Category: Economics

A hotel in Germany has started charging its guests by the pound for an overnight stay, according to a Local 6 News report.

The hotel owner in the town of Norden, Juergen Heckrodt, said he was continually getting overweight guests, so he decided to make them step on the scales to determine room costs.

The hotel requires guests to pay half a euro or 61 cents per 2.2 pounds, according to a Reuters report.The report said that the move appears to be working with returning guests. "Much to (Heckrodt’s) surprise, the guests were thinner on their next visit," according to the report.  Heckrodt said he hopes his initiative will inspire others to lose weight too and live longer.  The hotel does not turn anyone away who refuses to step on the scales.  If they do refuse, they are charged a regular room rate — without a discount.

Here is the link, and thanks to Bill Griffiths for the pointer.  This makes sense as price discrimination if either heavier people are wealthier, or less able to choose across hotels.

This is incomplete (it doesn’t list my entry, for instance), but it makes for fun browsing.  Note that Bryan Caplan still makes the cut, despite a debate over whether he is Wikipedia-worthy.  He is a "notable," most of all in my eyes: "It seems to me that the fact that someone would bother to try to delete me is notable per se."

The United Nation’s Security Council has 5 permanent members and 10 non-permanent members, the latter are elected from regional groups and serve two year terms.  Yesterday Eric Werker presented a fun paper at GMU showing that US foreign aid increases dramatically to countries elected to the Security Council.

    The result isn’t that surprising but Werker did a good job of ruling out explanations other than bribery.  Foreign aid, for example, increases just as a country joins the council and drops just at it leaves.  Foreign aid also increases especially dramatically in important years, as measured by the number of New York Times stories involving the council.  Perhaps most interestingly, although US foreign aid is larger for democracies than for autocracies on average, autocracies get bigger increases in aid when they join the council.  The result makes a lot of sense.  Autocracts can sell their votes more easily than democratically elected leaders (no domestic constituencies to worry about) and transactions costs are lower – the aid goes directly to the vote seller.

Virginia Postrel has the scoop, and yes I am still at my old job as well, including the blogging part.

John List again looks to field data:

This study examines data drawn from the game show Friend or Foe?, which is similar to the classic prisoner’s dilemma tale: partnerships are endogenously determined, players work together to earn money, after which, they play a one-shot prisoner’s dilemma game over large stakes: varying from $200 to (potentially) more than $22,000. If one were to conduct such an experiment in the laboratory, the cost to gather the data would be well over $350,000. The data reveal several interesting insights; perhaps most provocatively, they suggest that even though the game is played in front of an audience of millions of viewers, there is some evidence consistent with a model of discrimination. The observed patterns of social discrimination are unanticipated, however. For example, there is evidence consistent with the notion that certain populations have a general “distaste” for older participants.

More specifically, players are less likely to select old people for their teams, even taking into account differences in expected returns from the differing strategies of the elderly.  In general, whites, old people, and women cooperate more in the game.  Mixed racial teams cooperate more than do all-white teams.  Perhaps most surprisingly, even with these very high stakes, players cooperate far more than economic theory would predict.  They cooperate about as much as they do in the games with lower stakes.

Here is the paper.  Here is John’s home page.  Here is my previous post on John.

Here are the gory details.  Best excerpt:

"It takes a better economist than me to understand how reducing contributions by that much is going to protect benefits and put the system on a sounder footing," said Jeremy I. Bulow, an economist at Stanford University.

That’s actually funny, since there are no demonstrably better economists than Jeremy Bulow.

…the Dubai Financial Market Index shed 81.18 points or 11.7 percent to
close at 611.86 points. It has so far dropped 40 percent from its
end-2005 close and down 57 percent from its all-time high.

Is Ski Dubai like buying corporate naming rights to a sports arena, namely a sign of trouble?  Here is the link, check out the blog, and thanks to jck for the pointer.  Try this post on whether psychologists are better market speculators than economists.

Last week in The New York Times (TimesSelect), Joseph Nocera quoted Robin Hanson as saying private businesses had not made a breakthrough with the use of idea futures.  It seems natural to let your employees bet on future business conditions, the success of product lines, or broader questions of corporate strategy.  Microsoft and Google and a few other companies have played with the idea, but it does not (yet?) seem to be taking off.  Why not?

1. Prediction markets threaten the hierarchical control of top managers.  It would become too obvious that most managers are idiots, unable to predict the future.

2. Prediction markets make a big chunk of the bettors into "losers."  Yet within a company morale is all-important.  Businesses proceed by soliciting feedback, and by reshaping their plans to pretend that everyone is on board and has an ego stake in the final outcome.  Prediction markets make this coordination more difficult.  Once people make bets, they start rooting for their bet to win and for the other bet to lose.  They move away from maximizing the value of the firm and develop an oppositional mentality vis-a-vis other employees.  Furthermore it is disruptive to have a running tally on who are the winners and losers each day.

3. No matter what they pretend, businesses are not much interested in forecasting many future variables.  Successful businesses find product markets they can control for long periods of time.  They do a few things really well, and let a surprisingly large number of tasks slide.

