Category: Economics

Assuming you start from a multi-dimensional global utility maximum, which Lancastrian characteristics — with non-trivial shadow prices — would you like more of in a corresponding unconstrained equilibrium?

Forget about money or time, which obviously we all want more of.  Which unbundlings do you desire? 

I, for one, would like to have more of Bryan.  But he is bundled with Fairfax.  I travel a great deal and he usually stays put.  I can’t get much more of him in my first best outcome.  But if he were suddenly eating kabobs with me in Hyderabad, if only for an hour, how fun that would be.  More generally, I would like to have a less wide circle of friends but my Wanderlust interferes.

I would like taste to be unbundled from calories.  I would like books to be smaller, lighter, and easier to carry, if that were a free lunch so to speak.  I would like fantasy novels to be bound by stricter rules.

What would you like to see unbundled?

Apparently there’s a simple reason why annual reports are hard to
read: managers, in many cases, are trying to hide something.

The study, Annual Report Readability, Earnings and Stock
Returns, found that the annual reports of underperforming
companies are harder to read than those of companies that are
performing well.

Feng Li, an assistant professor of accounting at the university,
measured annual report "readability" using a sample of more than
55,000 company reporting years. He examined syllables per word and
words per sentence in reports filed with the Securities and
Exchange Commission.

He used two readability measures.

First, the "Fog Index" indicated the number of years of formal
education a reader of average intelligence would need to read the
text once and understand it. Fog = (words per sentence + per cent
of complex words) x 0.4. Complex words were defined as words of
three syllables or more.

Second, the Kincaid Index rated the reports on a US primary
school level.

According to the study, annual reports of companies with lower
earnings were more difficult to read. Similarly, companies that had
volatile earnings were more likely to produce abstruse reports.

Here is the full story.  The bad companies might be obfuscating.  Alternatively, poor quality production might be correlated with poor quality writing.  Thanks to Natasha for the pointer.

Read the ongoing debate over at EconLog.  Bryan Caplan writes:

When I’ve asked economists "Do you hold less money when
interest rates rise?," they usually admit that they don’t. And we’re
trained to think we should! If we asked non-economists the same
question, I bet that most would simply be baffled.

I have much sympathy for this view as long as we are talking about currency.  But it is a trickier question for the broader monetary aggregates.  High measured nominal interest rates alter the real interest rates faced by some market participants.  We don’t all face the same rate of price inflation.  High nominal rates of interest, for this reason, proxy for a high variance of real interest rates (across individuals) and perhaps a more general greater future uncertainty as well.  I would not be surprised if these effects kept down the broader measures of money demand, albeit not the demand for currency through the mechanism of portfolio substitution. 

Let’s not forget the Litterman and Weiss result (Econometrica, 1983) that high nominal interest rates in a VAR model predict bad times ahead.  Who knows why, but they do.  So why can’t they predict money demand as well?

Sometimes a nominal interest rate is not just "a nominal interest rate," to turn Freud’s aphorism on its head.

Some husbands in western India are renting out their wives to other
men, cashing in on a shortage of single women available for marriage,
according to a news report Monday.

Atta Prajapati, a farm worker who lives in Gujarat state, leases out
his wife Laxmi to a wealthy landowner for $175 US a month, the Times of
India reported, citing unidentified police officials. A farm worker
earns a monthly minimum wage of around $22. Laxmi is expected to live
with the man, look after him and his house, and have sex with him, the
report said.

Here is the story.  Might we call this temporary polygamy?  For the pointer I thank Pablo Halkyard and also SunCraig.

My Open Letter on Immigration has been officially released by the Independent Institute.  It has now been signed by over 500 economists including 5 Nobel Laureates – Thomas Schelling (University of Maryland), Robert
Lucas (University of Chicago), Daniel McFadden (University of
California, Berkeley), Vernon Smith (George Mason University), and
James Heckman (University of Chicago).  Many other prominent economists are also signatories including Eugene Fama, Robert Pindyck, Jeffrey Perloff, Barry Eichengreen, and Steven Salop to name just a few of many.

My personal thanks to everyone who signed and all who helped to make this a big success.  Thanks!

