

Why Close Reading is Important

In the opinion piece below, Alan Blinder explains why it is critical to carefully read documents, especially if they involve legislation and even more importantly if they affect the Federal Reserve Bank.

Alan Blinder – Opinion piece on PBS
January 2010 “The Future of the Federal Reserve”

Do you ever get the feeling that this country is over-lawyered? Well, here’s another example.

Ron Paul, the libertarian congressman who wants to abolish the Federal Reserve, has long promoted a first step in that direction. The so- called Paul bill would subject the Fed’s monetary policy decisions to GAO audits. Like most economists, I find the idea, well, appalling.

But I breathed a sigh of relief when a modified version was appended to the House’s financial reform bill late last year. The Paul-Grayson amendment added what I thought was an important clause. Let me read it to you.

“Nothing in this subsection shall be construed as interference in or dictation of monetary policy to the Federal Reserve System by the Congress or the GAO.”

That sounds like a strong affirmation of the Fed’s independence, right? I certainly read it that way and so did my students. Then I talked to a lawyer.

So put on your lawyers glasses and read it again. Nothing in this subsection shall be construed as interference and so on.

Read literally, the sentence does not instruct Congress to keep its nose out of monetary policy. Instead, it asserts that the proposed law does not interfere with monetary policy even if you think it does. Orwell’s big brother would have been proud. He gave us war is peace, freedom is slavery. Now the House thought police give us interference is not interference.

Ladies and gentlemen of the House, could we please fix this?

The Bad Seed?

As students of 450 know, not all nonstandard contracts are designed to establish or maintain market power. That, indeed, is one of the central messages of Oliver Williamson’s work:

Transactions that are subject to ex post opportunism will benefit if appropriate safeguards can be devised ex ante

This is useful to keep in mind as we watch the antitrust suit against seed-giant Monsanto that is unfolding in America’s heartland. The case speaks to managerial v. entrepreneurial capitalism, contracting for innovation, and the role of a non-standard contract.
Continue reading The Bad Seed?

Summer Internship Opportunities

Act quickly if you wish to take advantage of the internships indicated below.

Summer Internship in Washington D.C: Still accepting applications
Sweet, Stephen [Stephen.Sweet@cgkfoundation.org]
Sent: Thursday, March 11, 2010 8:12 PM
To:
Merton D. Finkler
Attachments:

Dr. Finkler,

I wanted to alert you that several great (and unexpected) internship positions have just became available in this summer’s Koch Internship Program, so we are going to continue accepting applications from interested candidates for a few more days. Please let your students know that this paid opportunity ($13.00/hr) is still available for those who are interested in gaining valuable professional experience in an organization that advocates free-market principles. Candidates who want to be considered for the program have until March 17th to submit their application materials. I will be available to answer any questions about the internship, so feel free to circulate my contact information.

Thank you!

Steve

Stephen Sweet
Program Coordinator, Marketing and Recruiting
Charles G. Koch Charitable Foundation
www.cgkfoundation.org
Ph: 202.215.7491

Course Evaluations “Opportunity”

No kidding, we really care what you have to say.    It helps us to gauge how we’re doing, make specific improvements to a course, and make improvements to our teaching generally.  In the spirit of Bjorklunden weekend, consider it an opportunity!

Here’s the Provost again:

DearLawrence Student,

It is time to do the end of term course evaluations. This term, we will be continuing the on-line course evaluation procedure. T he instructions for completing the forms are at the bottom of this note. The on-line course forms will be available from MARCH 5 (at 5:00pm) TO MARCH 23.

These course evaluations are very important to course instructors, and I hope you will take the time to fill them out carefully. Faculty use them to make changes in courses that will benefit your education. They are a significant part of Lawrence’s efforts to make certain we have the strongest possible academic program– and that strength is good for everybody.

One change this term is that whenever you log on to Voyager you will be immediately directed to the evaluation site. This is being done to help remind you of the importance of completing the evaluations.

Thanks for your help.

David Burrows
Provost and Dean of the Faculty

“in this, the most efficient of all possible worlds”

Following this past weekend’s performance of Candide on campus (with our own Alex Gmeinder in the leading role), I was reminded of this sight gag in a set of slides by Professor Richard Langlois of the University of Connecticut.

