General Interest

Category: General Interest

Too Much of a Good Thing

In preparation for this weekend’s big LSB Investments Summit, it might be useful to ask the question:  Is venture capital a big waste?

Well, that might be overstating it a bit, but the potential profitability of venture capital is the topic of James Surowiecki’s new piece in MIT’s Technology Review.   He diagnoses the problem of there being too much VC money out there, and the glut is putting a big crimp in the side of an industry that once produced monster profits.   On the other hand, shouldn’t we expect that a profitable industry would attract entry, driving (economic) profits to zero? (Hint: yes).    Is that a bad thing or a good thing?

Those interested in diving deep into this subject should consult Josh Lerner’s new book, Boulevard of Broken Dreams:  Why Public Efforts to Boost Entrepreneurship and Venture Capital Have Failed — and What to Do About It.

Of course, I strongly endorse you reading up and peppering this weekend’s panel with questions, prefaced with things like, “I read in the recent Technology Review that…” and “Do you agree with Josh Lerner that…”

UPDATE: Here’s Lerner interviewed at Vox.

Food for Thought, Students Going Bananas

This question came up in class the other day — are you peeling your bananas wrong?   As usual, the Armchair Economist Steven Landsburg has something to say about the matter:

My friend Petal peels her bananas from the bottom. Well, it’s the top, actually, since bananas grow upside down. Come to think of it, that’s not quite right either—bananas grow the way they grow, which should be right-side up by definition, even if we think of them as upside down. So let me start over. Petal peels her bananas from the end without the stem.

Petal’s method is counterintuitive and thus instantly appealing to economists, who love nothing more than to overturn conventional wisdom. Multiple experiments (well, two experiments, actually, since we only had two bananas) quickly convinced a majority of the department that Petal’s way is—surprisingly—easier than the traditional method, though the econometricians thought you’d need to test at least 30 bananas to report that result with confidence. The labor economists immediately resolved to apply for a grant.

Still not convinced?  Well, you aren’t alone.  But the peel-from-the-bottom case is a compelling one:

In the anti-Petal camp, we have the theorists who argue that peeling from the stem end must be optimal because that’s what people do. But Petal counters—and indeed this is her clincher argument—that monkeys do it her way (though I think it would be more accurate to say that she does it the monkeys’ way) and monkeys are the real experts.

If such knotty problems interest you, you should consider taking Econ 300 with me this fall.   In fact, you should consider it anyway.

Food for Thought or Thought for Food?

Looking for a conversation starter?  Perhaps you should take a sample off this menu from Alex Tabarrok over at Marginal Revolution:

Suppose that you are a cow philosopher contemplating the welfare of cows.  In the world today there are about 1.3 billion of your compatriots.  It would be a fine thing for cows if all cows were well treated and if none were slaughtered for food.  Nevertheless, being a clever cow, you understand that it’s the demand for beef that brings cows to life.  How do you regard such a trade off?

If each cow brought to life adds even some small bit of cow utility to the grand total of cow welfare must not beef eaters be lauded, at least if they are hungry enough?  Or is the pro beef-eater argument simply repugnant?

Should a cow behind a haystack of ignorance choose the world with the highest expectation of utility?  In which case, a world of many cows each destined for slaughter could well be preferable to one with many fewer but happier cows.

Or is it wrong to compare the zero of non-existence with existence?  Should a cow philosopher focus on making cows happy or on making happy cows?  If the former, would one (or two) supremely happy cows not be best?

As I tell all my students — cows are more like gold and buffalo are more like oil.

Are you feeling lucky, Prius?

My colleague Paul Fischbeck is in the news for calculating the incremental risks from driving a Toyota with an accelerator problem.  According to his press release:

In the U.S., there is a little more than one fatality for every 100 million miles driven. The average U.S. vehicle logs about 13,000 miles each year. Based on these averages, for the 2.3 million Toyotas being recalled, there are about 340 fatalities every year for causes unrelated to the accelerator. The accelerator problem is adding about six deaths every year to this total — meaning that the accelerator problem is increasing the driving risk by about 2 percent.