Will Wilkinson offers a good summary of economic thought on the topic.  His early salvo:

The law of demand is very, very empirically adequate as it is…

Here is my previous post on the minimum wage.  Here is Tyrone on the minimum wage.

Addendum: Jane Galt (where is Jennifer?) adds commentary.

Or should I refer to availability heuristics?  Here is Daniel Gilbert’s MP3 on the topic.  To put it simply, lottery losers, despite their great numbers, rarely receive as much media publicity as the few winners.  Here is my previous post on Gilbert, or just check the right hand side of this blog for the Blogads entry which quotes me… 

Thanks to Boing Boing for the pointer.

Addendum: Here is Gilbert’s short essay, from his blog, on whether fatherhood makes men happy.  Happy Father’s Day to our eligible readers…

Think of a standard IS-LM picture. Does that match current reality?
Obviously not: the Fed doesn’t target the money supply, so holding M
constant is not a useful thought experiment, and actually confuses
students. In fact, since the Fed actually targets the Fed funds rate
rather than the money supply, you might think that the LM curve should
be replaced with a horizontal FF curve. This would seem to suggest no
crowding out at all.

But except in the very short run the
Fed doesn’t set the interest rate passively; instead, it tries to
stabilize output around potential. A reasonable way to represent a
Taylor rule or something like that in a simple diagram is to draw a vertical line, the BB curve (for Ben Bernanke). This gives us 100% crowding out.

And
I think that’s right. Except in liquidity-trap conditions or in the
very short run, before the Fed has a chance to catch up, fiscal policy
doesn’t change aggregate demand, only the mix. 
 
 
 

The source is Brad DeLong.

Here is the link, Becker joked only once, and Tim reports:

Becker wants a clear head for tennis that afternoon. He is 75 and looks
it, with fine white hair and translucent, heavily lined skin, but he
moves like a younger man. When I arrived at his home to take him up on
his offer of a lift to the restaurant, I could see his silhouette
coming down the stairs at a fair clip. He drives confidently. In the
summer, he moves his work to Cape Cod and often swims in the ocean.
Becker has always loved sport, but that, and his family, seem to be his
only distraction from work. "I don’t like small talk too much, so I
don’t try to get involved in that." It is clear from even a few minutes
conversation that what really motivates Becker is the world of ideas.

Drivers in three US cities will soon be able to earn a buck or two just
for vacating a parking space. SpotScout is a website that matches
people about to leave a parking spot with those looking for one. Using
a cellphone, drivers tell SpotScout when they will leave their parking
spot, where it is, and how much they will sell this information for.
The site, to be launched next month in New York, Boston and San
Francisco, matches this information with people looking for a space.

Here is the link; the pointer is from Daniel Akst.  If you don’t already know it, here is Dan’s article on how to best help other people.

Here is my New York Times column today.  The focus is on how we often make bad charitable decisions.  Excerpt:

…before we can improve our charity, we must first understand it. John A. List, an economist at the University of Chicago,
is studying fund-raising campaigns toward this end. Professor List,
combining his career as a researcher with a role as part-time
consultant, introduces variations into real world fund-raising
campaigns and studies the results. This reflects his core method of the
"field experiment," which he has applied to topics as diverse as
competition between the genders, how contestants cooperate on
television game shows and how markets work in baseball card trading.
Steven D. Levitt, co-author of "Freakonomics" and a colleague at the
University of Chicago, refers to Professor List as the young economist
most likely to win a Nobel Prize.

Here is another bit:

For purposes of contrast, Professor List and his team then increased
the attractiveness of the woman who asked for the money. The more
attractive women (a "one standard deviation increase in
attractiveness," in statistical terms) had as big a positive impact on
giving – in the range of 50 to 100 percent – as moving from the least
successful fund-raising method to the most successful.

