Month: April 2017
Friday assorted links
1. Eli Dourado offers advice to undergraduates. And Scott Sumner tells it like it is.
2. The case for placebo politics.
3. Reemergence of some famine conditions around the world. I take this to be another sign of a broader breakdown of global order.
4. David Brooks on the Cuomo free college plan (NYT). Masterful analysis of an idea that otherwise is being passed around uncritically.
5. Jean Tirole speaks sense on the French election (FT).
6. Is there life on Enceladus, moon of Saturn? I think so. Hi out there!
The Relevance of BR Ambedkar in Modern India
Outside my apartment a cobbler has a sidewalk shop where he sits and fixes shoes. One of the things that interests me in this photo is the picture the cobbler hangs behind him, that’s BR Ambedkar. In the 
independence movement BR Ambedkar was the leader of the Dalit (untouchable) class and the guiding force in writing the Indian constitution, which in India makes him a combination of Martin Luther King and James Madison.
Ambedkar died in 1956 but he continues to be highly regarded, especially, but by no means solely, among the Dalits. Indeed, of the great triumvirate, Gandhi, Nehru, and Ambedkar, only Ambedkar seems to have grown in stature since his death. Gandhi is given lip service but his image no longer carries meaning. As Arundhati Roy put it, “Gandhi has become all things to all people…he is the Saint of the Status Quo.” The image of Ambedkar, however, still signals a demand for justice and an insistent claim that not all is yet right.
Today is Ambedkar’s birthday and at the stroke of midnight my neighborhood, which happens to be on Ambedkar Road, erupted in a party and parade that lasted until two in the morning.
Of the great triumvirate, I’ve always been partial to Ambedkar. He had a PhD in economics from Columbia where he worked under Edwin Seligman and later also graduated from the London School of Economics writing another dissertation under Edwin Cannan. Ambedkar was not a free market advocate and he didn’t write much in pure economics after the 1920s but he was an early supporter of monetary rules because he had a sophisticated understanding of the distributional consequences of monetary interventions and feared government manipulation.
A managed currency is to be altogether avoided when the management is in the hands of the government.
Ambedkar also wrote insightfully on the problem of India’s small farms, a problem that continues to plague India (although some of his solutions such as government ownership of land actually don’t fit the problem, lack of capital, that he emphasized).
So why does Ambedkar continue to resonate in modern India? Ambedkar never had Gandhi’s worship of the village and tradition. He understood that progress would come with cities, industrialization and education. Exactly the forces that are transforming India today. Ambedkar did not mince words:
The love of the intellectual Indian for the village community is pathetic. What is the village but a sink of localism, a den of ignorance, narrow mindedness, and communalism?
Most importantly, quoting Luce’s excellent In Spite of the Gods (still the best introduction to modern India):
Ambedkar gave India’s most marginalised human beings their first real hope of transcending their hereditary social condition. He saw the caste system as India’ greatest social evil, since it treated millions of people as sub-humans by the simple fact of their birth.
But even as the caste system declines in importance (in some ways), there remain those who are marginalized and downtrodden. Ambedkar, for example, resigned as law minister in post independence India when his bill to bring greater equality and property rights to women was rejected. Even today, Ambedkar’s vision is not complete. Ambedkar was a modernist, a rationalist, a believer in the principles of liberty, equality, and the rule of law for all, and for these reasons he remains relevant in modern India.
Are there too many speed bumps?
Probably yes. That is the topic of my latest Bloomberg column, here is one excerpt:
Another economic approach would consider whether the private sector, when trying to accommodate customer demand, finds that speed bumps help or hurt business. That’s a kind of market test of the concept, and indeed I often see speed bumps in shopping mall parking lots, to slow down traffic and ease the risk of accidents, including to pedestrians. The mall and parking lot owners have decided that the benefits of greater safety will attract more customers than the inconveniences of driving more slowly, and other possible costs, will put customers off. That is a seat-of-the-pants cost-benefit test, and it suggests some role for the bumps in the broader world.
