Category: Economics

Book rage, anyone? As the Canadian dollar hit the $1.10 mark earlier
this week, booksellers and publishers began to circulate stories of
customers going beyond simply venting their dismay at hapless clerks
and turning books into projectiles, sometimes to the point of drawing
blood.

If you live in Bangalore or Singapore, you may not know that the cover of a North American book typically has a price posted in U.S. dollars and a higher price posted in Canadian dollars.  The Canadian dollar used to be worth much less yet now it is worth more and so Canadian consumers feel ripped off.  Could we minimize this problem by also posting the price of the book in Switzerland or New Zealand, two countries with notoriously high book prices?  Or do Canadians care most about their price treatment relative to Americans, or simply their price treatment relative to the greatest comparative outrage elsewhere, rather than their relative treatment compared to the world as a whole?

Here is the link and story.  Along related lines, I found Sarah Maxwell’s The Price is Wrong:  Understanding What Makes a Price Seem Fair and the True Cost of Unfair Pricing to be a stimulating collection of anecdotes on this issue.  Here is my previous post on the iPhone and price resentment.

I have a very different approach to compensation. I think that the
key is to change compensation schemes frequently. The reason is that
any scheme can be gamed, and the longer you wait to change any given
scheme, the more effectively the participants will have gamed it. That
is one reason I think that "Pay for Performance," the newest miracle
cure for health care costs, will fail miserably. The doctors will be
able to run circles around the bureaucrats. In the U.K., they already
have–all of a sudden, 91 percent of doctors were receiving bonuses for
being above average.

I think that the more Washington tries to regulate CEO pay, the more
it will create a disconnect between pay and performance. Regulation
will inhibit companies from frequently changing their incentive
systems, and that will give CEO’s more time to game them.

Here is the full post, which also covers Tim Harford’s forthcoming The Logic of Life, which you’ll hear more about in due time (it carries a blurb and recommendation from yours truly).

Here, by Menzie Chinn.

And here you can read Bob Solow on Greg Clark for $3.  Here are Solow’s tips for time management, interesting but obviously not written by a member of the email generation.

Here’s an update on the forthcoming Malcolm Gladwell book.

As usual James Surowiecki has an excellent piece.  Excerpt:

Fund managers get bonuses at the end of each year, and they keep those performance fees even if the fund eventually goes south. So if a billion-dollar hedge fund rises twenty per cent in its first year and falls twenty per cent in its second, its investors will have lost money, while the fund’s manager might earn forty million dollars in performance fees. Hedge funds do have a rule that’s meant to deal with this problem: when a fund loses money, it yields no performance bonus until investors get back to even. The catch is that nothing prevents a hedge-fund manager from simply shutting down after a bad year and walking away with the fees he’s already accrued…Because fund managers reap large rewards on the upside without a correspondingly punitive downside, they have a much greater incentive to take big risks than ordinary investors do.

Managers, or for that matter ordinary investors, may not under normal conditions have enough incentives to take risk.  Remember the Kenneth Arrow argument that not all private financial risks amount to equivalent social risks?  Who cares if you lose money, provided that no real resources have been destroyed?  Yet a risk that pays off, say with a new product, does not in general return the entire social value of that product to the entrepreneur.

With hedge funds, are we now above or below the optimal amount of risk?  The answer of course is "we are taking the wrong kinds of risk."  We are finding more and more ways to (implicitly) write naked puts in highly leveraged forms.  Yes this has brought us new products but it all seems to be new mortgage products.  Could those products possibly justify the financial carnage we have seen?  That is the critical question but I suspect the answer is "no," that in this sphere we stepped beyond the bound of optimal risk-taking.

The junk bond revolution of the 1980s involved some "excess" risk-taking, but I believe those risks were more closely connected to the real economy, and more likely to bring real economy benefits, than the recent spate of mortgage-related risks. 

Greying Japan has a new weapon to scare people into saving for their retirement — an exploding piggy bank.

