Inequality and parenting style

by on October 15, 2014 at 1:50 pm in Data Source, Economics | Permalink

Greg Mankiw refers us to this graph (there is further explanation here), which of course can be interpreted in a variety of ways, with causation running either way or perhaps not at all:

inequality and parenting style

Assorted links

by on October 15, 2014 at 12:24 pm in Uncategorized | Permalink

1. The magical organ and musical taste.

2. Dropbox apologizes in Mission Soccergate.

3. Leonard Liggio has passed away.  Leonard’s voracious reading habits, and gentle nature, were very much a role model for me.  We will miss him.

4. There is no great cloud stagnation.

5. Austin Frakt on the new David Cutler book.  And Bill Gates reviews Piketty, very good piece.

6. Data on rebounds.

Tivo and Netflix ought to have been made other entertainment more popular and football less popular as a form of entertainment but instead more people are watching football than ever before. Gabriel Rossman asks why?

We can start with a few basic technological shifts, specifically the DVR and broadband internet. Both technologies have the effect that people are watching fewer commercials. From this we can infer that advertisers will have a pronounced preference for “DVR-proof” advertising.

….In practice getting people to watch spot advertising means programming that has to be watched live and in practice that in turn means sports. Thus it is entirely predictable that advertisers will pay a premium for sports. It is also predictable that the cable industry will pay a premium for sports because must-watch ephemera is a good insurance policy against cord-cutting. Moreover, as a straight-forward Ricardian rent type issue, we would predict that this increased demand would accrue to the owners of factor inputs: athletes, team owners, and (in the short-run) the owners of cable channels with contracts to carry sports content. Indeed this has basically all happened….

Here’s something else that is entirely predictable from these premises: we should have declining viewership for sports….If you’re the marginal viewer who ex ante finds sports and scripted equally compelling, it seems like as sports get more expensive and you keep having to watch ads, whereas scripted gets dirt cheap, ad-free, and generally more convenient, the marginal viewer would give up sports, watch last season’s episodes of Breaking Bad on Netflix, be blissfully unaware of major advertising campaigns, and pocket the $50 difference between a basic cable package and a $10 Netflix subscription.

…The weird thing is that this latter prediction didn’t happen. During exactly the same period over which sports got more expensive in absolute terms and there was declining direct cost and hassle for close substitutes, viewership for sports increased. From 2003 to 2013, sports viewership was up 27%. Or rather, baseball isn’t doing so great and basketball is holding its own, but holy moly, people love football. If you look at both the top events and top series on tv, it’s basically football, football, some other crap, and more football…. I just can’t understand how when one thing gets more expensive and something else that’s similar gets a lot cheaper and lower hassle, that you see people flocking to the thing that is absolutely more hassle and relatively more money.

It’s a good question. Demographics don’t appear to explain the change. Football skews young, male and black but none of these are undergoing rapid increase. (It’s the aged that are undergoing high growth rates but it’s baseball that appeals more to the old and that isn’t doing great). Fantasy football is big but is it cause or effect?

One possibility is that precisely because there are so few common events to coordinate on, the ones that do coordinate become more important. Why football and not baseball or basketball? Why not? It’s not hard to spin stories but it may also be that random advantages snowballed.

Other theories?

Terrence McCoy reports:

Schultz wants $150,000 for Ebola.com — a price he thinks is more than reasonable. “According to our site meter, we’re already doing 5,000 page views per day just by people typing in Ebola.com to see what’s there,” said Schultz, who monitors headlines the way brokers watch their portfolios, to gauge his domain’s worth. “We’re getting inquiries every day about the sale of it. I have a lot of experience in this sort of domain business, and my sense is that $150,000 is reasonable.”

The full story is here, and for the pointer I thank Michael Rosenwald.

From a Jean Tirole press conference:

French economist Jean Tirole advocated Scandinavian-style labour market policies and government reform as a way of preserving France’s social model.

Hours after he won the economics Nobel Prize, Tirole said he felt “sad” the French economy was experiencing difficulties despite having “a lot of assets”.

“We haven’t succeeded in France to undertake the labour market reforms that are similar to those in Germany, Scandinavia and so on,” he said in telephone interview from the French city of Toulouse, where he teaches.

