Category: Economics

Who knows, maybe I’ll try to get to them all.  Here’s the first:

What impact will algorithmic game theory have on economics?

I’d start by asking: will game theory pure and simple have (further) impact on economics?  And I’d say basically "no."  The common concepts and tricks of game theory are invaluable but we already have those and I don’t see any more coming down the pike.  Algorithmic game theory will address problems internal to game theory and within that context it will flourish.  Finding equilibria, and discriminating among multiple equilibria, are otherwise very difficult problems and AGT is a natural way to crack those nuts.  So AGT will have continued practical applications in computer science and problems of engineering.  But it won’t much affect how most economists think about the world or do their research.

As for NBA analysis, I’ll just say that a) Boston is still an odds-on favorite, b) No one ever really told us what happened to Andrew Bynum, and c) Even though Phoenix probably won’t make it, the Shaq trade was very clearly a good idea and all you doubters should offer up mea culpas.

At Bet2give, an online electronic prediction market, anyone can “bet”
real money on the outcome of these events but with a twist – the
“winnings” go to a charity of the person’s choice.

Here is the full article, and here is Bet2give.com.  One of the "problems" with prediction markets is that they are zero-sum investments and traders cannot on average hope to come out ahead.  So why trade?  If only people really "in the know" trade liquidity will be low.  If too many "betting for fun" fools trade, the prices don’t mean that much.  You might get the right mix of informed and uninformed but who knows?  So the idea of doing these in charitable form might make some sense.

What’s missing is a recognition of how mysterious the secret of
economic growth remains, despite all the energy that economists have
poured into solving it.

That’s James Surowiecki, reviewing Ha-Joon Chang’s Bad Samaritans and writing on free trade; the piece is interesting throughout.  The pointer is from Ben Casnocha.

David Cass, formerly an economist at the University of Pennsylvania, has passed away.  His contributions were notable:

He made singular
contributions to economic theory, including the introduction of the "Cass-Koopmans"
growth model, the discovery of the "Cass" criterion for Pareto efficiency in overlapping
generations models. With Karl Shell, he discovered the importance of extrinsic uncertainty (sunspots)
in economic dynamics.  His work with many
coauthors on incomplete financial markets was extremely influential.

The main idea of sunspots models is that when multiple equilibria are present, expectations can determine which equilibrium comes to pass.  This is a twist on rational expectations; under RE people expect the true model but Cass showed that what is the true model will depend on what people expect.  If I recall correctly, Cass also helped figure out when problems with infinities will render growth models incoherent or invalid.  Cass’s version of "high theory" is exactly what is out of fashion today but in the 1980s it was the rage.  I believe some of his work will return in importance.  Here is Cass on scholar.google.com.

Thanks to Chester Norman for the pointer.

"Do Funds-of-Funds Deserve Their Fees-on-Fees? "

The answer, of course, is yes.

The Mobi is Germany’s mobility bonus, funding that covers moving, relocation and retraining costs for unemployed Germans seeking work anywhere in the world.

Plagued by high unemployment due to the turmoil of
re-unification and rigid labour laws, Germany has been helping
its skilled and less-skilled jobless workers match up with
foreign employers searching for manpower.

The country has also been offering financial support to
cover moving and transportation costs for the hordes of
unemployed Germans in search of jobs across the European Union,
and even as far away as Australia and Canada.

The mobility bonus strikes me as a move of desperation. The Germans have created a bloated welfare state and now they are paying people to get off the welfare rolls and get out.  I wonder what Rawls would have said?

Even now, I see an opportunity for America:

Give me your tired, your poor,
Your huddled masses yearning to breathe free,
The wretched refuse of your teeming shore.
Send these, the homeless, tempest-tost to me,
I lift my lamp beside the golden door!

Only one country in the world has eliminated the shortage of transplant kidneys.  Only one country in the world has legalized financial payments to kidney donors.  That country is Iran.

In an important report, transplant surgeon nephrologist Benjamin Hippen argues that the Iranian system has saved thousands of lives and it should be used if not as model then to inform America’s efforts to eliminate its deadly shortage.

