Viva Marginal Revolution

Tag: Viva Marginal Revolution

Gladwell Claims There is No Free Lunch

In his latest Revisionist History podcast, Malcolm Gladwell gives us some food for thought about where we put our resources. He claims that small liberal arts that develop gourmet-level dining services are doing so at the expense of bringing in low-income students. To develop his argument, he compares two elite schools from the northeast, characterizing the situation thusly:

They compete for the same students. Both have long traditions of academic excellence. But one of those schools is trying hard to close the gap between rich and poor in American society—and paying a high price for its effort. The other is making that problem worse—and reaping rewards as a result.

His logic is pretty straight forward: Schools have a budget constraint, and at the margin they can spend an additional dollar on financial aid or on campus amenities. A school that invests in campus amenities will draw more students willing to pay a premium price, whereas a school that skimps (relatively speaking) on amenities in favor of financial aid will be at a relative disadvantage in two ways: First, students generally prefer high-quality amenities to low-quality amenities. Second, it generates less revenue per student and therefore fewer resources to put into financial aid or campus amenities.

Malcolm Gladwell is an influential writer with best sellers to his credit such as Outliers and The Tipping Point, as well as about a million New Yorker articles, so this pieces is certain to make waves. That he calls the investment in high-end dining services “a moral problem” and implores students not to go to schools with ridiculously good food pretty much ensures people will be up in arms about this.

This is also relevant from our perch here at a small liberal arts school with our own financial decisions to make. I was more amused than convinced by the thesis when I first read the abstract, but after looking at the numbers and listening to Gladwell, I am more sympathetic (scroll down the Revisionist History page for the photo of a banana chocolate chip waffles with the school logo emblazoned in the center). Though, I guess that’s why Gladwell is such a popular figure: he makes an interesting claim, tells a good story, and makes a good case.

As an aside, I think I speak for most people who attended a residential campus prior to 2000 when I say that the food even at campuses that “skimp” on quality is ridiculously good compared to what we ate (though I did love the Monte Cristo sandwich on Thursdays).

You can read more about it at the always lively Inside Higher Ed website.

Addendum: It’s probably worth adding that it’s still okay to complain about food at your school. You probably pay a lot of money for dining services, and with that, you expect certain levels of quality, variety, and availability.

A quick peek reveals that the average U.S. household (a.k.a., consumer unit) spends about $6,800 annually on food compared with college meal plans that run $2000-$3500 per semester.

Is American Economic Growth in a Gordonian Knot?

One of the reasons, I suppose, that there has never been a more interesting time to be an economist is that we can all see remarkable technological advances unfolding in front of us, but no one quite agrees what to make of them. A few years ago, Tyler Cowen published a little e-book, The Great Stagnation, that was widely talked about and reviewed in about a million places. The man-bites-dog angle there was these technological changes have not translated into more robust growth (building on the Solow Paradox, I suppose, that we “can see the computer age everywhere but in the productivity statistics.”)

Since then, we have seen MIT’s techno-optimist Eric Brynjolfsson weigh in with The Race Against the Machine and Northwestern’s Robert Gordon counter with his “headwinds” argument. Specifically, Gordon argues that our most productive days are behind us, and that innovation will be insufficient to enable us to sustain the 2% per capita real growth of the 20th century. If you are so inclined, you can watch Brynjolfsson and Gordon square off in this TED debate.

Gordon has now substantially bolstered his argument with a new book, The Rise and Fall of American Growth. The massive 762-page tome will certainly be the hottest economics book since Thomas Piketty published Capital in 2014 (and probably read cover-to-cover by approximately the same percentage of readers). But if you don’t have time to wade through the text, there are plenty of people discussing it, including Gordon himself in this PBS News Hour video.

A number of big hitters have offered their thoughts, including Paul Krugman in the New York Times, LU Econ Blog favorite, Ed Glaeser in the Wall Street Journal, and the aforementioned Tyler Cowen for Foreign Affairs. I expect to see many, many more in the coming weeks.