France is plagued by record unemployment and Tirole described the French job market as “catastrophic” earlier on Monday, arguing that the excessive protection for employees had frozen the country’s job market.

“We haven’t succeeded also in downsizing the state, which is an issue because we have a social model that I approve of – I’m very much in favour of this social model – but it won’t be sustainable if the state is too big,” he added.

Tirole remarked that northern European countries, as well as Canada and Australia, had proven you could keep a welfare social model with smaller government. In contrast, he said France’s “big state” threatened its social policies because there will not be “enough money to pay for it in the long run”.

There is more here, hat tip goes to Alex.  And I very much liked this Appelbaum interview with Tirole,here is one bit:

There’s no easy line in summarizing my contribution and the contribution of my colleagues. It is industry-specific. The way you regulate payment cards has nothing to do with the way that you regulate intellectual property or railroads. There are lots of idiosyncratic factors. That’s what makes it all so interesting. It’s very rich.

It requires some understanding of how an industry works. And then the reasoning is very much based on game theory. Usually we don’t have a perfectly competitive market, so we use game theory, which describes situations with a small number of actors. And information economics, those are the tools. But then you go into the industries and try to think about the possible rules. It’s not a one-line thing.

I liked David Henderson’s piece, and this one too, Tirole on France and Canada.

India fact of the day

by on October 14, 2014 at 2:38 pm in Current Affairs, Travel | Permalink

$74 million: That’s the amount India spent on its Mars program. Modi described it best when he said the Sandra Bullock-starrer Gravity cost more to make than India’s Mars mission. NASA’s Maven mission, admittedly more complex, cost $671 million in comparison. European Space Agency’s 2003 Mars Express Orbiter mission cost $386 million. Japan’s failed mars mission cost $189 million.

Rs 7 per kilometre: That is how much the journey to mars cost India. That is cheaper than an auto ride in Delhi, which will cost you, if you are lucky, Rs8 per km.

From Saptarishi Dutta, there is more here.

He has a new paper (pdf) on this topic, with Jorda and Schularick, based on data from seventeen advanced economies since 1870.  In an email he summarizes the main results as follows:

1. Mortgage lending was 1/3 of bank balance sheets about 100 years ago, but in the postwar era mortgage lending has now risen to 2/3, and rapidly so in recent decades.

2. Credit buildup is predictive of financial crisis events, but in the postwar era it is mortgage lending that is the strongest predictor of this outcome.

3. Credit buildup in expansions is predictive of deeper recessions, but in the postwar era it is mortgage lending that is the strongest predictor of this outcome as well.

Here is VoxEU coverage of the work.  On a related topic, here is a new paper by Rognlie, Shleifer, and Simsek (pdf), on the hangover theory of investment, part of which is applied to real estate.  It has some Austrian overtones but the main argument is combined with the zero lower bound idea as well.

Assorted links

by on October 14, 2014 at 11:34 am in Uncategorized | Permalink

1. Ireland’s suburban ghost towns.

2. The man who smuggles Trader Joe’s into Canada.  By the way, I much prefer Whole Foods, I hardly like any of the items at Trader Joe’s, although they have good smoked trout.

3. The culture that is San Francisco, bros vs. kids.

4. James Hamilton on lower oil prices.

5. Should China privatize its farmlandIs North Korea doing a bit better than most people think?

6. Catalan government calls off independence referendum, but it’s complicated.

7. Tirole on energy, climate, and the environment.  And Justin Wolfers on Tirole.  Vera’s list of fun Tirole papers.  And from Economist’s ViewA Fine Theorem.

Discover Cosmic Rays with your SmartPhone

by on October 14, 2014 at 9:44 am in Science | Permalink

This is one of the stories that I had to double check to make sure it wasn’t a hoax but it does check out. Here’s the background:

[R]esearchers from the University of California have drafted a paper in which they describe testing whether a smartphone camera can detect high energy photons and particles of the sort produced by cosmic rays. Testing with radioactive isotopes of radium, cobalt, and cesium showed that the detector easily picked up gamma rays (and you didn’t even have to point the phones at the source!). They also put a phone inside a lead box and showed that they could detect high energy particles. Finally, they took a phone up on a commercial flight and were able to obtain a particle track across the detector.