So there’s a meat-and-taters public policy question for you — do the benefits of fixing the problem justify the costs of a massive recall?   To put this in context, a 2 in a million chance is about the same as flipping a coin 19 times and getting heads every time.

See you in 240.

Economics TBA — today at 4 p.m.

After a scintillating weekend up north, we are back for the home stretch of the second term.  And what better way to finish a Monday than TeaBA with the economics faculty and students?

Today will be the Oliver Zornow Tea, for his spectacular finish in the this weekend’s game theory tournament.  Today’s cookies are courtesy of Mr. Zornow.

We will also hear a presentation from a group in The Economics of the Firm (Econ 450), examining the role of the football coach in the division III schools.  Can we measure his performance in terms of wins and losses?  Or is it a multi-attribute principal agent model?

Should be a corker.  See you there.

Pareto Improvements, Film at 11

Tom Hazlett continues to beat the drum to auction off the spectrum.   What does that mean?

Professor Hazlett estimates that selling off this spectrum could raise at least $100 billion for the government and, more important, create roughly $1 trillion worth of value to users of the resulting services. Those services would include ultrahigh-speed wireless Internet access (including access for schools, of course) much improved cellphone coverage and fewer ugly cell towers. And they would include other new things we can’t imagine any more than we could have imagined an iPhone just 10 years ago.


What’s the downside?

“the secret, multibillion-dollar systems that U.S. intelligence agencies use to monitor the communications, transactions, and associations of people in this country and around the world”

Slate.com has an extended dialog with Shane Harris, the author of The Watchers: The Rise of America’s Surveillance State.   Here’s the prelude:

The Watchers is really a book about [Admiral John] Poindexter, the visionary Ph.D., former national security adviser, disgraced Iran-Contra conspirator, and father of one of the most far-reaching and reviled surveillance initiatives of the post-9/11 era, Total Information Awareness. The Bush administration gagged Poindexter when TIA ignited a firestorm in Congress in 2003, and after being removed from his position at the Defense Advanced Research Projects Agency (the Pentagon’s R & D shop, known as DARPA), the admiral appeared to recede from the national stage. But he gave you unprecedented access—14 long interviews about his philosophy and career—and in your book, he emerges not as the caricature civil libertarians have come to know and loathe but as a nuanced, surprisingly sympathetic character.

I’d imagine this is an interesting piece for folks interested in organizations or regulatory policy generally.   I look forward to reading this one.

Happy Valentine’s from The I & E Reading Group

Early in life I had three ambitions. I wanted to be the greatest economist in the world, the greatest horseman in Austria, and the best lover in Vienna. Well, I never became the greatest horseman in Austria.

That, of course, is from Joseph Schumpeter, the subject of the first book in the Innovation & Entrepreneurship Reading Group.

If you are interested in reading with us, let Professor Gerard know. You can usually catch him around the office, or at the Economics Tea, Mondays at 4 p.m. somewhere on Briggs 2nd.

We will begin blogging about the book this week and plan to meet and discuss it at the Bjorklunden weekend and in early March.

Watch this space.

Kudos to Professor Shober

This looks interesting. The best way to foment effective policy outcomes is to allow administrative agencies to do their thing unfettered. How do they solve the agency problem? I guess we’ll have to read the book and find out.

Order now!

Splintered Accountability: State Governance and Education Reform

Arnold F. Shober

The No Child Left Behind Act declared that improving education in every school in the United States was a top national priority. However, this act did not acknowledge how state departments of education have successfully constructed reforms for the past few decades, despite the power struggle between governors, legislators, school districts, and state boards of education. Drawing upon archival sources, state budget documents, interviews, and statistical analysis, Splintered Accountability amply demonstrates that sustained education reform is best left in the hands of the relatively autonomous state departments of education in order to maintain curriculum standards, school finance, and teacher licensure systems. Comprehensive and successful education reform originates from within state education agencies, propelled by savvy state superintendents.

