Month: June 2006

Dan Hill asks

Why does the liklihood of free internet decrease as the hotel price increases?

My answer: The more expensive the hotel, the more likely it will have many business travelers.  Those people are less price sensitive, especially for add-ons.  The greater dispersion of valuations also increases the incentive to price discriminate and, in essence, charge them a higher rate.  If Internet service is averaged into the basic price, Internet users receive an implicit discount.  Why offer that discount to your business travelers?  Steve Landsburg wrote a short piece on this for Slate.

Here is Dan’s original question.

What are the thirty best travel books?

Here is the list, courtesy of WorldHum, via Bookslut.  I agree with most of it, recognizing that no single author (e.g., Thubron, Raban, Theroux) can receive more than one pick.  But where is Barry Lopez’s Arctic Dreams?  David Campbell’s The Crystal Desert?  For my first choice I would select either Naipaul’s Turn in the South or Robert Byron’s Road to Oxiana.  Surely they forgot Marco Polo’s Travels, which remains riveting.  Herodotus?  Can we count Democracy in AmericaGulliver’s Travels?  Dante’s Inferno?  Your further suggestions are welcome.

Why are there hidden fees?

Here is the bottom line:

Laibson and Gabaix’s explanation relies on a good bit of math, too, but
it can be summarized pretty simply using a hypothetical example.
Imagine two hotel chains. The first, Hidden Price Inn, has a very low
room rate of $80 a night, but makes liberal use of high "shrouded"
fees: Three bucks for a minibar Dr Pepper, $25 for parking, $12 for
eggs at breakfast. The unsophisticated traveler cheerily (if
unwittingly) forks over the fees, all the while patting herself on the
back for getting a cheap room.

Now imagine a second chain, Straightforward Suites. It charges much
more reasonably for the extra costs ($1, say, for that Dr Pepper), but
because it makes less on the extras, it has to charge slightly more for
the room-$95, instead of $80. Even an unsophisticated traveler can tell
$95 isn’t as good as $80.

Through an aggressive ad campaign, Straightforward could try to point
out how devious the approach of Hidden Price Inn is and how much less
deceptive its own prices are. But Laibson and Gabaix show that there’s
a catch in this strategy: Hidden Price Inn actually has two key types
of customers. Yes, there are the clueless consumers (the economists
prefer to call them "myopic"). But there are also the sophisticated
ones, who know that if they avoid the hotel restaurant, take a taxi
instead of using the parking garage, and call home with a cellphone,
they’ll actually get a better deal at Hidden Price than at

Straightforward Suites’s ad campaign, then, might just end up
increasing the ranks of sophisticated consumers who will in turn dial
up Hidden Price Inn for a cut-rate room. Rather than play this
self-defeating game, Straightforward will most likely just lower its
own room prices and stick it to the customers on the extras.

Here is the full story, by Christopher Shea.  The pointer is from  Here are earlier versions of the paper.

Does a gold standard involve resource costs?

Milton Friedman said yes, but on this question I am not convinced.  Friedman thought the costs would be as high as 2.5 percent of gdp.

The standard argument is that a gold standard means more gold held in vaults.  That’s less gold for tooth fillings or jewelry.

But the gold held in vaults involves an implicit option on conversion into jewelry.  What is exactly the value of that option?  Yikes, I feel confused after only a few sentences of this post.

But surely the real value of that option depends on the price level and also the division of gold into monetary and non-monetary uses.  I therefore suspect there is some price level path where the option value on holding gold is equal, in risk-adjusted terms, to the returns on other assets.  (A Mr. Smarty Pants TroubleMaker type might here cite Truman Bewley in response.)  Probably that means deflation.

The gold in the vault is then no longer barren.  It is no more barren than the gold held in your bureau, which is presumably an "option on wearing it to a fine dinner party."

The Friedman argument, to me, seems pre-Black-Scholes.  Here are some related skeptical arguments.

That all said, I do not favor a gold standard.  For behavioral wage-and-price-stickiness reasons I think mild inflation is better than a high probability of deflation.

