Month: October 2006

Auction strategy and dating

In a standard English auction participants keep on bidding until one person is left with an unambiguously highest offer.

In a Dutch auction, which is used to sell tulips, the auctioneer starts out with a high price and keeps on lowering it until someone bites.  The auction then ends.

A large literature considers the conditions under which these two approaches yield the same expected revenue. 

In terms of dating, if you run an English auction you go out with many people, if not simultaneously then relatively closely bunched in time, and you stick with the one who offers the most.  If you run a Dutch auction you signal clearly your standards (lowering the standards over time if need be), and stick with the first person who bites.

I believe that strongly Christian women are more likely to run a Dutch auction.  Perhaps non-religious women are more likely to run Dutch auctions as they get older.

The economics literature suggests that if bidders are risk-averse, the Dutch auction is more likely to yield higher revenue (in the limiting case, grab quickly any positive consumer surplus, before it goes away).  Alternatively, if the seller thinks that bidders would be more enthusiastic if they saw each other’s ongoing bids, this tends to encourage an English auction.  In other words, hidden but not too hidden qualities encourage English auctions.

Here are other kinds of auctions.

Demand curves slope downward

A fact or two which Krugman leaves out about the Medicare drug coverage:
— If you don’t want a doughnut hole, you don’t have to have it.
> In every area, there are plans which cover drugs in that coverage
> gap.
> — There are also plans offering no deductible.
> — The original estimate of premium was $37. Then it went down to
> $32. In every state but Alaska, you can get coverage for less than
> $20. And in many states, there are plans for less than $10 month.
> — When the Medicare bill became law, people said no companies would compete for the Medicare drug coverage. That has turned out not to be true, and the competitive marketplace has helped drive down costs for taxpayers and those in Medicare.

Why is it so hard to keep the house clean?

The simplest hypothesis is that we like to complain about a dirty or messy house but in fact we are observing an optimum.  We just don’t want to put more time in.

The behavioral economist believes we are making the same mistake over and over again.  What might that mistake be?

1. We clear away papers, books, and dirt, but we do not develop new systems for preventing their future accumulation.  In other words, we reduce the immediate stress but discount the future stress of future dirtiness at too high a rate.

2. A free-rider problem, combined with ill-defined property rights, means that piles accumulate repeatedly.  Cleaning is like removing a few cars from one lane of a two-lane highway.  New cars (piles) step in quickly to fill the temporary gap.  In a multi-person household, cleaning just shifts the traffic into different lanes rather than pricing the road.

A real solution might involve the random destruction or taxation of the property of other household members, so as to limit accumulation in the first place.  Bonuses for savings could help as well, since savings are a relatively liquid and low storage cost means of carrying wealth.

3. We overrate the liquidity value of inventories.  We want many things at hand which are of little or no use, perhaps because of an endowment effect.  Most people should throw away anything they have not touched for the last three years. 

4. Framing effects mean that we can get used to many kinds of messes.  The real problems come from the people who keep their homes clean.  Tax them and their cleanliness, for the same reasons that Bob Frank wishes to tax status goods.

Here is my previous post Tyler Cowen, Ramist.  Here is my idea of how to clean up the house.  Here is my post on the tennis ball problem.

Should pro-immigration forces favor a fence?

I am beginning to wonder:

Legislation passed by Congress mandating the fencing of 700 miles of
the U.S. border with Mexico has sparked opposition from an array of
land managers, businesspeople, law enforcement officials,
environmentalists and U.S. Border Patrol agents as a one-size-fits-all
policy response to the nettlesome task of securing the nation’s borders.

said the fence does not take into account the extraordinarily varied
geography of the 2,000-mile-long border, which cuts through Mexican and
U.S. cities separated by a sidewalk, vast scrubland and deserts,
rivers, irrigation canals and miles of mountainous terrain.  They also
say it seems to ignore advances in border security that don’t involve
construction of a 15-foot-high double fence and to play down what are
expected to be significant costs to maintain the new barrier.

And, they say, the estimated $2 billion price tag and the mandate that
it be completed by 2008 overlook 10 years of legal and logistical
difficulties the federal government has faced to finish a comparatively
tiny fence of 14 miles dividing San Diego and Tijuana.

"This is the feel-good approach to immigration control," said Wayne
Cornelius, an expert on immigration issues at the University of
California at San Diego.

Construction of a fence, of course, would defuse many other pressures.  Here is the full story.