The Prisoners Dilemma and Corrupt Figure Skating Judges

The Olympics are upon us, and economists of many stripes are gathering to watch the figure skating, dish about the routines and outfits, and speculate which judges are corrupt. Fortunately, one of our own, Eric Zitzewitz of Dartmouth, has been gathering data to give us the low-down on the corruption problem. Ray Fisman discusses the research in a recent Slate piece.

The 2002 Winter Games in Salt Lake City were tainted by a figure skating scandal in which judges from five countries allegedly colluded to deliver victory to a Russian couple over a pair of Canadians…. [Economist Eric] Zitzewitz found that the “home judges bias” added nearly 0.2 points to skaters’ scores (on a six-point scale), often enough to boost their ranking by at least one position. [H]aving a countryman on the panel helped a skater not just through the direct effect of that one judge’s scoring–the home-country judge also convinced others on the panel to inflate their scores.

What was the solution? Well, perhaps paradoxically, it was to make judges anonymous and set up the classic prisoners dilemma situation. In other words, if we agree to give each other’s skaters inflated scores, then I need to be able to observe what score you give to ensure that you are keeping up your end of the bargain. Absent that, your strategy should be to “defect” from our agreement because your skater certainly benefits from the rival’s lower score.

Was that the effect? In a word: No.

The home-country bias gets even worse when anonymous judges can hide from a scrutinizing press and public, despite the barriers that anonymity may create for effective backroom deal-making. The home-judge advantage under the new system is about 20 percent higher than in the days of full disclosure. (Zitzewitz can’t say how much of this increase in bias is from the home-country judge himself, and how much from others he’s persuaded to go along with him; how each judge has scored a performance–and which judges’ scores are counted–are kept secret.)

Fascinating either way. Perhaps they should find figure skating judges from countries that don’t have any serious figure skaters?

Schumpeter Day Tea, That Is

The folks over at Organizations & Markets remind us that it’s Schumpeter Day again (where does the time go?). The nation-wide celebrations commemorate the birthday of the prominent economist, who plied us with such memorable lines as this:

The process of Creative Destruction is the essential fact about capitalism … it is not [price] competition which counts but the competition from . . . new technology . . . competition which strikes not at the margins of profits . . . of existing firms but at their foundations and their very lives.

The Economics TBA / Schumpeter Day High Tea at 4 p.m. today (along with “Reading Days”) will serve as a kick off for the Innovation and Entrepreneurship Reading Group. We will begin blogging the text later this week.

See you at 4

Update: The tea was once again a resounding success, with the student faculty ratio of better than 3:1. I still think offering caffeine could boost our numbers.

Revisiting the Amazon-Macmillian Fracas

The dust is settling on the, well, the dust up between Amazon and Macmillian over eBook prices. There are some excellent posts from Virginia Postrel, Lynne Kiesling, and Megan McCardle. Some great Industrial Organization topics here, like price discrimination, resale price maintenance, and why entry by Apple here is leading to higher retail prices. (Did he just say entry is leading to higher prices? Yes, he did).

Well, as we try to sort that out, it appears the dust is on the rise again, as a third publisher is demanding the “agency model” in the pricing of e-Books.

The future of the $9.99 e-book is in danger. A third major publisher, Hachette, is going for Apple’s agency model in order to sell e-books for up to $14.99 apiece, the company revealed in a memo to agents.

Following Amazon’s public dispute over e-book prices with Macmillan early this week, Hachette is also seeking a shift to the agency model, which allows the publisher to set the price for the e-book, while the retailer keeps 30 percent of the sales.

I wonder if that “agency model” bears any relationship to the “principal-agent” problem we will be covering in 450 after the break?

Stay tuned.

McOutsourcing in Moscow

Solid New York Times piece on McDonald’s in Russia. To wit:

The company celebrated a different milestone earlier this year by outsourcing the last product — hamburger buns — it had made at a proprietary factory outside Moscow called McComplex. It was built before the chain opened its first restaurant. Nearly everywhere else, McDonald’s buys ingredients, rather than making its own. But in the Soviet Union, there simply were no private businesses to supply the 300 or so distinct ingredients needed by a McDonald’s outlet.