The Pigou-Brennan-Buchanan club

Greg Mankiw asks for members in the Pigou club and lists a growing and illustrious set of people.  I’ll opt in, though I would wish to change the name of the club.  Geoff Brennan and James Buchanan, in their The Power to Tax, wrote one of the best and most important books on public finance in the twentieth century.  Their message is simple: if you don’t always trust government, beware of "efficient taxes."  Those same taxes will make it easier for government to extract excess revenue from the population.  For instance lump sum taxation is not in every way a dream come true.  It can turn into outright confiscation beyond reasonable levels.

I’ll fess up to the following.  We have been fiscally irresponsible and must pay the bills.  Global warming is a major problem and a carbon tax is at least possibly a partial solution.  So the Brennan and Buchanan point, circa USA 2006, is less relevant than at many other times or in many other places.  But hey, clubs are universal and forever and forever (at least my treehouse club was, when I was six).  I’ll join, but I suspect Greg would not be fully on board with Pigou’s politics.  There is a reason why Pigou taxes come from…Pigou.  That same reason is why the concept should be broadened just a wee bit…

The minimum wage: theory before history

Greg Mankiw and Brad DeLong are having some back and forth over the minimum wage.  I’m willing to admit, unabashedly, that I form my judgments on this matter by theory more than "raw evidence."  When the evidence is unclear, or points in multiple directions, I favor the most plausible explanation.

Unlike like most market-oriented economists, however, I am not obsessed with the story of the downward-sloping demand curve for labor, to the exclusion of all other possible mechanisms.  I am more likely to see markets as extremely flexible and to look to the quality of job as a critical variable.  If minimum wages go up, I expect some mix of two scenarios:

1. The employer restores the previous net wage by worsening working conditions.

2. The employer upgrades the quality of job and thus marginal products, to meet the new level of minimum wage.

Now #1 is not much of an argument for boosting the minimum wage.  But is #2?

It sounds good but the employer had decided in the first place not to create those higher productivity jobs.  So those jobs must cost more and we should expect a negative effect on employment, albeit perhaps a slight one.

It is also the case that those jobs will go to the "most easily upgradable" workers among the low-wage working set.  I suspect those are the low-wage workers with relatively high human capital and high levels of adaptability.  Among the class of low-wage workers, the effects are probably anti-egalitarian.  That again does not make the minimum wage sound so great, even though the employment effects could be small or perhaps even zero.  I might add this also explains why the most articulate low-wage workers probably, for reasons of self-interest, favor increases in the minimum wage.

I don’t buy into the Card-Krueger monopsony scenario, at least not outside of rural Nebraska.  If you wish to defend it (does anybody? — even Krugman scorned it), comments are open.

I invite all participants to the debate to indicate the relative weights they place on "theory" vs. "history."  I’ll invent an imaginary, meaningless scale and opt in at "0.7" in favor of theory.  If the evidence were clearer, of course, my weights would change.


Joel Waldfogel covers an interesting new study of corruption in the motor vehicle department in India.  Some eight hundred Indians were randomly assigned to one of three groups: the first group got a cash bonus for getting a license, the second group was given driving lessons, the third group was a control.

If government worked well we would expect the second group to be the most likely to get a license in the shortest period of time.  Instead, the first group bribed their way to a license.  In addition to taking the shortest period of time, most of the first group never even had to take a test!

Waldfogel has more details.  He misses, however, what I think is the most important finding of the study.  The delay in the Indian DMV is "endogeneous," i.e. it’s not due to torpor or constraint but instead is a result of corruption.

How can the Indian bureaucrats make the most of their control over licenses? First, make the line long.  But that can increase the bribe-price only so much – especially given how cheap it is to hire someone in India to wait in line for you.  The real value is in the license itself so the Indian examiners randomly fail many applicants, even those with good driving skills.  Paying the bribe, therefore, is really the only route to a license.  The net result is long lines and unsafe drivers.

Corruption like this is endemic throughout the world.  Libertarians should take note, however, the problem in this case is not so much that there is too much government but that government is too weak. 

Which is the second most polite city?

My current locale Zurich, it turns out, based on this field experiment.  New York City of all places came in first, but I agree.  There is so much human capital in the city one is always tempted to speak to strangers, given the reasonably high chance you will hear something magnificent in return.  Third and fourth were Toronto and Berlin.  In Europe Moscow and Bucharest were the least polite cities.  Bombay fared worst of all.