Certainly, there are plenty of resources to get you thinking about the topic even if you don’t have the book itself. I currently have procured the Mudd’s copy, and will report back my thoughts when I get to it in 2018.

Tirole wins Nobel; Galambos wins Nobel-Picking Contest

Jean Tirole is the sole winner of the 2014 Nobel Prize in Economics, for his work on industrial organization. He is certainly well-known among graduate students, as his industrial organization textbook was the industry standard for decades. He is a favorite on Briggs 2nd for, among other things, his classic 1980s co-authored piece, “The Fat-Cat Effect,the Puppy-Dog Ploy, and the Lean and Hungry Look.”

Some of his more recent work is on platform markets, which is the subject of our ECON 495 course this term! Here is Alex Tabarrok’s take:

Platform markets or two-sided markets are markets where a firm brings together two or more sides both of whom benefit by the existence of the platform and both of whom may (or may not) be charged. A trivial but telling example is the singles bar that brings together men and (usually) women. Other examples are the Xbox a platform for game players and game developers, credit cards bring together buyers and firms that accept that card, newspapers bring together readers and advertisers, mall brings together stores and customers.

A key difficulty in these markets is that the price charged to one side of the market influences the demand on the other side of the market… [T]he cost of the technology that goes into an X-box console is often more than or not much less than the price of the console. So Microsoft sells the console at near cost and instead makes it money by charging game developers for the right to write games for the Xbox. Antitrust and regulation issues come into play here because the two sets of prices may look discriminatory or unfair. In a mall, for example, it’s often the largest firm (the anchor) that gets the lowest price (sometimes even zero!). Does this represent an unfair advantage that a large firm has over smaller rivals or is it a rational consequence of the fact that the anchor store may bring the most customers to the other, smaller stores in the mall so that the total package is welfare maximizing? Is Microsoft engaging in predatory pricing if it prices the Xbox at or below cost?… Platform markets mean that pricing at marginal cost can no longer be considered optimal in every market and pricing above marginal cost can no longer be considered as an indication of monopoly power.

Professor Galambos picks up the department prize for his selection.

The 4th or Possibly the 5th Predict the Nobel Prize in Economics Competition

Once again it’s time where I (sometimes) remember to post the Vegas odds on the Nobel Prize in Economics. Here are the venerable Thomson Reuters predictions for the 2014 cycle:

Philippe M. Aghion and Peter W. Howitt for contributions to Schumpeterian growth theory
William J. Baumol and Israel M. Kirzner for their advancement of the study of entrepreneurism
Mark S. Granovetter for his pioneering research in economic sociology

Wow, if you had to pick three topics of interest at Lawrence economics, you could do worse than Schumpeterian growth theory, entrepreneurism, and economic sociology.

For my pick, I would probably take Daron Acemoglu if he wasn’t so young. Last year I picked Philippe Aghion, so maybe I should just go ahead and pick him again this year?

Professor Galambos is going with Paul Milgrom and/or Jean Tirole.

Professor Caruthers is picking Daniel Hamermesh

UPDATE: Tyler Cowen goes with William Baumol and William Bowen for their work on the venerable cost disease.

Send me your picks or put them in the comments.

Must be 18 or older to enter, void where prohibited.

World Cup Predictions

analyst

Once again the World Cup is upon us, and once again my friends and colleagues are pumping me for information about who I’m picking. Well,like American coach Jurgen Klinsmann, I am not picking the Americans.

Who then?

Well, I suppose you could do worse than ask a bunch of economists:

Brazil will beat Germany to win soccer’s World Cup and also will score the most goals, according to a survey of economists across 52 countries.

The tournament’s host nation eclipsed Germany and Argentina as the top choice among 171 economists from 139 companies in a Bloomberg News poll published today. The Latin American country is also tipped to find the net the most times, topping Argentina and Spain.