Everything — from frozen French fries to pie filling — had to be made from scratch at a sprawling factory.

McDonald’s is always a good lens through which to view the 118 or so countries where it operates. In the 20 years since McDonald’s arrived in Russia, enough private enterprises have sprung up to supply nearly every ingredient needed to operate one of its restaurants.

Today, private businesses in Russia supply 80 percent of the ingredients in a McDonald’s, a reversal from the ratio when it opened in 1990 and 80 percent of ingredients were imported.

Fascinating stuff. I could probably write an entire final exam around that passage.

Did Amazon Blink?

Looks like Amazon might have blinked.

Dear Customers:

Macmillan, one of the “big six” publishers, has clearly communicated to us that, regardless of our viewpoint, they are committed to switching to an agency model and charging $12.99 to $14.99 for e-book versions of bestsellers and most hardcover releases.

We have expressed our strong disagreement and the seriousness of our disagreement by temporarily ceasing the sale of all Macmillan titles. We want you to know that ultimately, however, we will have to capitulate and accept Macmillan’s terms because Macmillan has a monopoly over their own titles, and we will want to offer them to you even at prices we believe are needlessly high for e-books. Amazon customers will at that point decide for themselves whether they believe it’s reasonable to pay $14.99 for a bestselling e-book. We don’t believe that all of the major publishers will take the same route as Macmillan. And we know for sure that many independent presses and self-published authors will see this as an opportunity to provide attractively priced e-books as an alternative.

Kindle is a business for Amazon, and it is also a mission. We never expected it to be easy!

Thank you for being a customer.

More on the Amazon-Macmillian Fracas

Excerpts from a very illuminating discussion:

Greed, no doubt, exists on both sides, living as we do under capitalism, but greed alone doesn’t explain the dispute. Yes, Amazon wants to sell e-books for $9.99 or less, and Macmillan wants Amazon to sell them for $15 or less. But as Macmillan’s CEO John Sargent explains, in a statement released today as an advertisement to the book-industry newsletter Publisher’s Lunch, Amazon and Macmillan aren’t at the moment fighting to see who can make more money on a book sale. They’re fighting to see who can lose more money. This is a very peculiar battle.

,,,

Most publishers have until now sold their e-books to Amazon for the same wholesale price that they sell their hardcovers–roughly half the hardcover’s list price. It is up to a retailer like Amazon whether to sell the book to consumers at its list price, as printed on the inside front flap, or at a discount. With e-books, Amazon has usually offered a discount so low that it actually loses money. That is, Amazon buys for $12 an e-book whose hardcover list price is $24.95, and then Amazon sells the e-book to its customers for $9.95.

…

Macmillan has probably been selling its e-books to Amazon at the wholesale price of about $12, and Amazon has been selling them retail for about $10. Macmillan says that it would like to sell its e-books at the wholesale price of about $10.45, and have Amazon sell them for the retail price of $14.95. In other words, Macmillan was offering to earn $2 less per e-book. Amazon, however, insisted that it would prefer to take a $2 loss on each e-book, instead, and became so indignant over the matter that it has now ceased selling any Macmillan titles, print or electronic. Macmillan’s proposal is known as the “agency model” for e-book pricing, and the company probably only dared attempt it because Apple has promised that it will sell e-books for its new tablet on exactly those terms. (Amazon has said that they’re willing to accept the agency model, starting in June, but only if an e-book’s list price does not exceed $9.99.)

…

Thank you, Mr. Shatzkin.

Big Apple Stirs Up Bezos’ Hive

A few months ago we saw Amazon and Walmart and Target engaged in some aggressive price competition in the sale of on-line books. I haven’t heard to much on that front of late, so I assume that the dust has settled and those firms will fight another day. Amazon is back in the thick of things, this time aggressively defending its Ebook turf from the encroachment of Apple and its new iPad.

The book world is all a flutter. Here’s a note from one of friend of mine, who has intimate knowledge of the sordid dealings of the book world (edited for content; these book people drink like journalists and swear like sailors):

So this ebook pricing conflict is getting serious. Amazon has pulled all of Macmillan’s titles from its store — physical, ebook, etc. — in response to Macmillan wanting higher prices for some kindle editions than $9.99. So, for example, you can’t buy any Picador titles. That’s a lot of bestselling books.