For those of you not in Economics 450, that’s recent Nobel Prize winner, Oliver Williamson, pictured delivering a lecture.  Professor Langlois appears to be chiding him about the rather strong efficiency implications of transaction cost economics.

You can read the full explanation at the Organizations & Markets blog.

Should You Take Out a Student Loan, Or Issue Equity?

BACK BY POPULAR DEMAND!!!

Great post over at Cheep Talk about Kjerstin Erickson, who is selling a 6% stake in her lifetime income for $600,000.

Think of Kjerstin as a self-managed firm.  She could issue debt or equity.  The Modigliani-Miller theorem explains why most people in Kjerstin’s position choose to issue debt.  Her income is taxed, but interest on debt is often tax-deductible.

But a key difference between Kjerstin and a firm is that you if you acquire Kjerstin you cannot fire the manager.  So your capital structure is also your managerial incentive scheme.  Debt makes Kjerstin a risk-lover:  she gets all the upside after paying off her debts and her downside is limited because she can just default.  With equity she owns 94% of her earnings no matter what they are.

Why don’t Lawrence and other colleges and universities ask for an equity stake rather than providing student loans?  Evidently, economists from Milton Friedman to James Tobin have advocated such a system and it seems to work only too well.  Hence the beneficiaries opportunistically opting out of the deal.

Ah, well.

Fast Growing Young Firms Dominate New Employment

A study released today by the Kauffman Foundation documents the significant influence young companies have on employment growth in the United States.  Companies that are less than five years old and employ between 50 and 250 employees are likely to make the largest contribution to both economic output and job growth.  Check out the press release, or better yet,  read the report.

http://www.kauffman.org/newsroom/high-growth-firms-account-for-disproportionate-share-of-job-creation-according-to-kauffman-foundation-study.aspx

The End is Near

Many students find the end of the term the ideal time to break up with that not-so-special person they’ve been seeing.   Maybe your returns to scale in the relationship are constant or even decreasing.  Or maybe you really don’t have that much specific capital invested in the relationship (K is low).  Or, perhaps, you’ve found a relatively higher redeployment value for your affections.   If that’s the case, transaction cost theory suggests that you might consider outsourcing your break up.

That’s right, a mere $10, will get you into a “basic break up,” with escalating rates based on increasing specificity (engagement, divorce), but, interestingly, not based on increasing complexity.

Huh.

Economics Tea, Today at 4

Today marks the last regular season Economics TeaBA before the start of our playoffs — the finals’ week TBA.   We will discuss what happened at the investment summit (including the performance of the triumphant winning team of Molly Ingram, Rana Marks, and two people who are not in my Econ 300 class), and find out if there are any takeaway messages.

We can also tell you about courses for next term and for next year, who will be on leave, the I&E reading group, what it means to be an entrepreneur, and ideas for improving the quality of the chocolate chip cookies (pay more?).

See you in the Fishbowl around 4.

Price Discrimination, Girl Scout Cookie Edition

The Girl Scouts are in the news again, this time for ruthlessly exercising market power:

Girl Scout cookies sell for different prices in different areas. The going price is either $3.50 or $4.00 depending on where you live. Local Girl Scout councils are actually allowed to set any price they want…

Well, perhaps not ruthless.  The author incorrectly titles it “price gouging,” when in fact it is simply a form of third-degree price discrimination, I suppose.   I would be interested in seeing data on different prices across different markets.  Do you think the different elasticities of demand stem from differences in income? Differences in tastes?  Differences in close substitutes?  Why isn’t there entry to wipe away the excess profits? I could spend the rest of the day thinking about this (and probably will).

For you 450 readers, perhaps there is an arbitrage opportunity out there for a would-be (Kirznerian) entrepreneur.

I am definitely going to check the price before I commit to Girl Scout cookies for the Economics TeaBA.

Speaking of the TeaBA, see you Monday at 4.

Reminder: LSB Investments Summit Today

There is no bigger LSB supporter than trustee Bob Perille ‘80, who is spearheading today’s LSB investments summit.   Mr. Perille is the managing director at Shamrock Capital and a very sharp cat, indeed.   That should be reason enough to come out today.

But, of course, there’s more.   Mr. Perille will be joined by Alan Allweiss ‘77, Dan Howell ‘74, and Bryan Torcivia ’81.   That’s a lot of talent in one room.

The Summit starts at 3:30 over in the Hurvis room.

Here is Prof. Galambos’ original post on the matter.