Month: April 2014

IP law for Girl Scouts (sentences to ponder)

As STEM fields become increasingly popular, it is important that we teach young people about the incentives and protections available to them through the patent system. IPO Education Foundation is excited about the opportunity to work with the GSCNC and the USPTO to bring the patent system to girls through the IP patch…

There is more here, via Mark Thorson.

Taxation and the distorted allocation of talent

That is a paper from last year by Benjamin B. Lockood, Charles G. Nathanson, and E. Glen Weyl.  The key sentence of the abstract is this:

If higher-paying professions (e.g. finance and management) generate less positive net externalities than lower-paying professions (e.g. public service and education) taxation may enhance efficiency.

In other words, marginal tax rates may be Pigouvian taxes on externality-generating activities.  Note that in this model high elasticities of switching careers, in response to incentives, may motivate progressive taxation rather than militating against it.

The paper does not attempt to derive which are the positive-externality and negative-externality professions, but rather considers some left- and right-wing assumptions about various professions, as well as the views of the authors.

One worry I have about this paper is that it focuses only on the static dimension.  If we believe that investment has higher positive externalities over time than consumption, that militates in favor of leaving resources in the hands of wealthier individuals.

If we consider wage structures within firms, equity norms and stickiness theories predict an excess of wage compression relative to marginal products.  This is what we observe in academia and also scientific research.  High marginal tax rates worsen that problem rather than alleviate it.

Most of all, I think of “fundamental innovation” as the great under-rewarded input.  That doesn’t correspond well to either income levels or descriptions of professions, so maybe those are not the categories this paper should focus upon.  And the number of true innovators may be fairly small, so thinking about typical cases may prove misleading.  If we consult “our feelings” about various professions, we will focus on typical members of that profession and their social contributions, or lack thereof.  An alternative approach is to start by listing the known under-rewarded innovators from the past, noting their distribution in the professions, and then thinking how to reward those professions with the tax system, along the way worrying less about the averages or typical members of those professions.  That path will bring you some very different results, and I think results more favorable to both business and scientific research.

For the pointer to the paper I thank Daniel Frank.

Assorted links

A study of limiting HFT

From Philip Delves Broughton:

These advantages were demonstrated in a recent natural experiment set off by Canada’s stock market regulators. In April 2012 they limited the activity of high-frequency traders by increasing the fees on market messages sent by all broker-dealers, such as trades, order submissions and cancellations. This affected high-frequency traders the most, since they issue many more messages than other traders.

The effect, as measured by a group of Canadian academics, was swift and startling. The number of messages sent to the Toronto Stock Exchange dropped by 30 percent, and the bid-ask spread rose by 9 percent, an indicator of lower liquidity and higher transaction costs.

But the effects were not evenly distributed among investors. Retail investors, who tend to place more limit orders — i.e., orders to buy or sell stocks at fixed prices — experienced lower intraday returns. Institutional investors, who placed more market orders, buying and selling at whatever the market price happened to be, did better. In other words, the less high-frequency trading, the worse the small investors did.

…In a paper published last year, Terry Hendershott of Berkeley, Jonathan Brogaard of the University of Washington and Ryan Riordan of the University of Ontario Institute of Technology concluded that, “Over all, HFTs facilitate price efficiency by trading in the direction of permanent price changes and in the opposite direction of transitory price errors, both on average and on the highest volatility days.”

The pdf of the paper is here.  Here is the conclusion of a Charles M. Jones survey paper on HFT (pdf):

Based on the vast majority of the empirical work to date, HFT and automated, competing markets improve market liquidity, reduce trading costs, and make stock prices more efficient. Better liquidity lowers the cost of equity capital for firms, which is an important positive for the real economy. Minor regulatory tweaks may be in order, but those formulating policy should be especially careful not to reverse the liquidity improvements of thelast twenty years.
There are a variety of significant problems on Wall Street, but this really isn’t one of them.

Going Postal: My First Job

In this article some Nobel prize winners talk about their first jobs and the lessons they learned. One of my first jobs was as a scab.

One summer when I was a teenager, the Canadian postal union workers went on strike and I was hired to deliver the mail. The pay was astounding, something like $25 an hour plus benefits when I was earning $4 an hour as a stock boy. The first day was disorganized and we never got out of the depot where we were supposed to be assigned to a postal station. The second day we were taken in a van to a station but the striking workers rocked and shook the van violently and we barely made it in. The company feared for our safety so we spent the entire day twiddling our thumbs. It was boring sitting around for 8 hours but I was thrilled to head home with $200. The third day we were again trucked to a postal station but there was no mail to deliver and by early afternoon it was clear we were going nowhere and doing nothing. I decided to leave. The guy in charge looked at me incredulously but said it was my call. I slipped out a back door but several burly postal workers saw me and started to chase. I hopped over a fence into, of all places, a graveyard. I ran through the graveyard and eluded a beating. The strike ended the next day. For several years afterwards I collected some kind of pension/overtime benefit.