With everything looking good, they made some software, called CRAYFIS, for cosmic rays found in smartphones (why they didn’t add “and handhelds,” I’m not sure). When your phone is inactive and plugged in for charging, CRAYFIS monitors the camera, looking for signs of high-energy items striking the detector. The authors calculate that if they can get 1,000 active cell phones within a square kilometer, they’ll be able to detect nearly all of the high energy cosmic rays that strike the atmosphere above it despite the low efficiency of each individual detector.

You can find out more about the science and sign up your smartphone here.

There are now some 1.75 billion smartphone users in the world and soon there will be many more. That’s an astounding amount of computing power distributed over most of the world’s surface and it’s computing power that is capable of reaching out to the world around it to measure, monitor, test and connect.

Adam Posen on Japan

by on October 14, 2014 at 2:23 am in Economics | Permalink

Similarly, the returns on tackling the underutilisation of human capital in Japan dwarf the impact of everything else, including the problem of a declining workforce. If Japan were to get more of its university-educated women into the workforce, the demographic problem would go away for 20 years. If Abe accomplished this, the fatalistic whining about Japan’s supposedly intractable demographic crisis would cease to be an excuse or a constraint for its economic future. But the efforts made to date, while encouraging, are insufficient. About 420,000 women have rejoined the workforce over the past year or so. This is an impressive achievement. In absolute terms, though, this is a small fraction of what is possible for female labor force participation.

There are further points of interest here.

I found this piece by Alex Hutchinson very interesting, here is one excerpt on the issue of incentives:

One reason marathoners are running faster is that road racing is more lucrative. When the Sheikh of Dubai put up $1 million in prize money plus a $1 million world-record bonus in 2008, the Dubai Marathon instantly became one of the world’s fastest, despite its desert temps (average high in January, when the race is held, is 75°F). In fact, prize money for road races more than doubled since 1998, while track racing purses have gotten smaller (see below). As a result, runners are increasingly heading straight to the marathon. But big money can also draw the fastest runners away from the fastest courses, and the standard winner-takes-most prize structure favors cat-and-mouse tactics as runners race each other instead of the clock. When the Amsterdam Marathon switched to time-based prizing in 1999, four different runners immediately smashed the course record by 90 seconds. The sub-two-hour solution? A big pot of money that runners can win no matter where they race, and that is shared equally among all who break 2:00 in that event.

It is not obvious to me why a big first prize is not a good incentive, for instance why does it militate against speed to “race each other instead of the clock”?  Is it that the runners stay on too few courses, thus lowering the variance of performance outcomes?

In any case the hat tip goes to Vic Sarjoo.

Although not central to his work, one of my favorite papers of today’s Nobel prize winner, Jean Tirole, is Extrinsic and Intrinsic Motivation (written with Roland Benabou). In this paper, Tirole and Benabou try to resolve the economist’s intuition that incentives motivate with the idea from psychology that incentive schemes can sometimes demotivate. The psychologists argue that extrinsic motivation can reduce intrinsic motivation (but they are not at all clear on why this should be the case). Tirole and Benabou try to produce a similar finding by arguing that in addition to providing motivation an incentive scheme gives the agent, the one being incentivized, some information and the information may undermine the motivation.

For example, if I tell my son.  “If you get an A in math, I will give you $1000.”  What does my son conclude?

  • My father must think math is very important for my future to offer me $1000.  My father is smart.  I will work hard.

This is the message that I hope to send. But my son knows that I know something about math and also that I know something about him and he may use this knowledge to make a very different inference.

  • If my father thinks I need $1000 to get an A, math must be very hard or I must lack talent.  I will work for an A this year but next year I should probably not sign up for advanced math classes.

Or perhaps he infers

  • If my father is offering me $1000 to do the right thing , he must not trust my judgment.

Or perhaps

  • My father is trying to use his money to control me.  I rebel!

Thus reward has two effects a pure incentive effect (holding information constant) and an inference effect. Notice that the inference effect depends on the context. Thus, without knowing the context–how the father gets along with the son and their history of interaction–we can’t know what the effect of the “incentive” will be. Thus I have argued that “an incentive is not an objective fact but a subjective interpretation.”