Univision and Hispanic assimilation: a market test

When Univision [the major Spanish-language TV station] put itself on the auction block earlier this year, it was widely seen as an effort…to capitalize on the surging interest in the fast-growing Hispanic media sector.  Univision signaled early on that it was seeking $40 a share, or more than #13 billion, and was confident it would attract interest from both major media companies and private-equity investors.

But big media…never emerged as serious bidders.

Some of the issues were the general decline in television advertising and regulatory constraints on cross-ownership.  The article continues:

And then there is the demograhic issue: New Hispanic immigrants to the U.S. frequently are drawn to Univision and its popular telenovelas — essentially Spanish-language soap operas  But their children eventually become more mainstream media consumers, after immersing themselves in English-language programming.

That is from The Wall Street Journal, 23 June 2006.  The share price has been falling. 

If you disagree with me on immigration and assimilation, as I know a few of you do, I urge you to buy stock in Univision.

My favorite things Swiss

I am here only briefly, to talk about how America funds the arts.  Of course my favorite thing Swiss is Switzerland itself; in that sense I agree with the natives.  But to get more specific:

1. Sculptor: Alberto Giacometti is the obvious choice, runner-up is Jean Arp.  The smaller the Giaocometti sculpture, the better it is likely to be.  You could say the same for Calder.

2. Drama: I’ll opt for Durrenmatt’s The Visit of the Old Lady or The Physicians, or Max Frisch’s Don Juan, or the Love of Geometry.  I like these better than any Swiss novel.

3. Painter: These days I find Paul Klee repetitive.  Arnold Boecklin and Ferdinand Hodler are both consistently interesting, if not always consistent.  Try this Hodler.  Here is the most famous BoecklinHenry Fuseli, who moved to England and became a perverse quasi-Romantic, remains underrated.

4. Novel: I don’t know of a great Swiss novel, unless you count Rousseau’s Heloise for its historical value.  Max Frisch’s Gantenbein is one runner-up.  Robert Walser has his moments.

5. Music: This one gets tough.  Honegger bores me.  I will listen to Frank Martin, though he is not a favorite.  Paul Hindemith was of Swiss-German extraction but born in Germany.  He would otherwise win hands down.  Edwin Fischer was a wonderful Bach pianist.  Swiss popular music is too ghastly to contemplate, as is the folk music.

6. Actress: Can I say Ursula Andress?

7. Movie, set in: I still like George Lazenby’s Bond movie, On Her Majesty’s Secret Service.

Extra: You’ve also got Saussure, the Bernoullis, and the Eulers, not to mention Le Corbusier.  There is an overall inclination toward the mechanical, the scientific, and the systematizing.  Perhaps that is why music is so weak.

The bottom line: It is not just cuckoo clocks (as Orson Welles had suggested), which in any case do not originate in Switzerland. 

Robin Hanson’s ‘Myth of Creativity”

Here is the link.  Excerpt:

To succeed in
academia, my graduate students and I had to learn to be less creative
than we were initially inclined to be. Critics complain that schools
squelch creativity, but most people are inclined to be more creative on
the job than would be truly productive. So schooling is mostly about
selecting the smarter and more diligent, and learning to show up day
after day to somewhat boring jobs with ambiguous instructions.

What society needs is not more creativity or suggestions for change but
better ways to encourage people to focus on important issues, identify
the most promising ideas, and tell the right people about them. But our
deification of creativity gets in the way.

The microeconomics of Click

You know, the new Adam Sandler movie; try this site for the trailer.  The guy has a universal remote control device which he can use to Pause, Fast Forward, or Rewind reality, rather than TV.  How much would you pay for such an item?  And what would you do with it?

Of course you would use it to prevent accidents, such as car crashes.  You would likely die of old age.  I wouldn’t use fast forward much.  If you want more money, Pause could help you shuffle through confidential papers and garner inside information for trading (or are the papers glued to the desk and thus unreadable?). 

Voyeurism is another possibility, as explored by Nicholson Baker’s much-underrated The Fermata.  Here is one good excerpt from the book.  Here is a summary of the basic plot.