That said, my personal impression is that these private-sector speed bumps are smoother and gentler than the ones I often find in neighborhoods. When it comes to local roads, the residents are actively trying to keep outside drivers away, whereas the shopping mall and parking lot owners seek the best overall environment for commercial reasons. As a tentative conclusion, I think some speed bumps are a good idea, but many are too obstructive, and perhaps they are too numerous as well; this view is supported by some recent research.
Another angle of the speed bumps debate is how much it revolves around issues of symbolic value, and that in part explains why the discussion can become so heated.
By its very design, a speed bump is a deliberate obstruction with maximum transparency as such. It is sending a message that the social goals of safety or neighborhood quiet are sufficiently important that it is worth slowing people’s progress when they travel. There are many regulations that try to make our lives safer, but most of them are hidden, with nontransparent costs, such as auto-safety regulations as applied through crash tests. A speed bump, in contrast, can work only if people notice it each time. So to the extent a society accepts speed bumps, it is visibly advertising the notion that limits to fast transportation — a symbol of progress — are acceptable in the name of safety and cozy locality.
Do read the whole thing.
Which colonies fared best under British rule?
In a previous column on India, and how it suffered under colonialism, I mentioned:
If you are looking for the upside of British colonialism, you are more likely to find it in the wealthier and better-treated Singapore or Malaysia.
Why might this have been true? Part of India’s colonial curse was its high population, which meant the British viewed it as a source of soldiers, and a captive market for goods, rather than an area whose value could be internalized through direct economic development.
When it comes the British history in India, I think of “letting the interior fester” as a big part of the core problem. Most of India was and still is interior. You might look at the coastal regions, but given that British policy forced India to accept free trade for British goods, without receiving the same privileges in return, the coastal regions became rent-seeking imperial clusters more than possible rivals to Hong Kong or for that matter Manchester.
Singapore, in contrast, was built around its port, and the British encouraged further developments in that direction, even as early as Raffles in the 1820s. The city didn’t/doesn’t have much of an interior or for that matter much population (about 1,000 when the British took over). Keeping the people servile didn’t seem worth the trouble, because they could neither fight nor buy in great numbers. Instead, you can think of British policy as trying, selfishly, to maximize the value of Singaporean land to the British. But that wasn’t such a nasty process, as the British Navy made Singapore more focal as a trade center, with a later boost from the opening of the Suez Canal. Note that as late as the mid-1960s, just before independence, about 20 percent of Singaporean gdp was British defense spending.
Singapore as port and entrepot developed “the entire nation,” all the more as the induced spirit of enterprise later spread to manufacturing. This in turn gave the territory the possibility of a relatively inclusive and egalitarian future. Unlike with India, the British rulers never imagined a future where Singapore might threaten them economically, or politically, and so they could just let matters rip. The British felt, more or less correctly (until the Japanese invasion), that improvements in the value of Singapore would be captured by them.
So it was “keeping an option on captive buyers and fighters” (India) vs. “maximizing the value of the land for Empire” (Singapore). Both were selfish strategies, but the latter did better for the colony in question. Hong Kong seems to fit comfortably into this framework, though other cases might be considered (Barbados vs. Guyana? Ghana vs. Uganda?).
Singapore also benefited from having most of its relevant colonization come later, whereas India had a damaging East India Company period in the 17th and 18th centuries, when imperialism often was more brutal and less sophisticated.
Non-Singaporean Malaya/Malaysia would require a post of its own. In that case, and also with Singapore more narrowly, an evaluation of British rule cannot be separated from major changes in the exports and also corresponding changes in the ethnic composition of the territory. The Singaporean national anthem is still a song written in Malay, and by law it must be sung as such.
Maximum Government, Minimum Governance?