In the Iranian system organs are not bought and sold at the bazaar.  Instead a non-profit, volunteer-run Dialysis and Transplant Patients Association (DATPA) mediates between recipients and donors.  Recipients who cannot be assigned a kidney from a deceased donor and who cannot find a related living donor may apply to the DATPA.  The DATPA identifies a possible donor from a pool of people who have applied to the DATPA to be donors.  Donors are medically evaluated by transplant physicians, who have no connection to the DATPA, in just the same way as are non-financially compensated donors.

The government pays donors $1,200 plus limited health insurance coverage.  In addition, charitable organizations also provide renumeration to impoverished donors.  Thus demonstrating that Iran has something to teach the world about charity as well as about markets.  Will wonders never cease?  Recipients may also contribute to donor remuneration.

Hippen reports that the system works well, although better follow-up of donors would be an improvement.  He concludes with a call to legalize financial compensation in the United States.

Might there soon be a pill for men?  Standard theories of tax incidence (borrowing from the Coase theorem) say that if so, it shouldn’t much affect the quantity of intercourse.  Either the gains from trade are there or they are not.  The initial burden of taking the pill might change the distribution of those gains across the sexes, but at the end of the night the final result should still be the same.

Only not!

If you are a man who can credibly signal he is taking such a pill, it is like paying the woman for that final result you so desired.  The woman no longer has to perform the costly pill-taking action herself.  And indeed the typical equilibrium is in fact that the man does the paying.  But with the male pill you are paying her in a way that will flatter her, not insult her.  Nice, eh?

The funny thing is, I don’t expect the male pill to be popular at all.  The key question is to figure out which assumption of the basic model is not satisfied.

One possibility is that women will infer that a man taking the pill is essentially paying other women for sex and she values him less highly.

Another possibility has to do with credibility combined with lags.  If it’s focal for the woman to be taking the pill, the woman is in any case taking her pill in advance.  The male pill would have impact, at the margin, only on women who weren’t really planning on having sex at all.  And what kind of man spends his energy targeting such women?  Yes, some men indeed do target such women, but then we’re back to the male pill not really being so popular.

A third possibility is that women in any case want the man to use a condom, if only to prevent STDs.  If the man is on the pill, it is harder to make that request without insulting him and thus a woman doesn’t want her new paramour to be on the male pill.

Addendum: Megan McArdle adds a fourth explanation.

Geoffrey Heal writes:

Sterner and Persson…talk about the effect of changes in relative prices rather than consumption of produced and environmental goods, but the point is the same.  If we consume both produced goods and the services of the environment…then we can expect that with climate change environmental services will become scarce relative to produced goods and therefore their price will rise relative to that of produced goods.  Consequently, the present value of an increment of environmental services may be rising over time, and the consumption discount rate on environmental services may thus be negative…This could be the case even with a positive pure rate of time preference…

Here is the paper.  Here is an ungated version.  In the interests of fairness to both sides of this debate, I should note that while I believe the costs of climate change are higher than most people think, I also believe that the costs of fixing the problem are higher than people think.

…game theory predicts, and empirical studies of auctions bear out, that auctions will often be won by "weak" bidders, who know that they can be outbid and so bid more aggressively, while the "strong" bidders will hold out for a really great deal. You can find a technical discussion of this here. (Be warned: "Bidding Behavior in Asymmetric Auctions" is not for everyone, and I certainly won’t claim to have a handle on all the math.) But you can also see how this works intuitively if you just consider that with a lot at stake in getting it right in one shot, it’s the women who are confident that they are holding a strong hand who are likely to hold out and wait for the perfect prospect.

This is how you come to the Eligible-Bachelor Paradox, which is no longer so paradoxical. The pool of appealing men shrinks as many are married off and taken out of the game, leaving a disproportionate number of men who are notably imperfect (perhaps they are short, socially awkward, underemployed). And at the same time, you get a pool of women weighted toward the attractive, desirable "strong bidders."

Where have all the most appealing men gone? Married young, most of them–and sometimes to women whose most salient characteristic was not their beauty, or passion, or intellect, but their decisiveness.

