Prediction Markets
I’m in NYC today talking about prediction/information markets, of which the Pentagon’s recently canceled Policy Analysis Market is the most infamous example. Our colleague, Robin Hanson, was one of the architects behind the PAM. Red Herring, the hi-tech magazine is now back in business in an online form and they have a precis of my comments for those who are interested.
The Politician and the Mechanic Conspire to Rip Me Off
Virginia requires yearly “safety” inspections of automobiles. Yesterday, it was my turn – it cost me $15 bucks and an hour of my time. What a pain. Merrell, Poitras and Sutter (MPS) (summary here, reference below) estimate that nationally inspection programs cost in excess of a billion dollars a year (I think this is a serious underestimate – see below). What do we get for our time and effort? Not much. MPS find that mandatory inspections do not reduce highway fatalities or injuries. Not surprising really since there are already good incentives to maintain one’s car and accidents are most often caused by factors, primarily driver behaviour, that are not inspected. (By the way, yes there is an externality but if self-interest alone causes you to replace a broken headlight then on the margin the externality is irrelevant – economists often forget this point.)
MPS arrive at the billion plus figure by summing inspection fees and travel time. But the major cost of the inspection system, in my opinion, is unnecessary repairs. Mechanics have an incentive to indicate a car needs repairs and it is difficult to know when they are speaking the truth. This problem is bad enough when you have brought your car to the mechanic voluntarily – at least then you know the car has a problem. But the potential for opportunistic behaviour is worse when you are required to take your car in for inspection and if you don’t follow the mechanic’s advice you fail. The mechanics know they have you over a barrel and act accordingly.
The citation for the MPS study is Merrell, D. Poitras, M and Daniel Sutter. 1999. The Effectiveness of Vehicle Safety Inspections: An Analysis Using Panel Data,” Southern Economic Journal, Volume 65, pp.571-583.
All Oil to the People!
In an economy based on labor, leviathan government faces an inherent, albeit weak, constraint – tax and regulate too much and you will kill the goose that lays the golden eggs (or the goose will run away). But in an economy based on oil the goose can’t run away and is almost impossible to kill. As a result, natural resource based economies tend to be corrupt, war-stricken, and slow growing. After 35 years and some 350 billion dollars in oil revenues the people of Nigeria, for example, have had no increase in per-capita GNP.
Iraq is another case in point, which is why it’s crucial that we not squander the opportunity to create new institutions for getting oil wealth away from governments and into the hands of the people. Norway and Alaska distribute revenue from “stabilization funds” but these appear not to be very effective, especially in countries that begin with weak institutions. Economists Xavier Sala-i-Martin and Arvind Subramanian argue in favor of direct payments of revenues to citizens but I think Vernon Smith, our colleague and recent Nobel prize winner, offers the best approach – distribute shares, real ownership, in the oil producing lands to every citizen.
Aside from the benefits to the Iraqi’s can you imagine what a great public relations boost this would be to the United States? In one swoop, we would credibly demonstrate to the Muslim world that the war was not about our rapacity, provide for a thriving domestic economy in Iraq, and lay the foundations for a stable democracy.
The Dumbing Down of Safety
Under the federal No Child Left Behind Act, parents are supposed to be allowed to transfer their children from “persisently dangerous” to safer schools. But, according to this article in the NYTimes, “44 states have set the legal threshold for persistently dangerous schools so high that no schools in those states fit the definition.” Consider Locke High School in Los Angeles which in the last three years has had “33 assaults with a deadly weapon, 116 beatings, 66 robberies and 17 sex offenses.” But these crimes resulted in only 11 (!) expulsions and CA requires a school like Locke to have 30 explusions before allowing parents to transfer their kids to a safer school.
The fact that the standards qualify virtually no schools is accidental, say state officials in CA and elsewhere. Nonsense. It would be easy enough to write the standards in terms of percentages. Define any school in the top x% of schools for violence as qualifying. (We can then argue whether, for example, x should be 5, 10, or 25 percent.) A percentage standard would always qualify the worst schools even if they were pretty safe but remember that all we are talking about is giving parents the option of moving their children. Is it too much to ask that we err on the side of child safety?
Thanks Fabio!