In 2014, Narenda Modi campaigned on the slogan “maximum governance, minimum government”. It was a brilliant slogan that neatly captured India’s dichotomous problem, too much government and not enough capacity to actually govern. Since then, however, Modi’s government has not done much to fulfill its promise. The latest absurdity is a plan to govern the size of meal portions that restaurants may serve–apparently an attempt to fulfill Modi’s musings on the subject as if they were commands from the Maharaja. Add to this the absurd paid leave maternity bill–something akin to having the US government mandate seatbelts on flying cars, not exactly wrong but not exactly dealing with a problem relevant to most people either. Top off with the Supreme Court’s ban on any liquor sales within 500 meters of a highway (Mumbai, by the way, will follow Rajasthan in recategorizing highways within the city as roads to get around the ban). Put it all together and it looks like we are back to the old India model of maximum government, minimum governance.
In an excellent piece, Rupa Subramanya asks exactly the right question:
…how exactly is intervening in food portion sizes, a matter which in any sensible country would be left to the market system to decide, an example of good governance?
As a first principle of good governance, the government must recognize the limitations of state capacity and prioritize in areas in which it wishes to intervene in the market economy, based on a cost benefit analysis and grounded in a market failure it’s trying to correct.
…Modi campaigned on good governance. It’s time for him to start delivering on that promise.
What should I ask Garry Kasparov?
I will be doing a Conversations with Tyler with him, no public event, podcast only. Today by the way is his birthday, so send along some good questions as a birthday present to him, and a non-birthday present to me!
Garry’s forthcoming book Deep Thinking: Where Machine Intelligence Ends and Human Creativity Begins is just superb, and the podcast will be released around the time of book publication in early May.
Thursday assorted links
1. My chat/podcast with Jim Pethokoukis. And Scott Sumner on macro and complacency. I think of the public as simply insisting on low inflation, and not understanding the causal chains laid out by Scott.
2. “Among the great running battles between progressives and conservatives in Montreal over the past 150 years has been the question of whether denizens should be able to relieve themselves in public. ” Interesting throughout, lots of history.
3. Marketplace feature on which are the robot-proof jobs.
4. 569 pp. of Acemoglu lecture notes on political economy.
5. Josh Ryan-Collins on how land disappeared from economic theory.
6. Willy Staley on Mike Judge (NYT).
An economic critique of prison
That is a new article by Peter N. Salib, at the University of Chicago, here is the abstract:
This Article argues that we should not imprison people who commit crimes. This is true despite the fact that essentially all legal scholars, attorneys, judges, and laypeople see prison as the sine qua non of a criminal justice system. Without prison, most would argue, we could not punish past crimes, deter future crimes, or keep dangerous criminals safely separate from the rest of society. Scholars of law and economics have generally held the same view, treating prison as an indispensable tool for minimizing social harm. But the prevailing view is wrong. Employing the tools of economic analysis, this Article demonstrates that prison imposes enormous but well-hidden societal losses. It is therefore a deeply inefficient device for serving the utilitarian aims of the criminal law system — namely, optimally deterring bad social actors while minimizing total social costs. The Article goes on to engage in a thought experiment, asking whether an alternative system of criminal punishment could serve those goals more efficiently. It concludes that there exist economically superior alternatives to prison available right now. The alternatives are practicable. They plausibly comport with our current legal rules and more general moral principles. They could theoretically be implemented tomorrow, and, if we wished, we could bid farewell forever to our sprawling, socially-suboptimal system of imprisonment.
One of the suggested alternatives is (non-prison) mandatory labor in the highest-value available jobs, combined with monitoring, and also restitution to the victims or the government.
Benefits and Costs of the Better Seeing State?