Projections of a sixth World Cup victory for Brazil mesh with bookmaker odds and forecasts based on economic models created by Goldman Sachs Group Inc., UniCredit SpA and Danske Bank A/S. Paddy Power Plc and Ladbrokes Plc both rank Brazil as favorite, at odds of 3/1….

How this survey is newsworthy is an interesting question, I suppose. As I type this, Brazil is down 1-0 to Croatia in the opening match.

Special EconTea: The Nuclear Option

There will be a special Econ Tea on Tuesday, May 20 at 2:30 p.m. in Briggs 217 to discuss this paper:

Joseph Michael Newhard, “The Stock Market Speaks: How Dr. Alchian Learned to Build the Bomb,” Forthcoming in Journal of Corporate Finance.

The paper covers the remarkable story of Armen Alchian’s attempt to figure out the fissile material in nuclear weapons. Here’s Alchian’s telling of the story:

We knew they were developing this H-bomb, but we wanted to know, what’s in it? What’s the fissile material? Well there’s thorium, thallium, beryllium, and something else, and we asked Herman Kahn and he said, ‘Can’t tell you’… I said, ‘I’ll find out’, so I went down to the RAND library and had them get for me the US Government’s Dept. of Commerce Yearbook which has items on every industry by product, so I went through and looked up thorium, who makes it, looked up beryllium, who makes it, looked them all up, took me about 10 minutes to do it, and got them. There were about five companies, five of these things, and then I called Dean Witter… they had the names of the companies also making these things, ‘Look up for me the price of these companies… and here were these four or five stocks going like this, and then about, I think it was September, this was now around October, one of them started to go like that, from $2 to around $10, the rest were going like this, so I thought ‘Well, that’s interesting’… I wrote it up and distributed it around the social science group the next day. I got a phone call from the head of RAND calling me in, nice guy, knew him well, he said ‘Armen, we’ve got to suppress this’… I said ‘Yes, sir’, and I took it and put it away, and that was the first event study. Anyway, it made my reputation among a lot of the engineers at RAND.

You can get an ungated version of the the paper here.

As per usual, the availability of refreshments is subject to estimated demand and prevailing market prices.

A Principled Agent?

As I wrapped up Econ 450 today, I told the class that the basic theoretical frameworks, including agency theory, should continue to pop up for as long as we both shall live. And here, from Wired, we have an agent (allegedly) trying to bilk the principal. The players should be familiar.

The Obama administration accused Sprint today of overcharging the government more than $21 million in wiretapping expenses…

Sprint… inflated charges approximately 58 percent between 2007 and 2010, according to a lawsuit the administration brought against the carrier today.

The Agent says it was just doing what it was told:

Under the law, the government is required to reimburse Sprint for its reasonable costs incurred when assisting law enforcement agencies with electronic surveillance,” Sprint spokesman John Taylor said. “The invoices Sprint has submitted to the government fully comply with the law. We have fully cooperated with this investigation and intend to defend this matter vigorously.”

It seems that the Principal gave the Agent plenty of opportunities:

According to records, the number of domestic federal and state wiretaps reported in 2012 increased 24 percent from the year earlier. Overall, a total of 3,395 wiretaps were reported in 2012. Of those, 1,354 were authorized by federal judges, and 2,041 by state judges. The number of federal orders jumped 71 percent. State orders increased 5 percent.

Nobel Prize Committee Covers Its Assets

The Nobel Prize in Economics goes to Eugene Fama, Robert Shillier, and Lars Peter Hansen for their work on asset pricing. Fama is well-known for his empirical work on the Efficient Market Hypothesis, as well as work corporate finance (or any organizational finance, really). He has a half dozen articles with north of 10,000 citations. Zoinks. Shiller is a well-known behavioral guy who writes about market volatility and asset bubbles (are those inconsistent with the EMH?). You might know him from the Case-Shiller housing price index we’re always reading about. I don’t know much about Hansen, beyond the generalized method of moments business.