Our thanks go out to Fabio Rojas for doing a great job as Marginal Revolution’s first guest blogger. Stay tuned to this spot for future guests!
Kissing Cousins (More)
A John Tierney article in today’s NYTimes argues that the Iraqi tradition of cousin marriage and consequent clan loyalties make it difficult to establish democracy. (See Tyler’s earlier post for a map and some other links.) Most interesting claim is that the Western taboo against cousin marriage was promoted by the church explicitly in order to reduce loyalty to the clan and promote universal love. Key quote:
Cousin marriage was once the norm throughout the world, but it became taboo in Europe after a long campaign by the Roman Catholic Church. Theologians like St. Augustine and St. Thomas argued that the practice promoted family loyalties at the expense of universal love and social harmony. Eliminating it was seen as a way to reduce clan warfare and promote loyalty to larger social institutions – like the church.
By the way, recent genetic research indicates that cousin marriage does not lead to dramatically higher abnormalities in children.
Capitalism comes to Iraq
Most of the talk about the reconstruction of Iraq has been about US aid, a so-called “Marshall plan for Iraq.” But as Tyler pointed out the Marshall plan never did that much for Europe – what made the difference was economic liberalization (and recall that the key reform in Germany, Ludwig Erhard’s lifting of price controls, was done without the permission and against the wishes of the US administrators). It is heartening therefore that liberalization appears to be coming to Iraq. Here is the key information from The Economist (subscription required).
A shock programme of economic reforms signals a radical departure for Iraq. The changes, announced by the country’s provisional rulers at the annual World Bank/IMF jamboree in Dubai, could see its battered economy transformed abruptly into a virtual free-trade zone.
If carried through, the measures will represent the kind of wish-list that foreign investors and donor agencies dream of for developing markets. Investors in any field, except for all-important oil production and refining, would be allowed 100% ownership of Iraqi assets, full repatriation of profits, and equal legal standing with local firms. Foreign banks would be welcome to set up shop immediately, or buy into Iraqi ventures. Income and corporate taxes would be capped at 15%. Tariffs would be slashed to a universal 5% rate, with none imposed on food, drugs, books and other “humanitarian” imports.
Small, Medium, Large
Ever wonder why product quality often comes in threes? (Basic, Regular, Premium. Bronze, Silver, Gold. Third, Second, and First Class etc.) When there are only two product qualities consumers are torn between two “extremes,” either of which makes them uneasy. Add a third quality and you create a happy medium. Simonson and Tversky (the cite is in the link below) report that when offered a low-end and a midrange microwave oven consumers chose the midrange 45% of the time. But when offered the same two ovens plus a high-end oven they significantly increased their purchases of the midrange. Even when few consumers buy the premium product the mere fact that it is offered can increase sales of the midrange product. Hal Varian calls this Goldilocks pricing (see discussion beginning at p.10).
OPEC, Iraq and Taxes
OPEC unexpectedly announced a cutback in production today. I wonder if the administration tacitly encouraged the cutback? At the very least, I suspect that they are secretly pleased. The increase in oil prices will mean greater funds for rebuilding Iraq – funds that the administration is having difficulty getting Congress to approve. Unlike a tax, the increase in oil prices does not require Congressional approval.
An even shorter introduction to intelligence
I recommend Ian Deary’s Intelligence: A Very Short Introduction. I am going to buy more books in this Oxford series. We at Marginal Revolution aim to provide value for attention, however, so here is an even shorter introduction.
1) Almost all measures of intelligence correlate with one another and quite a few measures of different aspects of intelligence are highly correlated. It is thus meaningful to talk about general intelligence, g. Howard Gardner’s work on “multiple intelligences” is on the fringes of scientific psychology.
2) Intelligence rankings are stable with age but fluid intelligence, meaning something like pure reasoning power, as opposed to crystalized intelligence peaks in the 20-30s and then declines with age.
3) Connecting IQ scores to brain morphology and activity is still in its infancy but there are modest, but well established, correlations between brain size and IQ (psychometric intelligence) and measures of reaction time (which plausibly measure brain speed) and IQ.
4) Intelligence is in large part genetic and that which is due to environment is primarily not due to the obvious possibilities such as family upbringing.