The Economist has two good pieces on India’s Aadhaar card. First, the bright side:
IT TAKES a little over 90 seconds. At the government-subsidised ration shop in Sargasan, a village in Gujarat, Chandana Prajapati places her thumb on a fingerprint scanner. A list of the staples she and her family are entitled to this month appears on the shopkeeper’s computer: 10kg of rice, 25kg of wheat, some cooking oil, salt and sugar. The 55-year-old housewife has no cash nor credit card, but no matter. By tapping in an identifying number and presenting her thumb one more time, Mrs Prajapati authorises a payment of 271 rupees ($4.20) straight from her bank account. It is technical wizardry worthy of Stockholm or New York; yet outside buffaloes graze, a pot of water is coming to the boil on a pile of firewood and children scamper between mud-brick houses.
Like most Indians, Mrs Prajapati would have struggled to identify herself to the authorities a few years ago, let alone to a faraway bank. But 99% of adults are now enrolled in Aadhaar, a scheme which has amassed the fingerprints and iris scans of over 1.1bn people since 2010. With her authorisation, any government body or private business can check whether her fingerprints or irises match those recorded against her unique 12-digit identifying number in its database. When it comes to identification, India has unexpectedly leapfrogged every country with the possible exception of Estonia, a tiddler with a penchant for innovation.
The Aadhaar system has cut corruption and cleaned the rolls of people with fake identities trying to scam fertilizer, food or some other subsidized good. But the government wants the mark of the beast Aadhaar system to be used for just about everything including paying taxes, getting school lunches, buying airline tickets or a cell phone and that makes some people worried:
In theory, the law on Aadhaar passed last year by Mr Modi’s government includes stringent protections against the sharing of information; its rules allowing exceptions on grounds of national security, although vaguely worded, appear well intended. Sweden has required all citizens to have a national ID number since 1947—the year of India’s birth—with little trouble. Most Swedes consider the scheme, which is linked to tax, school, medical and other records, an immense convenience.
But India is not a tidy Nordic kingdom. Mr Modi’s government, with its strident nationalism and occasional recklessness—such as last year’s abrupt voiding of most of the paper currency in circulation—does not always inspire confidence that it will respect citizens’ rights and legal niceties. By sneaking the linkage between Aadhaar and tax into a budget bill, it raises concerns about intent: will the government stalk tax evaders, or perhaps enemies of the state, using ostensibly “fire-walled” Aadhaar data? Many Indians will remember that, following sectarian riots in the past, ruling parties were accused of using voter rolls to target victims.
As the Economist wisely concludes:
…for Aadhaar to fulfil its potential, Indians must trust that it will not be misused. Adopting coercive regulations, ignoring the Supreme Court’s qualms and dismissing critics peremptorily will achieve the opposite.
Interpreting Contracts via Surveys and Experiments
Interpreting the language of contracts is the most common and least satisfactory task courts perform in contract disputes. This article proposes to take much of this task out of the hands of lawyers and judges, entrusting it instead to the public. The article develops and tests a novel regime — the “survey interpretation method” — in which interpretation disputes are resolved though large surveys of representative respondents, by choosing the meaning that a majority supports. The article demonstrates the rich potential under this method to examine variations of the contractual language that could have made an intended meaning clearer. A similar survey regime has been applied successfully in trademark and unfair competition law to interpret precontractual messages, and the article shows how it could be extended to interpret contractual texts. To demonstrate the technique, the article applies the survey interpretation method to five real cases in which courts struggled to interpret contracts. It then provides normative, pragmatic, and doctrinal supports for the proposed regime.
Just to be clear, I do not favor such a regime, but I think it is what we will be getting.
For the pointer I thank William the Irishman.
How bad was British colonialism for India?
That is the topic of my latest Bloomberg column, here are a few bits, these are all highly imperfect metrics:
For much of the 18th and early 19th centuries, under British rule, Indian economic performance was mediocre at best. It has been estimated that the yearly agricultural wage was higher in 1810 than in 1946. It’s difficult to prove how much of that decline was because of the British, but it is hardly a ringing endorsement.
And:
Another way to make the historical comparison is to consider which Southeast Asian economy never fell under colonial rule. That would be Thailand, which has a per capita income in the range of $16,300 by World Bank estimates, compared with India’s $6,100. Again, that single comparison is not dispositive, but it hardly favors the British record in India.
