Month: November 2006

America has done so well, we need less in the way of precautionary savings, and so we spend more on imports:

The early 1980s marked the onset of two striking features of the
current world macro-economy: the fall in US business cycle volatility
(the "great moderation") and the large and persistent US external
imbalance.  In this paper we argue that an external imbalance is a
natural consequence of the great moderation.  If a country experiences a
fall in volatility greater than that of its partners, its relative
incentives to accumulate precautionary savings fall and this results in
an equilibrium permanent deterioration of its external balance.  To
assess how much of the current US imbalance can be explained by this
channel, we consider a standard two country business cycle model in
which households are subject to country specific shocks they cannot
perfectly insure against.  The model suggests that a fall in business
cycle volatility like the one observed for the US relatively to other
major economies can account for about 20% of the current total US
external imbalance.

Here is more.  Here is a non-gated version.  Of course the risk here is that if things finally do go bad, the ex post costs are especially bad, even if the lack of insurance was ex ante optimal.

This was on ebay:

You are bidding on the contact information for my friend who acquired a PS3 by waiting  in line outside Best Buy for two days in advance. I was there with him the entire time, but already sold mine. He has in his posession a PS3, extra controller, extra charger, three games (Resistance, Madden, and Ridge Racer), and a 2 year replacement plan. Keep in mind that you are not bidding on an actual system, but only the information where you might obtain one. You will be able to contact him and he is very willing to sell if the price is right. The unit is in the Atlanta, GA area and he would be willing to deliver in person if close by. PayPal is the only payment form accepted.

There were 20 bids and the final price was $1,100.

The Friedman-Savage piece starts with an obvious puzzle: why do people both buy lottery tickets and insurance against losses?  That would seem to make them both risk-loving and risk-averse at the same time.  The proffered answer is simple: part of the utility function is concave, and part is convex.  Across the lower range we wish to play it safe, but above a certain margina we are willing to take gambles (by the way, here is some evidence, and why it might follow from market constraints).

For years this approach rubbed the "foundationalist Tyler" the wrong way.  "Surely there is a more general approach which will allow us to derive both behaviors from a few axioms concerning risk and utility.  We can’t just postulate arbitrary shifts in the curve across the utility space.  Maybe both parts of the curve follow from the "temporal resolution of uncertainty," that missing variable from so much of expected utility theory.  The Friedman-Savage approach will someday be seen as a diversion from the path which led to truth."

Many articles explored these routes, most notably Mark Machina’s 1982 piece on generalized expected utility theory.  None of them caught on.  A subsequent dose of empirical and experimental work indicated that behavior toward risk is strongly context-dependent.  Neuroeconomics implied that different decisions in fact may stem from different parts of our brain, thereby challenging the assumption of a unified agent.  Probably there is no overarching approach to all of the so-called violations of expected utility theory.  People simply behave differently toward risk in different situations.

In other words, Friedman and Savage were ahead of their time.  This is no accident, but rather it stems from Milton’s wise pragmatism, and from his general lack of interest in foundations.  He also never explained "why people hold money," or "what money really is," yet he charged ahead with monetary theory and indeed monetary policy.  The monetary foundationalists have been just as unsuccessful as the utility foundationalists.

Wuhan, my hometown in Central China, plans to sell the right to name streets, bridges, public plazas and high-rise buildings to businesses in exchange for money the municipal government desperately needs to make up for a "funding shortage in government operations."

Here is the story, and thanks to Petras Kudaras for the pointer.

Robert Tagorda sends along a story of governments doing the buying rather than the selling:

State leaders have tried for years to get more minority and low-income high school students to take tougher classes. One group Thursday proposed an eye-opening idea: Pay students to take the classes.  The Minnesota Private College Council called on the state to spend $50 million a year to pay eligible high school students who take and pass college-prep classes.

Alex once blogged on Roland Fryer, and paying students to get better grades.