Here is one recent ranking, courtesy of Newmark’s Door.  My view is simple.  The American Economic Review and Journal of Political Economy are the two most important journals.  The former will have more pieces with careful testing and design, but the latter has more conceptually important articles.  I find the JPE more enjoyable.  The Quarterly Journal of Economics has brilliant pieces which can tend toward the unsound or have imperfect execution.  Econometrica, while it remains a clear third or fourth in rank, is less important than it used to be, perhaps because pure theory has declined in influence.  For this same reason, the Rand Journal and Review of Economic Studies, while both still very good journals, have lost their previous luster.  Journal of Economic Theory mattered in the 1970s, but it has fallen off a cliff.  After that you have the top field journals, which of course vary by field.  Journal of Economic Perspectives and Journal of Economic Literature serve important functions, and are both fun and instructive to read, but they are rarely venues for presenting new ideas.  They report how new ideas have been interpreted and digested.

Science journals, especially Nature, are starting to become more important for economics.  My favorite field journal is the Journal of Law and Economics.  Journal of Finance is of very high quality, though finance is a world unto itself.  The relative returns to the top few journals have risen greatly in the last fifteen years; many more schools require publications in those journals for tenure than before.

Henry Manne says yes:

The implications of what we already know of this “wisdom of crowds”
approach to price formation, as against the traditional marginal
pricing/arbitrage approach, are apt to be startling. We should rethink
any current policies based on a view of pricing in which we exclude the
best-informed traders and discard the wisdom of the many. For instance,
we now have a new and more powerful argument than we had in the past
for legalizing most insider or informed trading.

Since such trading clearly makes the market process work more
efficiently, it aids capital allocation decisions and informs business
executives through market-price feedback of the best predictions about
the value of new plans. Furthermore, the Supreme Court’s “fraud on the
market” theory of civil liability under the federal securities laws and
Congress’s ideas of correct civil damage claims for insider trading no
longer have any intellectual merit. The same is true of any other part
of our securities laws implicitly based on the notion of the marginal
trader as a rational arbitrageur of price.

The new approach would suggest that it is undesirable to have laws
discouraging stock trading by anyone who has any knowledge relevant to
the valuation of a security.

Here is one summary; here is the (gated) WSJ piece.  I find it hard to believe that legalized insider trading would boost the level of equity prices in the United States; I would be willing to bet against that view.  Some new developments would be reflected in stock prices more quickly but, given that most marginal investment decisions are financed by a) retained earnings, and b) debt, I doubt if this would improve resource allocation very much.  Also keep in mind that another function of equity markets is to share risk and help people save for their retirement.  Even if it is only an issue of perception, legalized insider trading won’t serve either of those ends.

For the pointer, I am grateful to Chris F. Masse.

Earlier this spring…Burgess agreed to
indemnify England fan Paul Hucker for more than 1 million pounds
in case he suffers “mental trauma” resulting from the team’s
first-round games against Paraguay, Trinidad and Tobago, and
Sweden. The premium costs about $195 and is one of hundreds of
similar shelter-from-the-Sven policies his Essex-based firm has
established for England fans.

For about the same price, Burgess says he’s insured the
virginity of three women in Inverness, Scotland, who believe they
will immaculately conceive the second coming of Christ.         

“I have Scottish fans taking out mental-health policies
that pay for treatment if England wins the World Cup,” says
Burgess, who has also sold 30,000 policies to California
residents fearful of being abducted by aliens.

Here is the full story.  Thanks to John de Palma for the pointer.

I like to be early.  I don’t enjoy parties per se, but they are an opportunity to latch on to a very small number of interesting people and hear their thoughts.  Or just see what they look like.  The chance of succeeding in this endeavor is highest if you are there from the start or nearly so.

Why is early focal?  First, the host is early, by definition, and if the host (or hostess) is not interesting the party probably is in trouble.  Plus early arrival appears to be focal for most others who prefer small-number interactions.

The more clearly defined is your external public reputation, the less you need fear looking bad.  Some people, if they show up early, might be thought as "having nothing better to do."  Those who know me, or know of me, probably won’t think this, so I can appear when I please.  This post will make that all the easier.

Some people appear late so their arrival causes a scene.  The President of the United States is an extreme example of this phenomenon.  But I would not value such a scene, even in the unlikely event that I were capable of causing it.

I wonder how a person’s number of Google hits correlates with party time of arrival, of course controlling for total time spent at the party.