And:
Another possible comparison is between British-ruled India and India’s “native states,” namely the numerous territories and principalities where British involvement in direct rule was minimal. To be sure, those regions still were embedded in a broader nexus of British control, and there is no comprehensive database. Nonetheless, historian Jon Wilson, in his recent book “India Conquered: Britain’s Raj and the Chaos of Empire,” offered this assessment: “Economic growth and institutional dynamism occurred in the places that were furthest from the rule of British bureaucrats.” For instance, Tata Steel Ltd. put India’s first modern steel plant in Jamshedpur, a tributary area outside of British rule. Another study found that the independent areas had better performance in terms of education and health care during the post-colonial era.
Maybe you can twist all of those back to neutral, but the data make it surprisingly hard to make a case for British rule in India.
Solve for the equilibrium
In the latest example of marketers entering the living room, Burger King will release television commercials on Tuesday that are intended to prompt voice-activated smart speakers from Google into describing its burgers — after the 15-second spots end.
A video from one of the fast-food chain’s marketing agencies showed the stunt in action: “You’re watching a 15-second Burger King ad, which is unfortunately not enough time to explain all the fresh ingredients in the Whopper sandwich,” the commercial’s actor says. He continues, “But I got an idea. O.K. Google, what is the Whopper burger?” Prompted by the phrase “O.K. Google,” the Google Home device next to the TV in the video lights up, runs a search and states its ingredients.
Here is the story, via the excellent Michael Rosenwald.
Wednesday assorted links
1. Lending libraries in everything, including umbrellas, hand-knit shawls, and fishing poles.
2. Inside baseball: did you know that the “Capitol Steps” guy is also Bannon’s “Fourth Turning Point” guy? And his name is Strauss, to boot.
3. The wedding culture that is Brazil.
4. Robin Hanson speaks to the Mormon Transhumanists.
5. The Balkans are a problem again.
6. World’s first dyslexic-only sperm bank.
My Conversation with Patrick Collison
Patrick is co-founder and CEO of Stripe, based in San Francisco. I recently told a reporter he was one of the five smartest people I have known; he is so smart, in fact, that he asked to interview me rather than vice versa, and so he and I created a new episode of Conversations with Tyler (transcript and podcast at that link, alas no video, and note that was recorded in January so on a few points the timeline may feel off).
We discuss whether macro is underrated, what makes Silicon Valley special, optimal immigration policy, whether Facebook is beneficial for society, whether I might ever vote for Donald Trump, how to start a new religion, Peter Thiel, Brian Eno, where I differ from Thomas Schelling, Michel Houllebecq, how to maintain your composure in an age of Trump, the origins of this blog, how I read so much, why Twitter is underrated, and the benefits of having a diverse monoculture, among many other topics.
Here is one bit:
COLLISON: …You’ve written a lot about how the study of economics has influenced your appreciation for the arts, and for literature, and for food, and all of the rest. You haven’t written as much about the influence in the reverse direction. How has your appreciation for and study of the arts influenced your study of economics? And is this a version of that?
COWEN: This is a version of that. Here would be a simple example: If you think about Renaissance Florence, at its peak, its population, arguably, was between 60,000 and 80,000 people. And there were surrounding areas; you could debate the number. But they had some really quite remarkable achievements that have stood the test of time and lasted, and today have very high market value. Now, in very naive theories of economics, that shouldn’t be possible. People in Renaissance Florence, they didn’t produce a refrigerator that we’re still using or a tech company that we still consult.
But there’s something different about, say, the visual arts, where that was possible, and it was done with small numbers. So there’s something about the inputs to some kinds of production we don’t understand. I would suggest if we’re trying to figure out, like what makes Silicon Valley work, actually, by studying how they did what they did in the Florentine Renaissance is highly important. You learn what are the missing inputs that make for other kinds of miracles.