I’m sure there’s no dearth of news reports on these guys. Marginal Revolution has a thousand words on each today.

Once again, there was no winner in the Pick the Nobel contest, meaning the fabulous prize package will roll over to next year.

Did they play with “chained” dollars?

Loyal reader “Mr. H” points us to some recent improbable research from the Journal of Economic Behavior and Organization (JEBO*) that analyzes the classic prisoners’ dilemma game. The big story here is that the authors ran the experiments using actual prisoners! Specifically, they surveyed about 92 women from a prison “für Frauen” along with 90 college students as a control group, and they found that prisoners were actually more likely to cooperate (keep their mouths’ shut) in some situations.

Here’s from the abstract:

We compare female inmates and students in a simultaneous and a sequential Prisoner’s Dilemma. In the simultaneous Prisoner’s Dilemma, the cooperation rate among inmates exceeds the rate of cooperating students.

In the conventional setup, of course, cooperation means not ratting out your criminal partner. So what do the differential rates tell you — snitches get stitches?

Relative to the simultaneous dilemma, cooperation among first-movers in the sequential Prisoner’s Dilemma increases for students, but not for inmates. Students and inmates behave identically as second movers. Hence, we find a similar and significant fraction of inmates and students to hold social preferences.

Now what does that tell you? I’m not sure.

* For those of you keeping track, that’s pronounced “Gee bow”.

The Antitrust Legacy of Robert Bork

Whether one looks at the texts of the antitrust statutes, the legislative intent behind them, or the requirements of proper judicial behavior, therefore, the case is overwhelming for the judicial adherence to the single goal of consumer welfare in the interpretation of the antitrust laws.

That’s from the late Robert Bork, who died earlier this week. I’m putting this one in a “people you should know” category. Bork was a Yale law professor and sometimes Justice Department official who is most famous for having his nomination to the Supreme Court shot down for being too conservative, or too wacky, or too something. Whatever the reasons, the confirmation hearings and their aftermath are stuff of legend. (As was Bork’s beard!).

But for economists Bork’s greatest influence was certainly in the area of antitrust, and in particular his book, The Antitrust Paradox, from whence the above quotation was plucked. Indeed, Bork is a seminal figure in the law and economics movement. Note that Bork contends that consumer welfare is the end of antitrust policy, not the protection of firms from competition, not whether a given market is competitive or not, not even total welfare (!). Think about that.

Steven Landsburg says that Bork won the antitrust argument and that we’re all the better for it.

Tyler Cowen also points us to some links discussing Bork’s life and legacy.

UPDATE: A big piece on Bork’s influence in the Washington Post.

Do You Expect Me to Talk?

Welcome to winter break. One of the great things about returning home is that your family and friends can share not only in the new, colorful personal habits that you’ve picked up on campus, but also in the fruits of the valuable analytic skills that you have developed here at Lawrence.

And what better way to get that conversation jump started than to break down which Bond villains had plans that actually made economic sense?

Economist Jean-Jacques Dethier gets us started. Here — right on schedule — is a taste of analysis of the evil scheme of one Christopher Walken in A View to a Kill:

Plot: Max Zorin (Christopher Walken) wants to secretly trigger a massive earthquake that will destroy Silicon Valley. This will then allow him and his investor allies to monopolize the microchip manufacturing market.

Plausibility: “As far as I know, microchips aren’t actually manufactured in Silicon Valley,” says Dethier. “They’re made all over the world, in China and other places, though the guys who commission the work may be in Silicon Valley.” Therefore, while taking out Silicon Valley would obviously be cataclysmic for the tech industry, he notes, it also wouldn’t entirely remove your competitors, and wouldn’t ultimately affect manufacturing that much.

Ah, pity Zorin didn’t commission a five-forces analysis.

Via the Cheap Talk blog.