The "Savings Bomb," which goes on sale in Japan next week, "explodes" and scatters coins if users fail to save for a long time, toy manufacturer TOMY Co Ltd said Thursday.

The battery-powered toy — designed as a cartoon-style, ball-shaped black bomb with a skull and crossbones logo — lights up, makes a noise, shakes violently and scatters coins if it is not topped up for a long time.

"Users must pick up and collect the scattered coins and reflect on their laziness," the Japanese company said.

Here is the full story, and thanks to William Griffiths for the pointer.  Of course if you think about the third derivative long enough, you will realize this might just cause people to spend their money, not save it.

He writes in the FT:

…technology is bound to deliver a biofuel that will be competitive
with fossil energy at something like current prices. It probably
already has. Brazil has been exporting ethanol to the US at an average
delivery price of $1.45 for an amount with the energy equivalence of a
gallon of petrol. It is doing so profitably and in increasing amounts,
in spite of a 54 cents a gallon tariff to protect American maize-based
ethanol producers. Many countries are following suit.

But
ethanol is an inconvenient chemical compound that is corrosive and
soluble in water, thus limiting its immediate market to that of a
gasoline additive. However, this is just the Betamax phase of the
industry. There is plenty of private venture capital money being poured
into finding more efficient ways of extracting energy from biomass and
delivering it to transport and power systems. Over time, the technology
will also become more flexible, allowing more crops to be used as
feedstock, not just the current choice of sugarcane, maize and palm
oil…the world is full of under-utilised land that can grow the biomass that the new technology will require.

It shocked me to read this, though not for any good cognitive reason.  Perhaps I too quickly assume that the trendy will not pan out.  My not well informed mental model has been that our energy future lies with (relatively) clean coal, not so clean coal, nuclear, oil shale, and tar sands, all of which can in fact produce lots of power. 

David Pogue (via Kottke) asks:

Why doesn’t someone start a cellphone company that bills you only for
what you use? That model works O.K. for the electricity, gas and water
companies — and people would beat a path to its door.

Of course many companies will charge you by the minute.  Overseas, per minute plans are more common yet.  The puzzle I think is why the standard American plan is per month, with perhaps a non-convex minutes cap, rather than per minute.

The most likely answer combines price discrimination with consumer misjudgment.  If the company puts a very high marginal per minute price right at the cap, some consumers will, in self-deceiving fashion, think they are getting a good deal but then chat themselves into near-bankruptcy.  For the other consumers, you are forcing them to buy minutes as part of a bundle.  It is well know this can be an efficient means of price discrimination across high-value and low-value demanders; see my earlier post on cable bundling for a full explanation of the economics.

Why doesn’t competition break down such schemes?  First, cell phone competition has become more intense only with number portability in the last few years; we can expect pricing schemes to continue to evolve.  Second, the cost structure of the company may have more to do with marketing than with the cost of supplying extra miniutes.  So "marginal cost pricing," or the nearest approximation thereof, may involve "per customer" charges (a fixed monthly fee) rather than "per minute" charges. 

Of course they’ll let you opt out of all of this if you pay a high enough per minute charge, thereby reimbursing them for the fixed cost they paid upfront to recruit you.  That all said, if you go to Western Union and buy one of those cards with minutes to Sierra Leone, it seems that true marginal cost pricing reigns, subject of course to some probability of a fraudulent or difficult-to-use card.

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Here is the link, and thanks to Jared Hansen for the pointer.

Charge 80% per year on a loan in the U.S. and you’re called a usurer.  Charge 80% on a loan in Latin America or Africa and you can be a poverty-alleviation charity.

That is Dean Karlan and Jonathan Zinman, in today’s WSJ, "In Defense of Usury," p.A18.  Karlan and Zinman discuss their study showing that micro-credit borrowers in South Africa are better off for receiving the money, even when they pay very high interest rates.