Ireland and writing would be another example.
…COWEN: And I worry now that people in Ireland hear too much American English, too much English English, and that style of writing, talking, joking, limericks, is becoming somewhat less distinct. Still many wonderful writers from Ireland, but again, it’s like an optimal stock depletion problem, and maybe we’ve pressed on the button a little too hard.
COLLISON: The transaction costs should be higher?
And here is another:
COLLISON: Do we just need a sufficiently obfuscated version of the UBI and then we’re fine?
COWEN: We call it “disability insurance.”
And:
COWEN: Well, I voted on each of these hires. I voted for them. For a lot of them, I was on the hiring committee. Robin Hanson’s a good example. When we hired Robin, he was much older than a typical assistant professor would be. And of course, we don’t practice age discrimination, and neither does anyone else, but . . .
[laughter]
COWEN: Robin was going to have a tough time being hired. And I gave Robin some of my papers to read. He came in. He was a little, actually, obnoxious to me. Though he’s one of the nicest people you’d ever want to meet. He sent me back comments on my papers, that they were all wrong.
[laughter]
COWEN: There was no preliminary politeness: ‘I thought this was interesting, but…’ I thought this was great. So I thought, “We need to hire Robin. Robin is different.” And Robin wrote papers I thought were crazy, but he clearly also was a genius. I pushed very hard to hire Robin, and he made a good impression on a lot of other people. He’s been with us ever since.
COLLISON: Were the papers in fact all wrong?
COWEN: Robin’s criticisms were all good points.
[laughter]
COWEN: But they weren’t entirely wrong.
Self-recommending!
It’s time for some game theory, United Airlines edition
I agree the man should have left the plane in the first place, the police should not have used violence, the CEO should have apologized right away, United (possibly) should have known earlier it needed to transport the employees, and a bunch of other things. Perhaps United should have mimicked Ryan Air and charged people fifteen euros (or much more!) for dragging them off the flight. But let’s put that behind us and consider some analysis:
The priority of all other confirmed passengers may be determined based on a passenger’s fare class, itinerary, status of frequent flyer program membership, and the time in which the passenger presents him/herself for check-in without advanced seat assignment.”
There is also an exception for disabilities.
From the passenger’s point of view, this operates like randomization, as customers were told “the computer will decide.” An alternative of course is to eliminate the random shuffle and require cash payments to passengers no matter what, waiting until someone volunteers to give up his or her seat at the required high price.
One problem with using money to buy people out of queues is that it encourages more upfront queuing to begin with, and that involves negative externalities for passengers as a whole. In any model of stochastic demand and fixed capacity in the short run, demand will sometimes be too high, and I don’t know of many retail markets that rely on price alone to ration quantity. Given that reality, I am not sure why everyone is insisting the airlines should do things this way. If Nordstrom starts to run out of their blue cooking pots on the day of the sale, so be it, they don’t raise the price toward the end of the day as supplies dwindle. Paying $5 to each denied pot-buyer just ensures they are more likely to run out of pots the next time around.
You could spend many moons debating whether price-only solutions to short-run shortages lead to higher or lower upfront prices (and thus higher or lower deadweight loss) than price + quality adjustment solutions to short-run shortages. As far as I know, this question hasn’t been settled, and quality adjustment is well-known as a means of enabling more upfront price discrimination. If nothing else, it pushes more people into business class. The subtler mechanism is that the airlines have plenty of reasons to favor their more loyal customers, if only because of market segmentation, and this is one of them. The market segmentation effects brings more collusion, and higher prices, but the price discrimination effect tends to boost output.
To consider possible analogies, let’s say it was a queue to buy concert tickets, with more people in line than seats for the show. One option is to give cash to those who can’t get tickets, rather than just turning them away, but I’ve never heard anyone argue this would be efficient. The cash payments are a tax on product supply and also they encourage too much queuing in the first place. Instead we send some people home without tickets, even if they have waited in line for a long time. In essence, randomization is one factor behind who is sent home without a ticket, because no arrival, when deciding whether or not to show up, knows exactly how many other people will have been prior in line. Don’t be surprised if the airlines sometimes use a similar system.