[I’m not certain I agree with Amazon’s actions here]. To dictate $9.99 for all books and instill that price point in readers minds as the only appropriate ebook price is just ridiculous — especially when they’re losing money on every kindle edition they sell of a hardcover book.

And this:

So it’s about Macmillan trying to switch over the agency model of pricing, which is what Apple is offering with their new ibookstore. It makes a lot more sense than the distribution model that Amazon uses for ebooks.

Nothing like a good old fashioned price squabble to keep things interesting. I’m looking into the details of this “agency pricing” model and of course will let you know when I find out.

Stay tuned to this space.

Update: This stuff is so delicious I just want to take a big bite out of it. It appears to be more of a market power argument than a transaction costs argument. And it appears this may well have all come to a head with or without the iPad.

Thanks to my source, “The Big Stick,” for the tips.

This Means You!

Peter Temin has a new NBER paper on one economic historian’s view of the current debacle. Here’s the abstract:

This paper discusses parallels between our current recession and the Great Depression for the intelligent general public. It stresses the role of economic models and ideas in public policy and argues that gold-standard mentality still holds sway today. The parallels are greatest in the generation of the crises, and they also illuminate the policy choices being made today. We have escaped a repeat of the Depression, but we appear to have lost the opportunity for significant financial reform.

Let me know how this one turns out.

Kasparov Goes Mano-a-Mainframe

Gary Kasparov talks about his experiences going mano-a-mainframe on the chessboard in the latest New York Review of Books. Here’s a tasty bit discussing when the programmers finally prevailed:

It was the specialists–the chess players and the programmers and the artificial intelligence enthusiasts–who had a more nuanced appreciation of the result. Grandmasters had already begun to see the implications of the existence of machines that could play–if only, at this point, in a select few types of board configurations–with godlike perfection….

The AI crowd… was pleased with the result and the attention, but dismayed by the fact that Deep Blue was hardly what their predecessors had imagined decades earlier when they dreamed of creating a machine to defeat the world chess champion. Instead of a computer that thought and played chess like a human, with human creativity and intuition, they got one that played like a machine, systematically evaluating 200 million possible moves on the chess board per second and winning with brute number-crunching force…

It was an impressive achievement, of course, and a human achievement by the members of the IBM team, but Deep Blue was only intelligent the way your programmable alarm clock is intelligent. Not that losing to a $10 million alarm clock made me feel any better…

Here in the economics department, we believe people and firms make choices among alternatives. Of course, it can be both difficult and costly to identify all those alternatives ex ante.

Great read.

Making the Grade

College kids these days seem to have it easy. When I was that age, I had to walk twelve miles uphill through a blizzard to get to class, and then make a similarly brutal trip uphill to get back home. Not to mention that back then the median grade was somewhere around a C-. And this was during the easy courses in summer session.

Well, perhaps that isn’t all completely accurate, but according to a forthcoming paper by Philip Babcock in Economic Inquiry, it seems likely that we did study more back then. The key result is that students spend more time studying in classes where the expected grade is lower. So, if grade inflation leads to higher expected grades, I read that to mean that on average students will study less.

Abstract: College grade point averages in the United States rose substantially between the 1960s and the 2000s. Over the same period, study time declined by almost a half. This paper uses a 12-quarter panel of course evaluations from the University of California, San Diego to discern whether a link between grades and effort investment holds up in a micro setting. Results indicate that average study time would be about 50% lower in a class in which the average expected grade was an “A” than in the same course taught by the same instructor in which students expected a “C.“… Findings do not appear to be driven primarily by the individual student’s expected grade, but by the average expected grade of others in the class. Class-specific characteristics that generate low expected grades appear to produce higher effort choices — evidence that nominal changes in grades may lead to real changes in effort investment.

The emphasis is mine.

If we here in economics announced that the average course grade is a half point lower than the average campus grade, would we get harder-working students? Or just fewer students?