Gregor Smith of Queen’s University has discovered an amazing new relationship, Japan’s Phillips Curve Looks Like Japan.  John Palmer of EclectEcon believes that the result may be systematic as he has discovered that Canada’s Phillip’s Curve looks like Canada.

Obviously these people are crazy.  Smith and Palmer clearly do not understand Marshallian
macroeconomics – everyone knows that the Phillip’s Curve looks like this country.

A reform proposal from Kevin Hassett: "So let’s do something to reform Halloween. The first step would be for Halloween donors to give kids money instead of candy. Kids could then go to the supermarket the next day and binge on the candies they really like. That solution would get an A-plus in economics."

Linked here.  But alas, in-kind transfers are often more efficient than cash gifts, and that holds for public policy as well.  (Imagine giving "money to buy kidney dialysis," instead of "kidney dialysis," and see how many people fake kidney disease.)  The candy transfer insures that a) mostly young kids do the asking, and b) at some point everyone just stops and goes home.  I’ve long wanted to know how much movie attendance rises on Halloween evening, given that the real cost of going is suddenly and temporarily much lower.

Addendum: Here is a new paper on cash vs. in-kind transfers.

What a splendid title they chose for my NYT column on the economics of Blackwater.  To start:

…whatever the possible sins of the Blackwater firm, the overall problem
is not private contracting in itself; contractors do not set the tone
but rather reflect the sins and virtues of their customers, namely
their sponsoring governments.

…War is, among other things, an economic undertaking, so the profit motive in military affairs isn’t always bad or ignoble.   

And then:

Today, America no longer has a draft, its military bureaucracy can be
inflexible and the public wishes to be insulated from the direct impact
of war. Contractors are a symptom of government weakness, but are not
the problem itself. The first Persian Gulf War, which enjoyed greater
international support, was not reliant on contractors to nearly the
same degree.

Contractors can offer many efficiencies, but:

When things are going well and the “good guys” are in control, the
flexibility and experience of military contractors can make things go
even better. But when the environment is hostile and events are
spiraling out of control, the incentives of private contractors may
lead to many mistakes.

Note that a serious issue for Blackwater –
the allegations about needless deaths of innocent civilians – has also
been an issue for United States government forces from the beginning of
the conflict.

Most of all, contractors are appealing when a
victory is possible in relatively quick order. The potential
accountability problems won’t linger for long; conversely, few
contractors will look good when a conflict runs on for years.

As they say, read the whole thing; I discuss Alex’s research as well. 

Emily Oster tackles this question:

I generate new data on HIV incidence and prevalence in Africa based on inference from mortality rates. I use these data to relate economic activity (specifically, exports) to new HIV infections in Africa and argue there is a significant and large positive relationship between the two: a doubling of exports leads to as much as a quadrupling in new HIV infections. This relationship is consistent with a model of the epidemic in which truckers and other migrants have higher rates of risky behavior, and their numbers increase in periods with greater exports. I present evidence suggesting that the relationship between exports and HIV is causal and works, at least in part, through increased transit. The result has important policy implications, suggesting (for example) that there is significant value in prevention focused on these transit-oriented groups. I apply this result to study the case of Uganda, and argue that a decline in exports in the early 1990s in that country appears to explain between 30% and 60% of the decline in HIV infections. This suggests that the success of the Ugandan education campaign against HIV…has been overstated.

Since I used to believe Samuel Brittan when he argued that trade spreads sex, this result accords with my intuitions.

I thank Scott for the pointer.  There should be an algorithm informing me every time there is a new Emily Oster paper.  If Scott is indeed such an algorithm, I am pleased.  And of course I am that algorithm for you.

Ed Glaeser says no and offers very many reasons why.  His conclusion:

The best scenario would be for Buffalo to become a much smaller but
more vibrant community–shrinking to greatness, in effect.  Far better
that outcome than wasting yet more effort and resources on the foolish
project of restoring the City of Light’s past glory.

Does studying economics make the people of Buffalo happier?