As Garett Jones points out, sometimes the ATM runs out of cash and you don’t get any bonus afterwards. There are plenty of other examples.
Maybe United should allow for a secondary market for the doctor to stay on the plane by buying flying rights from some other passenger, one who wouldn’t take the United offer but who might take the doctor’s better offer. That idea is worth consideration, though arranging the contract could be tricky unless the passengers belong to a common system with pre-arranged arbitration in place (Facebook could run it? PayPal?) With tickets this kind of resale works smoothly through StubHub and the like. (By the way, once the guy proclaimed he was a doctor going to see his ailing patients, did any of the other passengers offer to get off instead? Hmm…)
The “re-accommodation” seems much worse to many people because the doctor already was seated. An endowment effect argument therefore might require that the airline use a full auction once seats are taken. That would increase the incentive of the airline to spot demand-supply imbalances in advance of boarding, and it might well be a good idea. On the other hand, the presence of an endowment effect can help make “removal” an especially effective pre-emptive demand tax in world-states of potential excess demand. The more you hate being removed from your seat, the fewer people have to be removed to achieve a greater S-D balancing ex ante. Furthermore, the highest valuation buyers will make sure to be loyal buyers, which presumably is what the airline wants.
The cynical, who have studied randomization in optimal tax theory (that is not I, I love human rights too much and spent my youth reading the Salamancans), would even say that the higher value are the trips, and the more people fear being manhandled, the more it makes sense to use stochastic pain as a deterrent for overbooking. Think of it as a way to increase the degree of ex ante price discrimination, and limit cross-buyer externalities, at minimal cost in terms of actual output.
Finally, the United episode gets at a more general problem with algorithms. Even if the selection of seat loser is “truly random,” it will not always look random to the outside world. The bumping of the doctor has been a huge event on Chinese social media, and how many of those Chinese are thinking that the doctor was bumped because he was Chinese. The international loss of reputation here is significant, and it damages the United States as a whole, not just United as a brand name. In essence, individual companies under-invest in perceptions of fairness, and reliance on “truly random” algorithms can make this worse rather than better. A deliberate human chooser might well have done better, if only by knowing that a public defense of the choice would have been required, and that might have nudged United back toward the full auction or some other solution. In essence, companies may be oversupplying “reliance on randomness,” not taking the collective negative externality into account. Counterintuitively, relying on algorithms can increase perceptions of unfairness, and many of the costs of unfairness come on the perceptions side, even if “the true model” is making choices using a fair process.
Two other factors are worth considering. First, due to social media it will be increasingly difficult to write and enforce retail contracts with legal meanings very different from their “common sense” meanings. Maybe I’ll write a separate post on whether that will raise or lower transactions costs, but I suspect a bit of both.
Second, given that the stock of United tanked after the incident, now airline customer service will improve rather rapidly. In the long run of course that will translate into higher prices too, so the net effect of this shift will prove regressive. The more you complain, the more you are redistributing wealth — through the medium of preferred price-quality configurations — away from lower earners and toward the wealthy.
I’m not saying that the United rules are efficient, either generally or in this particular case, but I do see many people not even willing to ask the question of under what conditions they might be efficient. And that is indeed to correct way to start on analyzing this problem.
Addendum: This is also a story of price controls, on that let’s turn the microphone over to Air Genius Gary Leff:
More importantly, United didn’t do it because Department of Transportation regulations set maximum required compensation for involuntary denied boarding (in this case 4 times the passenger’s fare paid up to a maximum of $1350). So they’re not going to offer more than that for voluntary denied boardings, especially since the violent outcome here wasn’t expected and the United Express gate agent had no authority to do more.