The summer after that I ran away and joined the circus. I worked selling tickets and cleaning up after the elephants. That was also fun.

I learned a lot from both jobs.

David Brooks on the McCutcheon decision

The Supreme Court just voted to eliminate aggregate contribution limits, here is David’s response:

The McCutcheon decision is a rare win for the parties. It enables party establishments to claw back some of the power that has flowed to donors and “super PACs.” It effectively raises the limits on what party establishments can solicit. It gives party leaders the chance to form joint fund-raising committees they can use to marshal large pools of cash and influence. McCutcheon is a small step back toward a party-centric system.

In their book “Better Parties, Better Government,” Peter J. Wallison and Joel M. Gora propose the best way to reform campaign finance: eliminate the restrictions on political parties to finance the campaigns of their candidates; loosen the limitations on giving to parties; keep the limits on giving to PACs.

Parties are not perfect, Lord knows. But they have broad national outlooks. They foster coalition thinking. They are relatively transparent. They are accountable to voters. They ally with special interests, but they transcend the influence of any one. Strengthened parties will make races more competitive and democracy more legitimate. Strong parties mobilize volunteers and activists and broaden political participation. Unlike super PACs, parties welcome large numbers of people into the political process.

There is more here.  Ray LaRaja makes related points here.

For which political views should a CEO have to resign?

Andrew Sullivan argues Eich should not have been forced to resign from Mozilla for his anti-gay marriage donations, combined with his unwillingness to recant his position.  As a supporter of gay marriage (as of course Sullivan is too), I very much agree.  Like Sullivan, I see such such ideological witch hunts as unjust, counterproductive, and stifling of free discourse.

I see some further economic angles to this dispute.

First, it implies the market share of browsers is fairly arbitrary, and highly subject to potential consumer rebellion.  I can think of other businessmen who have alienated parts of the American public through their political stances, but still their products are bought and there is little talk of deposing them from their leadership roles.  Free products seem especially vulnerable to fluctuations in corporate image, in part because no product has a durable edge on price.  Since more of our economy seems headed in the direction of “free to consumers for direct use,” we might want to start thinking about this tendency a little more carefully and cautiously.  Charging people a positive price liberates you to be less conformist, at least provided you fare well in market competition.

Second, ambitious young people just got more boring.  It wasn’t long ago that opposition to gay marriage was the mainstream position in American society and of course in many places it still is.

Third, let’s say that “recantation” is becoming more important and more potent as a defense mechanism against charges (I’m not sure this is generally true, but it does seem to be true in the Eich case).  That will make people more likely to express their eccentricities in youthful bursts, rather than as a consistent pattern of donations or support over many years.  Consistent support over time is harder to recant, but a single act is easier to write off as a youthful indiscretion.

When was the great age of migration?

Jürgen Osterhammel writes:

Between 1815 and 1914 at least 82 million people moved voluntarily from one country to another, at a yearly rate of 660 migrants per million of the world population.  The comparable rate between 1945 and 1980, for example, was only 215 per million.

That is from The Transformation of the World: A Global History of the Nineteenth Century.  Here is my first post on the book.

How has introductory economics changed as it’s been taught in American universities?

That is a new Quora forum, via Justin Wolfers, and the question is referring to the last several decades.  There are interesting answers by Summers, Jeremy Bulow, Preston McAfee, and others.  My answer was this:

I see greater changes than some of these answers are suggesting.

Textbooks are much clearer, better written, and the quality of problem sets and auxiliary materials is much higher.  Instructors can assign video supplements or other web materials, in a way that was not possible in earlier times.

Interactive homework sites help students discover what they know, or not.  Aplia led a huge revolution, which is not over.

In terms of content, in current texts there is much more on economic growth and institutions and incentives.  The macro models are much clearer, even if they are still not always intuitive.  Every part of the book is expected to cover and explain its material very well, a quality which was not the case in most of the earlier texts, perhaps all of them.

Overall I don’t see the difference between “content” and “presentation” as being so clear at that level of learning.  So improvements in presentation are also improvements in content.  I might have added that the use of “clickers” allows students to be tested in real time, as a professor is lecturing (the professor asks a question and each student has to click on the right answer, with immediate feedback), and this technique seems to be an effective one.


Questions that are rarely asked

But they are asked by Roland Stephen:

What signals are food trucks sending by pricing only in round numbers ($6, $8 etc.) unlike brick and mortar competitors (whose prices are often very similar, but expressed with lots of .95s )?