I’m not convinced that Tirole and Benabou have the right answer on intrinsic and extrinsic motivation but thus and other papers indicate Tirole’s broadness of thought and his characteristic approach to issues.

By the way, working out the equilibrium in these games is not at all easy because the principal knows the agent will infer information about the characteristic from the reward structure and the agent knows the principal knows that the agent will infer information about the characteristic from the reward structure and so on – thus we have a Moriarty problem and must look for conditions such that there can be an equilibrium in which everything is common knowledge. But heh, if these problem were easy you wouldn’t get a Nobel prize for solving them!

See Tyler’s post and my other posts below for much more on Tirole.

Jean Tirole and Platform Markets

by on October 13, 2014 at 7:54 am in Uncategorized | Permalink

Today’s Nobel prize winner in economics, Jean Tirole (working with Rochet) is a pioneer in one of the most important new areas in the economy and economics, the study of platform markets. Platform markets, also called 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 a platform for buyers and firms that accept that card, newspapers a platform for readers and advertisers, and malls a platform for customers and stores to meet. An important example for the internet age is that Google is a platform of search users and advertisers.

An 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. The price a newspaper charges to readers, for example, influences the number of readers but that in turn influences the price that the advertisers, the other side of the market, are willing to pay to advertise in the newspaper. It further often happens that one side of the market is harder to “get” than the other and so the profit-maximizing prices on the two sides of the market are very different. One side of the market may even be “subsidized.” The price that newspapers charge readers, for example, is often much less than the cost of the newspaper. Or, to give another example, Microsoft makes money by selling its Xbox at close to cost or even below cost and charging game developers a fee for the right to write games for the Xbox and a royalty rate on their sales. Google finds it optimal to give its services away for free and just charge one side, the advertisers, for being on the platform.

Antitrust and regulation of two-sided markets is challenging because the two sets of prices may look discriminatory or unfair even when they are welfare enhancing. 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? A singles bar may have “ladies are free night”. Sexist? or good economics? 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. The analysis also impacts such issues as network neutrality. People worry, for example, that firms like Netflix may be the anchor stores of the internet and get better prices as a result. But the analysis of platform markets suggests that this isn’t necessarily welfare reducing. As these examples indicate is easy to go wrong regulation these markets and in fact Rochet and Tirole urge caution in regulating platform markets.

Rochet and Tirole provide one of earliest and most important analyses of pricing in these types of markets (see also here for an overview).

See Tyler’s post below for much more on Tirole.

Graduate students in economics will instantly know Jean Tirole from his textbook, The Theory of Industrial Organization. In this textbook, Tirole brought game theory to the study of industrial organization–the study of firm behavior in different market structures (competition, duopoly, oligopoly, monopoly). First published in 1988 this textbook has been the dominant one in the field since that time. (Tirole has also written excellent advanced textbooks in game theory and finance which together have made him one of the most influential teachers of graduate students everywhere). The new game theory provided new answers and new questions. We can see in this prize the continued working out of the game theory revolution in different areas in economics. First the prizes went to the founders (Nash, Selten, Aumann, Schelling) and then to applications of the new theory in different areas (Hurwicz, Maskin and Myerson for mechanism design, Vickrey for auctions). This is probably the last one in this line as behavioral approaches take over and game theory runs out of steam.

A theory prize!  A rigor prize!  I would say it is about principal-agent theory and the increasing mathematization of formal propositions as a way of understanding economics.  He has been a leading figure in formalizing propositions in many distinct areas of microeconomics, most of all industrial organization but also finance and financial regulation and behavioral economics and even some public choice too.  He is a broader economist than many of his fans realize.

Tirole is a Frenchman, he teaches at Toulouse, and his key papers start in the 1980s.  In industrial organization, you can think of him as extending the earlier work of Ronald Coase and Oliver Williamson with regard to opportunism and recontracting, but applying more sophisticated and more mathematical forms of game theory.  Tirole also has been a central figure in procurement theory and optimal contracts when there is asymmetric information about costs.  The idea of mechanism design runs throughout his papers in many different guises.  Many of his papers show “it’s complicated,” rather than presenting easily summarizable, intuitive solutions which make for good blog posts.  That is one reason why his ideas do not show up so often in blogs and the popular press, but they nonetheless have been extremely influential in the economics profession.  He has shown a remarkable breadth and depth over the course of the last thirty or so years.