I will predict the movie argues that this device is more dangerous than useful and that Adam Sandler must give it up to find happiness with the ever-so-cute woman of his dreams.  Given self-constraint issues, I have yet to find a value-maximizing scenario for the device, can you?  Somewhere in here is a lesson about strong temporal complements and perhaps business cycles as well.

Here is my previous post The Macroeconomics of Superman.

Strange questions I ask Bryan Caplan

Assuming you start from a multi-dimensional global utility maximum, which Lancastrian characteristics — with non-trivial shadow prices — would you like more of in a corresponding unconstrained equilibrium?

Forget about money or time, which obviously we all want more of.  Which unbundlings do you desire? 

I, for one, would like to have more of Bryan.  But he is bundled with Fairfax.  I travel a great deal and he usually stays put.  I can’t get much more of him in my first best outcome.  But if he were suddenly eating kabobs with me in Hyderabad, if only for an hour, how fun that would be.  More generally, I would like to have a less wide circle of friends but my Wanderlust interferes.

I would like taste to be unbundled from calories.  I would like books to be smaller, lighter, and easier to carry, if that were a free lunch so to speak.  I would like fantasy novels to be bound by stricter rules.

What would you like to see unbundled?

Kenneth Arrow on academic freedom

Bowen: There was a study done recently by an economist at Santa Clara University,
Daniel Klein, showing disproportionate numbers of registered Democrats
versus registered Republicans in various departments at the
University of California, Berkeley,
and Stanford. [The study’s findings are available at] He has concluded that this
kind of ideological imbalance has a negative impact on the education of
students. He implies
there is a temptation to hire one’s own. Conservative activist David
Horowitz has made much the same kind of statement, saying that faculty
are preaching rather than teaching. And why?  Because there’s a gross
imbalance between liberals and conservatives in the professoriate.
they are calling for government regulation of the academy [TC: Klein is not, this is inaccurate]. Do you worry
about calls for legislation at the state level to correct this
situation? Does this worry you as an economist or as a professor?

You know, it certainly does worry me. It would worry me a lot if
legislation passed. There was a concern at one time that there would be
repression of the left. And now there are concerns that the left is
taking over. It’s hard for me to judge, of course, but I must say that
my department
a number of Republicans. And they were appointed by a democratic group,
whose members said these guys are good, and we’ve got to hire them. And
so far, I have not seen it work the other way, but I’m a little
concerned about where it could swing. In this case, the criticism seems
to be just wrong, because I think the departments hire on the basis of
merit. And I think it’s nonsense to say that we’re discriminating
against Republicans. We hire them all the time. On the other hand,
there was a department here that until the 1960s would not appoint
Jew. And, finally, the university did interfere, you see, in that case.
The dean took over the department. He took away the power to appoint
from the department and changed its   composition in three or four
years. In fact, I was amazed how rapidly he was able to turn things
to strengthen an already very good department. To defend the autonomy
of that department would not have been something I would have been very
happy to do.

Bowen: The  economics department at the University of Chicago
has had a reputation for many years for being quite conservative. Do
you think that’s the exception that proves the rule that you hire, as
you said earlier, on the basis of merit, not on the basis of party
identification of ideology?

There are people in that department who are not conservative. It’s a
very good department. Most of the conservatives are really quite
outstanding. I think they flock together.
don’t think it’s entirely the case where you pick your own kind. I
don’t think the economics department here is reproducing itself.
They’re different politically and methodologically. I think
methodological problems have been bigger more often than political
issues. I do not believe
university, the central administration, should be totally unconcerned
about appointments. I used to believe that the department had to be
completely autonomous. It took me a couple of years to realize that
that was not right.

I can remember an instance at Chicago
in which there was an incident involving a professor of economics who
was sort of a village atheist type. He was a very good economist, but a
little eccentric. He believed that religion was one of the big
oppressive things in this world. This fellow saw a priest in class. He
went and gave his whole lecture on the evils of the Catholic church.
The next time the priest came, he gives another lecture. The priest
finally quit the class, and the professor said that he could finally go
on with the course.

you know, the priest went to the chair of the department who had a very
good record on academic freedom at the university. And the chair said
it was a question of academic freedom. He wouldn’t interfere with this

TC: Does anyone have data on Stanford?