My best guess is this.  You buy something from a food truck and then you eat it.  You don’t keep running up a tab.  (The same is true for food stalls by the way, though you may run up a tab in the hawker centre as a whole.)  In a sit-down restaurant, there is a sequence of salad, main course, drinks, dessert, and so on.  People might estimate their total running bill using first digits, and thus there is reason to “trick” them into thinking they have spent somewhat less than they have.  The food truck doesn’t have that same incentive.

Addendum: Many of you say “to economize on change,” and maybe so.  But why is this motive especially strong at food trucks?  The truck clearly has the room to carry the change, and the typically urban clientele is the same group of people who are paying $6.99 plus tax somewhere else.  In this context maybe speed matters more, or the percentage of cash transactions is higher to the extent many trucks do not take credit cards or wish to discourage the use of such cards.

What kind of doctor should I become?

Hi Professor Cowen,

I am a loyal MR reader and I wondered if you could comment on the following situation:

I am a 3rd year medical student, and for the purposes of this question, let’s assume I have equal interest and ability in the various medical specialties.  In order to create the greatest good for the greatest number of people through my work in medicine (i.e., the highest return to society), what specialty should I pursue?  I should add that, although I intend to practice in the U.S., I am open to devoting as much of my free time/vacation as possible to pro bono medical activities, and further, that I wish to do the interventions myself (instead, for example, or just making lots of money and then donating the proceeds to some other charitable activity).  In attempting to answer this question, I’ve been looking at DALYs and QALYs associated with various medical interventions (e.g., cataract surgery).  Am I going about answering this question the right way?  Any thoughts?

An interesting corollary would be asking what job, in any field, has the highest return to society.  Is there any literature on this?

The fundamental institutional failure to overcome is that many lives “out there” are pretty happy, and very much worth living, but those individuals do not have enough money to afford reasonable doctors.  If you are seeking to maximize social welfare, look to step into some of these gaps.

But which gap in particular?

The second binding constraint, in my view, is that most people won’t in fact go through with their plan to do a lot of social good.  That means you too.  So you wish to seek out a form of do-gooding which is incentive-compatible over the long run, or in other words which is fun for you or rewarding in some other way.  This second consideration is likely to prove decisive.

For instance you might decide the fight against dengue (just an example to make a point, not an actual net assessment) is the way to go, based on a narrow cost-benefit analysis.  But it is hard as a field worker to really, fully protect yourself against dengue.  And getting dengue can be very bad indeed.  As you age, the pressures not to go into the field will mount.  You might do more good by pledging your efforts to fight a malady which you can help fix without so much direct risk or exposure to yourself, let’s say infant mortality.

You will note a difference here between pledges of individual effort and pledges of money.  A money pledger, thinking in game-theoretic Nash terms, will realize that effort pledgers will resist the fight against dengue.  That is all the more reason why throwing money at the fight against dengue may bring high returns, namely that at the margin not enough is being done from the side of volunteer and quasi-volunteer labor.  (In general this distinction creates a problem with talking up one kind of cause over another, namely that labor and money face differing incentives and should hear different messages of encouragement.)

You will note also that in a second best optimum, field workers will appear to be “consuming too many perks.”  At the same time, donated funds should be trying to push field workers out of their comfort zones, at least on the margin.

I would add two final points.  First, if you have a reasonable chance of being a research superstar, that may be the path to follow.

Second, if you are not already attached, spent time cultivating social circles (aid work, World Bank, vegetarians, etc.) where you are likely to meet a partner or spouse who will support a similar vision to help the world.

Addendum: David Henderson adds comment.

The costs of measuring value too precisely (model this)

…the editors at The Verge have a policy that seems a little bit odd and anachronistic: They don’t let writers see how much traffic their stories generate. Ever.

As the American Journalism Review reported, in a piece called “No Analytics for You: Why The Verge Declines To Share Detailed Metrics With Reporters,” the editors at The Verge simply don’t want their writers thinking about traffic.

What’s more, The Verge is not alone in this practice. Re/code, a tech site run by Kara Swisher and Walt Mossberg, the longtime Wall Street Journal tech columnist, also won’t share traffic stats with writers. MIT Technology Review holds numbers back too.

“We used to show the writers and editors traffic, and told them to grow it; but it had the wrong effect. So we stopped,“ says Jason Pontin, CEO, editor in chief and publisher of MIT Technology Review. ”The unintended consequence of showing them traffic, and encouraging them to work to grow total audience, is that they became traffic whores. Whereas I really wanted them to focus on insight, storytelling, and scoops: quality.”

That phrase – “traffic whore” – tells you everything you need to know about why some journalists have an aversion to chasing traffic. They fear it creates an incentive to do the wrong things.

Of course these policies hold only at some margins I believe…nor are they used at Gawker.

The full article, by Dan Lyons, is here.