…some argue that since the last tickets sold are usually the most expensive, airlines have too much incentive to sell $1,000 tickets when no seats are available if the penalty is only $400 to bump a cheaper-fare passenger.

That is from the 10 October Wall Street Journal, p.D1.

Rent Seeking Kills

It’s illegal to offer compensation for a transplantable human organ.  As a result of the price control there is a shortage of organs and thousands of unnecessary deaths.  None of this is news to readers of this blog.  The price control on organs, however, kills in another less well recognized manner.  The reduced supply of organs raises their value.  Organ donors can’t capture that value so who does?  Transplant centers.

    Transplant centers are artificially high profit centers because they capture some of the rents generated by the shortage of organs.  As a result, there are too many transplant centers in the United States and each center performs too few transplants.  Practice makes perfect so when a transplant center performs only a few operations a year lives are lost.

Medicare requires that transplant centers perform 12 transplants a year to be certified but many programs are in violation of that standard with little consequence.  Medicare is even thinking of reducing the standard from 12 per year to 9 in 30 months.  As one specialist says "I wouldn’t take my car to be serviced by someone who repaired nine cars over the past three years.  Would anyone do that?"

This Washington Post article has more on the excess number of centers although it doesn’t draw the connection between the organ shortage and the incentive to build a center.  Here’s some data, from the article, on centers local to Washington.


A simple theory of elections

Will the Foley scandal costs the Republicans votes, as is often suggested?  In my view, not so much.  When foreign policy, terrorism, and social issues are the questions of the day, the Republicans tend to do well.  It doesn’t matter so much if the Republicans have botched those very issues, provided those issues make the headlines.  Those are the issues which make the Republicans seen important.  Voters punish Republicans for bad governing "in the polls" but not always "in the booth."

The North Korean crisis helps the Republicans.  Even the botched war in Iraq helps the Republicans.  No matter how badly the Republicans do, people (rightly or wrongly) trust the Democrats with national security even less.  Along related lines, the Republicans will never get much credit for the rather high levels of discretionary spending pushed by the Bush Administration.  Even bringing up such spending gets voters in a "Democrat frame of mind."

The Democrats have their best chance when voters are focused on the economy.  It is neuroeconomics at work; the very topic activates the part of the brain that leads people to vote on way or the other.

It was safe to vote for Clinton once the Cold War ended.  More generally, Republican competence in foreign affairs is the greatest friend the Democrats have right now.

Think about it.

What I’ve been reading

1. Hidden Iran: Paradox and Power in the Islamic Republic, by Ray Takeyh.  A good implicit "public choice" treatment of how the different factions in the Iranian government fit together.  Surprisingly readable.

2. The United States of Arugula: How We Became a Gourmet Nation, by David Kamp.  Terrible title, good content, awkward writing style, terrible font, little economics, still good for foodies but only for foodies.

3. The Road, by Cormac McCarthy. "Post-apocalyptic masterpiece."  Fair enough, but is it better than The Dark Tower?  I’m not sure, but even to pose that question is to favor Stephen King.  Here is the NYT review.

4. The Iron Cage: The Story of the Palestinian Struggle for Statehood, by Rashid Khalidi.  Some of the apologetics and omissions really bugged me.  But as to why the Palestinians failed to construct their own state — before the creation of Israel — I learned a great deal.

5. Salman Rushdie, The Satanic Verses.  His best novel.  Fun from the outset, and you can test your knowledge of Bollywood and Islamic theology.  Too famous as a political dispute, too little known as a book.

Edmund Phelps — Today’s Nobel Prize in economics

Edmund Phelps.  Here is the announcement from Sweden

Here is his autobiography.  He was born in Chicago in 1933 and now teaches at Columbia.  Here is his CV, and here is another version.  Here are recent papers.  His Wikipedia entry is a short stub, but watch it grow.

Here is his summary of his research.  Here is another good summary of his workThis summary, from Sweden, is the best and most comprehensive, albeit more technical.

His main contribution is a better understanding of the Phillips curve and the dynamics of short-run unemployment and the concept of the natural rate of unemployment.  He gave the Phillips curve microfoundations and developed the "expectations-augmented Phillips curve."  As the name suggests, the level of inflationary expectations matter for how money will influence output.

Here is his memoir on developing the idea of the natural rate of unemployment.  His most influential 1960s work suggested that economies possess a natural rate of unemployment, monetary policy can reduce unemployment only temporarily (NB: in his view this is a conclusion, and should not be an axiom in economic models), monetary policy can reduce unemployment temporarily, and Keynesian economics should not treat the rate of unemployment as arbitrarily at the whim of monetary and fiscal policy.  He was also concerned with how the natural rate of employment can change over time; here is his 1997 paper on that topic.