5) Intelligence matters for work performance and education. IQ is a better forecaster of work performance than just about any other test short of a trial run on the actual work to be performed.
6) IQ has been rising, the Flynn effect. No one knows why.
7) None of the above points are controversial among intelligence researchers.
Aside from Dreary’s book another useful introduction to intelligence research is the authoritative consensus report from the American Psychological Assocation, Intelligence: Knowns and Unknowns, summary here.
Why executives should be paid more than they deserve
If workers are paid their marginal product its difficult to understand why some CEOs are paid such high wages. But think of the CEO’s wage as a prize. Valuable prizes make everyone else work hard in order to become the CEO. With this model, the tournament model (JSTOR) of Lazear and Rosen, it may even make sense that CEO wages go up as profits go down. After all, shouldn’t prizes be set highest when motivation is most required? No doubt, some will see this argument as more proof that economists are just shills for the capitalist class.
Never miss a day of the revolution!
You can now see all the posts from a specific day by clicking on that day in the calendar. Also, did you know that an easy way to see all the posts in a category is to click on the category link at the bottom of each post? The opening page of Marginal Revolution contains the last 7 days of posts. Google search and links to monthly and weekly archives are available in the left hand column.
Google the Revolution!
By popular demand we have added a search box to the left sidebar. Should, for example, you want to find all posts by your favorite Revolutionary, just search for Tabarrok! Now that we are getting lots of hits and a fair number of links, Google has a pretty good archive of MR. But you can help by putting a link to www.MarginalRevolution.com on your homepage – this will further draw the attention of the great Google spider! Thanks. You can, of course, also find content by category and date in the Archives.
NY Times Wrong on Iraqi Gun Ownership
In March, Neil MacFarquhar of the New York Times asserted that guns were easy and legal to obtain in Saddam Hussein’s Iraq. The NRA has long argued that guns are a bulwark against the police state so Slate’s Timothy Noah challenged the NRA to explain “how Iraq got to be, and remains, one of the world’s most repressive police states when just about everyone is packing heat.” Noah later rejected reader explanations of this apparent paradox, including the possibility that MacFarquhar was wrong, and “reluctantly” concluded that private gun ownership is not a bulwark against a police state.
Today, however, John Tierney of the New York Times reports that “Mr. Hussein, never one to tolerate competition, forbade private citizens to carry weapons, effectively outlawing the security industry.”
Clearly, the New York Times is wrong. But where does the truth lie?
Tortured Justice
I am angry. The lawyers will get $19 million, the plaintiffs have no damages and I have been involved in an abuse of justice. I received notice yesterday that I was a plaintiff in a class action lawsuit against Bridgestone/Firestone that is about to be settled. I was never injured by Firestone but that’s ok because injured people have their own lawsuit the one I am involved in is for people who were not injured. The lawsuit reads “Plaintiff Does Not Seek To Represent And This Litigation Does Not Involve Any Person Who Alleges That He or She Suffered Any Personal Injury or Property Damage Because Of A Failure Of One Of The Tires” (capitalization in original.) Bear in mind that Firestone has already replaced all four of my tires with a competitor’s brand for free and similarly for many of the other plaintiffs.
The settlement is simple, Firestone agrees to sell and advertise tires (as part of a safety awareness program). The plaintiffs get nothing except for the named plaintiff who gets $2500. The lawyers? “Plaintiff intends to seek, and Firestone will not object to, an award of $19 million for all fees, costs and and expenses…” Plantiff’s attorney Zona Jones says “The outcome is one that we believe is extremely positive.” Yeah, right.
Cases like this should be thrown out by judges. But that is not going to happen because the case was brought in Texas where judges are selected by partisan elections. My research (summary here) shows that awards against out-of-state defendants are much higher in states that select their judges using partisan elections compared to other states. I have little doubt that the plaintiff’s lawyers (or their firm) are big contributors to Judge Donald Floyd’s reelection campaign (this is neither illegal nor uncommon in Texas).
I do not blame Firestone for settling, they comment that they have done so only “to avoid further expense, burden, distraction, and inconvenience of litigation.” But I am outraged that against my will I have been made a party to extortion and am saddened that Firestone believes, probably correctly, that they risk more than 19 million dollars by letting this trashy lawsuit go to court.