His possible pick had been heralded for some numbers of years now, this award should not be considered a surprise at all.  You will note that the Swedes mention Jean-Jacques Laffont, who died a decade ago, and who co-authored many of the key papers in this area with Tirole.  Such a mention is considered a nod in the direction of implying that Laffont, had he lived, would have shared in the prize.

Here is Tirole’s home page.  Here is Tirole on Wikipedia.  Here is a short biography.  Here is Tirole on scholar.google.com.  Here is the press release.  Here is background from the Swedes.  Here is the 54-page document on why he won, one of the best places to start.  Here is the Twitter commentary.

One idea of Tirole’s I use frequently has to do with renegotiability.  Let’s say a regulator and a monopolist agree to a scheme of regulation and provision, creating some surplus for both parties.  As time passes, will each side of that bargain stick with the original agreement?  A simple example here is the defense contractor.  After a procurement contract is written, sometimes the supplier has the incentive to conduct a hold-up, to report that costs are higher than expected, and to ask for more money in return for timely fulfillment of the contract.  Of course this is a contract breach, but if no other supplier can step in and do the job, it may be optimal for the government to give in to these demands to some degree.  The question then is: how should the contract best be designed in advance, so as to prevent this problem from popping up later on?  Or should the renegotiation simply be allowed?  Anyone wishing to tackle these questions likely would start with the papers of Tirole on this topic.  For one thing, these papers help explain why a second-best optimal contract may offer some rents to agents and appear to give the agent “too good a deal.”

Some of his key papers focus on asymmetric information about costs.  Say a firm knows its costs and the regulator can only guess.  Ideally the regulator would likely to make the firm price at marginal cost, but the firm will pretend marginal cost is higher than it really is.  The regulator and the firm thus play a game.  Tirole figured out with rigor which principles govern how this game works and what a second-best regulatory solution might look like.  With Laffont, here is his key paper in that area.  David Baron made contributions to this area as well.  Again, there is a potential argument for an “agent rent,” to limit the incentive of the agent to lie too much about costs, for fear of losing that rent if the cooperative relationship breaks down.

Tirole, writing sometimes with Rey, wrote some important papers on vertical agreements and how they can be used to extend market power, for instance when can buying up parts of a supply chain help extend monopoly power?  His paper with Oliver Hart figures out some of the conditions under which vertical acquisitions can help foreclose a market.  With Rey, Tirole surveys the literature on vertical relations and foreclosure.

This early 1984 paper, with Drew Fudenberg, laid out the conditions when firms should overinvest in capacity to deter competitive entry, or when firms should instead look “lean and mean” for entry deterrence.  The underlying analysis has shaped many a business school discussion.

I am a fan of this 1996 paper on how we can think of firms as credible ways of carrying reputations in a collective sense.  For instance the existence of a firm called “Google” transmits real information about the qualities of the people you deal with when you are transacting with members of the Google firm.  This was an important addition to the usual Coasean vision of thinking of a firm in terms of economizing transaction costs.

He has written some key papers on financial intermediation, collateral, and the agency problems associated with lending, here is one well-cited paper by him and Holmstrom. Here is a non-gated version (pdf).  A key argument is that a decline in the value of the collateral in a lending relationship can lower efficiency and also output, and this can help explain some features of business cycles.  This 1997 paper was well ahead of its time and it remains one of Tirole’s most widely cited works.  Arguably it is relevant for recent financial crises.

He has a 1994 book with Mathias Dewatripont on the prudential regulation of banks and how to apply the proper incentives to make sure banks do not take too much risk at public expense.  Obviously this also has since become a much more important topic.  How many of you know his 1996 paper with Rochet on “Interbank Lending and Systemic Risk“?  They show the contradictions which can plague a “too big to fail” policy and the attempts of central banks to maintain a “creative ambiguity” about what kinds of bailouts will occur, using rigorous game theory of course.