Here is the full argument.  I don’t, however, quite buy this as the explanation of the phenomenon.  I view the real world auction as being held — at least if you wish — continuously rather than at discrete times.  So the "strong bidding women" can always cave and settle for a "lesser man" after an optimal amount of waiting, yet many don’t.  The distinction between period-by-period happiness and overall lifetime happiness also shapes the market.  As smart single women mature, their lives get better and better.  "Settling" becomes psychologically harder, even if it would make some of the "settlers" happy in the longer run.  So settling doesn’t happen; decisiveness become harder to conjure up at the same time that its long-run value is increasing, or in other words behavioral economics is very much at work here.

The introduction of automated cameras that ticket people who run a red light has given some cities a "clever" idea – let’s reduce the yellow-light period and increase ticket revenue.  Here’s one example from Dallas. 

An investigation by KDFW-TV, a local TV station, found that of the ten
cameras that issued the greatest number of tickets in the city, seven
were located at intersections where the yellow duration is shorter than
the bare minimum recommended by the Texas Department of Transportation
(TxDOT).

The city’s second highest revenue producing camera, for example, was
located at the intersection of Greenville Avenue and Mockingbird Lane.
It issued 9407 tickets worth $705,525 between January 1 and August 31,
2007. At the intersections on Greenville Avenue leading up to the
camera intersection, however, yellows are at least 3.5 or 4.0 seconds
in duration, but the ticket-producing intersection’s yellow stands at
just 3.15 seconds. That is 0.35 seconds shorter than TxDOT’s
recommended bare minimum.

More examples here and a hat tip to J-Walk Blog.

The most striking fact about the ongoing financial mayhem is that it is concentrated not in lightly regulated hedge funds but in more heavily regulated commercial and investment banks. It is banks that created subprime mortgage securities. It is banks that mispriced them. And it is banks that filled their own coffers with this toxic paper, losing hundreds of billions of dollars. A somewhat breathless March 31 Financial Times article proclaimed the closing of the worst month for hedge funds since the collapse of the infamous Long Term Capital Management in 1998. But the average fund tracked by the Chicago-based firm Hedge Fund Research declined by a mere 2.4 percent in March, bringing the cumulative fall for the first quarter of 2008 to 2.7 percent. By contrast, the bank-heavy financial services component of the S&P 500 fell 12.3 percent in the first quarter.

Hedge funds, for the most part, have weathered the storm remarkably well.

Here is more, interesting throughout and in my view largely correct.  See also related remarks by Megan McArdle.

• Keith Chen (of monkey sex fame) says cognitive dissonance may be an artifact of an unappreciated Monty Hall problem.

• Brad DeLong is an "optimist" on housing.  Even if wrong this puts him in good company.

• The economics of Barack Obama Senior is upsetting some people.

I’m a little surprised that the Bartels result is receiving so much attention because the result, in slightly different form, has long been known to political economists under the rubric of partisan business cycle theory.  In a nutshell, the theory of partisan business cycles says that Democrats care more about reducing unemployment, Republicans care more about reducing inflation.  Wage growth is set according to expected inflation in advance of an election.  Since which party will win the election is unknown wages growth is set according to a mean of the Democrat (high) and Republican (low) expected inflation rates.  If Democrats are elected they inflate and real wages fall creating a boom.  If Republicans are elected they reduce inflation and real wages rise creating a bust.  Notice that in PBC theory neither party creates a boom or bust it’s uncertainty which drives the result – if the winning party were known there would be neither boom nor bust.

Ok, there’s plenty to question about the theory but let’s look at the data.

Notice that in the second year of just about every Democratic Presidency there is a boom.  Interestingly, the boom is biggest for Truman whose reelection was highly uncertain (remember Dewey wins!) thus expected inflation would have been low and the boom big.  Similarly the boom is smallest (relative to the surrounding years) for Clinton II a relatively certain reelection.

Now look at Republicans in just about every second year of a Republican Presidency there is a bust.  The one major exception being Reagan II where uncertainty about the outcome was low.

It’s pretty clear that this result can explain Bartels’s result which is exactly Tyler’s point in his post.   It’s equally clear that when we consider Presidents there aren’t many data points.  (PBC does appear to hold somewhat in other countries).

Notice that the reason for the result, according to PBC, is sticky wages and the business cycle and not some nefarious story about taxes, oligarchies and political conspiracies.