The evolution of Phelps’s thought on how money can matter is complex.  His later work stresses monetary non-neutrality, mostly through non-rational expectations and non-synchronized wage and price setting.  His work in the 1980s focused on what the concept of rational expectations means in such complex environments.   

Do not assume that early Phelps and late Phelps are saying the same things or arguing against the same opponents.  Sometimes it is argued that he redefined macroeconomics twice.  After criticizing Keynesianism, he later turned against the "rational expectations"  point of view.  He is a complex thinker, although it can be hard to divine his "bottom line."  He fails to fit inside the "macroeconomics boxes" that have developed since the early 1980s, namely real business cycle theory vs. neo-Keynesianism.

Phelps’s work was considered revolutionary in the 1960s, though the subsequent work and influence of Milton Friedman have brought related ideas into the mainstream some time ago.

He also has done work on economic justice and how a Rawlsian maximin analysis might modify the idea of a zero rate of marginal taxation on top earners, as had been suggested by James Mirrlees.  Phelps believes that considerations of justice and distribution are important, and neglected, in economic thinking.  Once he had a piece in the Journal of Philosophy on ideas of justice in public finance.

He also wrote some well-known papers on what intergenerational justice means, the optimal accumulation of capital, and whether those allocations will prove sustainable and consistent over time.  He asks what kind of principles should govern how much capital we should leave for the next generation.  His 1961 work on capital theory formulated the notion of a "golden rule" of capital accumulation.  It asked what savings rate would maximize per capita income on an ongoing basis.  The concepts behind this work remain important for work on capital accumulation and also the sustainability of natural resource use and environmental policy.  Phelps also generated the counterintuitive result that the savings rate can be too high, and that all generations could be better off with a lower savings rate.  He does not, however, seem to think that this latter idea is policy-relevant.  The best summary of this work on capital theory is here, scroll through a bit.

Lately he has been working on the possibility of subsidies for hiring low-wage labor and Eastern European transitions.  Here is his book on wage subsidies.  Here is a more popular Phelps piece on wage subsidies.  He has also done work on the structural dynamics of economies and the underlying factors behind economic innovation.  Here is an early Phelps paper on technological diffusion; surprisingly it is his most frequently cited work according to  He looked to education and population size as key factors driving the rate of economic growth; this piece is a precursor of later work on endogenous growth theory.

Phelps also wrote a 1972 paper on statistical discrimination, one of the earliest formal economic treatments of that topic.

Here is Phelps on Project Syndicate, the link offers numerous essays on current events.  The European malaise stems from lack of dynamism.  He opposed the Bush tax cuts.  Here is Phelps on the rise of the West and the need for humane capitalism.  He has a broadly classical liberal slant but has adopted the modern liberal idea that distribution requires government intervention into labor markets and other parts of a modern economy.  He has a strong concern with the moral foundations of a free society.

Here are his cites on  4600 is a relatively low number for a Nobel Laureate.  Vernon Smith for instance has over 40,000.  In part this relatively small number reflects the older nature of Phelps’s major contributions, and that often his ideas have been absorbed but without citation.  Furthermore Phelps does not always write within the context of the most contemporary debates.

Over the last twenty years Phelps has spent a great deal of time in Europe.  In general his European influence and reputation is stronger than in the United States.

My take: It is hard to argue with this pick.  It is a good selection.  His 1960s macro work was true, important, and extremely influential.  The capital theory work endures and provides a foundation for subsequent theory.  The overall scope is impressive, and Phelps’s concerns never strayed far from the real world.

But Phelps is not an economist who has influenced my own thinking much if at all.  His major contributions were absorbed, and were standard fare, by the time I was a young’un.  For instance I drunk the same macro milk through the writings of Milton Friedman.  I find him to be a murky writer, and often he is frustrating to read and hard to pin down.  His advocates would characterize him as a "rich" thinker.

What this Prize means: The big questions still matter.  Unemployment, economic growth, labor markets, capital accumulation, fairness, discrimination, and justice across the generations are indeed worthy of economic attention.  Phelps contributed to all of those areas.   Normative questions matter.  Relevance and breadth triumph over narrow technical skill.

Addendum: The U.S. has now won six Nobel Prizes in a row, but I bet we don’t get the Peace Prize this year.