With Rochet, he has a well-known paper on platform competition, laying out the basics of how these “two-sided” markets work.  Think of internet or payment portals which must get both sides of the market on board.  What are the efficiency properties of such markets and what are the game-theoretic issues?  In this setting, how do for-profits compare to non-profits?  Competition to monopoly?  Rochet and Tirole laid out some of the basics here, here is their survey piece on the field as a whole.  Alex’s post above has much more on these points, and Joshua Gans covers this area too, here is Vox.

In public choice economics, he and Laffont have an important paper on when regulatory capture is actually likely to occur.  I have yet to see the insights of this paper incorporated into the rest of the literature adequately.  His paper on the internal organization of government considers the relative appropriateness of high- vs. low-powered incentives as applied to government employees, among other matters.  His 1999 paper with Mathias Dewatripont, “Advocates,” shows in game-theoretic terms why something like the Anglo-American system of competing lawyers might make sense as the best way of discovering information and adjudicating the truth.  This paper shows how career concerns affect bureaucratic incentives and what is the optimal degree of specialization within a government bureaucracy.

He has thought very deeply about the nature of liquidity and what is the optimal degree of liquidity in a securities market.  There can be some side benefits to illiquidity, namely that it forces parties to stay committed to an economic relationship.  This must be weighed against the more obvious benefits of liquidity, which include having better benchmarks for measuring managerial performance, namely stock price (see this paper with Holmstrom).  This kind of analysis can be applied to the question of whether the shares of a firm should stay privately traded or be put on a public exchange.  This 1998 paper, with Holmstrom, is a key forerunner of the current view that the global economy does not have enough in the way of safe assets.

Here is his paper on vertical structure and collusion in bureaucracies (pdf).  Here is his very useful survey article, with Holmstrom, on the theory of the firm.

His textbook on Industrial Organization is a model of clarity and remains a landmark in the field, even though it came out almost thirty years ago.

He has written a book on telecommunications regulation (with Laffont) although I have never read that material.

In finance he wrote this key 1985 paper, deriving the conditions under which you can have an asset bubble in a market with rational expectations.  The problem of course is that the price of the asset tends to keep rising, relative to the size of the economy as a whole, and eventually it becomes impossible to keep on buying the asset.  This has to mean an eventual crash, unless the growth rate of the economy exceeds the general rate of return on assets.  This paper helped us think through some issues which recently have resurfaced with the work of Thomas Piketty.  His earlier 1982 paper on speculation is also relevant to this topic.  Most economists think of Tirole as game theory, finance, and industrial organization, but his contributions to finance are significant as well.

Just to show his breadth, here is his paper with Roland Benabou on incentives and when they undermine the intrinsic desire to do a good job.  For instance if you pay kids to get good grades, will that backfire and kill off their own reasons for wanting to do well?  Alex covers that paper in more detail.  This other paper with Benabou, “Self-Confidence and Personal Motivation,” is a great deal of fun.  It analyzes the benefits of overconfidence, namely greater motivation, and shows how to weigh those benefits against the possible costs, namely making more mistakes.  It shows Tirole dipping a foot into the waters of behavioral economics and again reflects his versatility in terms of fields.  I like this sentence from the abstract: “On the supply side, we develop a model of self-deception through endogenous memory that reconciles the motivated and rational features of human cognition.”  Again with Benabou, here is his paper on willpower and personal rules, very much in the vein of Thomas Schelling.

Here is Tirole on intellectual property and health in developing countries, with plenty on policy.

It’s an excellent and well-deserved pick.  One point is that some other economists, such as Oliver Hart and Bengt Holmstrom, may be disappointed they were not joint picks, this would have been the time to give them the prize too, so it seems their chances have gone down.

Overall I think of Tirole as in the tradition of French theorists starting with Cournot in 1838 (!) and Jules Dupuit in the 1840s, economics coming from a perspective with lots of math and maybe even some engineering.  I don’t know anything specific about his politics, but to my eye he reads very much like a French technocrat in terms of approach and orientation.

Jean Tirole is renowned as an excellent teacher and a very nice person.