UPDATE: Tyler Cowen has weighed in.

Nobel Winners: Game Set Match

The Nobels go to Alvin Roth and Lloyd Shapley for their work on matching and/or market design; that is, markets without prices.

Professor Galambos was talking about Roth’s work in our community read this last week, and Alex Tabarrok has a lot more here. Here’s an accessible piece on matching kids to schools. Here’s the famous Gale-Shapley piece on college admissions and marriage.

In a related note, I often use Roth’s JEP excellent repugnance piece in my public policy classes.

Here’s Al Roth’s excellent blog.

A complement, not a substitute, we hope.

Well, no winners in our guess the Nobel contest, so the prizes will be rolled over into next year’s contest.

Pick the Nobel Update

Here is some more information on the possible Nobel winners in economics from Tyler Cowen and the guys at the Cheap Talk blog. Cowen picks the trifecta of Fama, Shiller, and Richard Thaler.

The Cheap Talkers show us the picks from the Kellogg School’s annual pool, which has Oliver Hart (of Grossman & Hart and Hart & Moore fame) and Jean Tirole (of Tirole fame) as odds-on favorites. However, the bloggers note the IO bias at Kellogg, and provide a far more sophisticated assessment:

While I think all these researchers will get this prize eventually, their age works against them – they are too young. they did seminal work at a time when Duran Duran ruled the airwaves or perhaps the Smiths in the case of Tirole. The Nobel Committee is still sorting out the time when ABBA was Number One and Bjorn Borg won Wimbledon. (Note Swedish influence on pop culture was high in the 1970s!)

Indeed.

Though, I don’t think The Smiths ever “ruled” the airwaves.

Here’s the previous post. Make your picks in the comments thread or yell them at me as I walk by you at the WCC.

Riesgo Moral

In our continuing series on how incentives shape behavior, we take a look across the sea to España, where a man tragically sawed off his arm to collect on eight insurance policies. It seems that insurance fraud is on the rise in the depressed economies of Europe

According to data from the ICEA, which carries out research for insurance and pension providers, there were 54,114 fraudulent claims in 2003; in 2011, there were 130,959.

We, of course, have seen this sort of thing before. And even before that.

But it turns out that it is not only the depressed economies of Europe that are seeing a rise in fraud. Right here in the U.S. it appears that there is a rather substantial rise in Social Security Disability Insurance claims. I had first heard about this on an EconTalk episode featuring David Autor.

Craig “Ironman” Eyermann at the Political Calculations blog has the numbers here and further elaboration here.

“Um, hello? Can I tell you about the real world?”

That’s hedge fund manager Hugh Hendry talking to Nobel-prize winning economist Joseph Stiglitz, as quoted in this Financial Times article.

See the exchange here. It gets interesting around 7 minutes for sure where Hendry suggests Greece will have to default or give creditors a “haircut” as it recognizes that it has unsustainable levels of debt.

But, back the FT piece, Hendry thinks we are on the verge of financial anarchy, that France will nationalize its banks, that China is hosed, that Japan is in trouble, and that the global debt situation is so dire that “the scale and the magnitude of the problem is greater than their (read: governments’) ability to respond.” He concludes that we are within ten years of an epic financial collapse reminiscent of the 1930s.

The good news?

The US isn’t as bad off as Brazil, India, Russia, and China. And that the financial collapse will create investment opportunities of a lifetime.

Have a good weekend.

Drastic Times Cause for Drastic Measures?

Marginal Revolution points us to some disturbing evidence on the increasing polarization of the European electorate.

The source is Credit Suise, so you can track that down to see what “extreme votes” means.

Coase Goes to China… Literally

Back in 1937 Ronald Coase asked a question fundamental to the economics of organizations — why are there firms? Then in 1960 he pointed out that externalities stem from the reciprocity of the relationship between harmer and harmee, and that the failure to negotiate and enforce contracts is fundamental to the persistence of “externalities.” As he says in his essay in “The Nature of the Firm: Influence“:

Transaction costs were used in the one case to show that if they are not included in the analysis, the firm has no purpose, while in the other I showed, as I thought, that if transaction costs were not introduced into the analysis, for the range of problems considered, the law had no purpose (62).

For these seminal contributions he picked up the Nobel Prize in Economics in 1991 and shortly thereafter helped found — along with Douglass North — the International Society for the New Institutional Economics.

Now, in 2011, he asks the questions, how and why did China go capitalist? And here comes the book later this month.

China’s road to capitalism was forged by two movements. One was orchestrated by Beijing; its self-proclaimed goal being to turn China into a “modern, powerful socialist country.” The other, more important, one was the gross product of what we like to call “marginal revolutions.” It involved a concatenation of grass-roots movements and local initiatives.

Here’s some more.

There’s a lot of New Institutional Economics work on China, by some very heavy hitters.

Ramen Noodles, Bus Rides, and the World Series (?)

As you know (or should know), an “inferior” good is one where as my income increases, the demand for the good decreases. My in class examples of inferior goods are typically things like Ramen noodles, hot dogs, bus rides, and Irish potatoes back in the day.

In a stroke of WT-you-know-what, John Burger and Stephen Walters from Loyola University in Maryland add the World Series to the list.

You can’t be serious?

Indeed. And, here’s the abstract from their paper in Economic Letters:

World Series telecasts are now an inferior good. Income and the time cost of consumption interact so that a ten percent income increase reduces viewership by 1.8 million households. Increased availability of substitutes reduces ratings but increased drama improves them.

Now why would that be? Is it because the proliferation of substitutes over the years (more cable television options in November).

Look for this in Econ 300 next year.

Man Bites Dog Reading Book

It is well known that author’s clamor for Oprah’s endorsement because the book sales go bonkers, and sales of the author’s other books also go bonkers. The conventional wisdom is that publishers love Oprah because she pumps up book sales.

On the other side of Chicago, however, Northwestern’s Craig Garthwaite has another tale to tell: Oprah’s endorsements reduce overall book sales:

In the publishing sector, endorsements from the Oprah Winfrey Book Club are found to be a business stealing form of advertising that raises title level sales without increasing the market size. The endorsements decrease aggregate adult fiction sales; likely as a result of the endorsed books being more difficult than those that otherwise would have been purchased.

It is I who emphasized that startling finding. Here’s how Garthwaite describes it:

At the genre level, the post-endorsement period is marked by large sales declines in the romance, mystery, and action categories. These genres were popular prior to the endorsements in the geographic areas demonstrating the largest endorsement responses. Using quantitative measures of text readability, I show that endorsed titles require one additional year of education to read than is typical for romance, mystery and action books. Furthermore, the post-endorsement sales decline was largest following the endorsement of classic novels, which require nearly four more years of education to comprehend than typical romance, mystery, or action titles. Since the cost of consuming a book is the combination of the retail price and the opportunity cost of the time spent reading the text, the post-endorsement sales decline in publishing should be considered similar to endorsements in other sectors that shift consumers towards more expensive products.

I read through the paper this evening, and this will likely wind up on my Industrial Organization reading list for next year. We’ve seen a similar phenomenon in our analysis of the beer industry — advertising doesn’t increase overall sales so much as it redistributes sales within the sector. Indeed, we kick off that class with a simple advertising game model, where advertising expenditures are treated as a prisoner’s dilemma, and we learn why incumbents are often copacetic with an advertising ban. The analogy here, I guess, is that a beer producer that heavily advertises a new, difficult-to-drink product could cause an overall beer consumption to go down (possible ad line: New Bud Super Dark: It’s Like Drinking a Bagel ! ).

I wonder if the “light beer” revolution of the 1970s had the opposite effect?

Via the fellas at Marginal Revolution.

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