4. We already have implicit betting markets in the form of resource prices.  When the information contained in those prices is sufficiently important, institutions will be organized in terms of "markets," rather than "firms."  Or firms can look at resource prices in outside markets for the information they need.

5. Most employees have no rational basis on which to bet.  If someone knows the truth, but is otherwise locked out from credibly signaling that knowledge to management, something is wrong with the organization of the company.  The small prizes from corporate prediction markets won’t be enough to elicit that knowledge from him in any case.

6. The corporate beast is far more constrained than most outsiders imagine.  Interest groups must be courted, coordinated, and sometimes fought every step of the way.  When it comes to choice, there are fewer degrees of freedom than one might think.  The real question is not what to do, but rather having the will and effectiveness to do it.  A bit like international free trade, no?  Prediction markets don’t help much in this regard.

7. When reward systems are created, employees view them as a means to distribute further privileges to insiders and favorites.  Prediction markets would be viewed the same way and in fact this might be true.  Who else is going to win all those bets?  Do corporations really need more insider favoritism?

Your thoughts?  Here are five open questions about prediction markets.

Who better to ask than Rajan and Zingales:

Why is underdevelopment so persistent? One explanation is that poor countries do not have institutions that can support growth. Because institutions (both good and bad) are persistent, underdevelopment is persistent. An alternative view is that underdevelopment comes from poor education. Neither explanation is fully satisfactory, the first because it does not explain why poor economic institutions persist even in fairly democratic but poor societies, and the second because it does not explain why poor education is so persistent. This paper tries to reconcile these two views by arguing that the underlying cause of underdevelopment is the initial distribution of factor endowments. Under certain circumstances, this leads to self-interested constituencies that, in equilibrium, perpetuate the status quo. In other words, poor education policy might well be the proximate cause of underdevelopment, but the deeper (and more long lasting cause) are the initial conditions (like the initial distribution of education) that determine political constituencies, their power, and their incentives. Though the initial conditions may well be a legacy of the colonial past, and may well create a perverse political equilibrium of stagnation, persistence does not require the presence of coercive political institutions. We present some suggestive empirical evidence. On the one hand, such an analysis offers hope that the destiny of societies is not preordained by the institutions they inherited through historical accident. On the other hand, it suggests we need to understand better how to alter factor endowments when societies may not have the internal will to do so.

In other words, for a long time the Mexican government didn’t want to educate rural campesinos for fear they would capture a greater share of the rents.  Low human capital, initial monopolies, and overly strong interest groups create an intersecting triple whammy to oppose the sacrifices necessary for development.  There is much of interest in the theory, including a discussion of when democracy is superior to dictatorship.  Here is the paper.

Michael Kinsley helps Alan Greenspan with his memoirs.

Although developments in human biology are always–and, in the view
of many experts, perhaps not un-including myself, quite
properly–subject to a variety of interpretations, the evidence does
tend to suggest, with only a limited amount of ambiguity, that I was
born…

There are fewer taxicabs in New York City today than in 1937.  Entry restrictions have meant too few taxis, too many private cars, and gridlock so bad that in downtown midtown Manhattan, pedicabs, basically tricycle-rickshaws, are faster than cars.  Is it any wonder, therefore, that the city is considering a crackdown?    

Thanks to Roger Congleton for the pointer.

"Minimum wage, bah humbug.  It is easy to defend.  Tyrone snorts at you.

First let us clear out some garbage.  The minimum wage should not be $50 an hour, and simply citing this possibility does not serve as an effective reductio.  And yes racist South African labor unions supported minimum wages, but wouldn’t you expect them, vile as they may have been, to support higher wages in any case?

We know the empirical evidence on minimum wages is mixed.  I am familiar with the Card-Krueger smackdowns but at the end of the day you have to work hard to get a big effect on employment.  Most importantly, all of these studies miss the longer-run effects that make a legally binding minimum wage such a good idea.

Don’t obsess over static neoclassical economics, where you start with a firm, a competitive market, and a set of marginal products already in place.  Think dynamic and look at the longer-run.  If you ban jobs beneath some hourly wage, you will end up with more jobs above that wage.  Ex ante, companies can set up their production to mesh with high-wage rather than low-wage jobs.  Surely we should prefer an economy with higher marginal products, higher wages, and higher median income.  Yes this redistributes a bit of wealth from capital but what an efficient way to do so.  And we all know that long-run dynamic gains tend to swamp one-time static losses.

Don’t expect to pick up these effects in any study with a short time horizon.

Furthermore there is more slack in the system than many economic models would indicate.  As a young’un, I worked in a supermarket.  When they raised the legal minimum wage, they raised my wage as well.  I was happy.  No one fired me.

Minimum wages probably lower the net amount of government intervention in an economy.  Lower minimum wages would mean higher welfare payments to make up the difference.  Ever heard of EITC?  In reality, minimum wages and EITC work together to keep the poor at decent standards of living.  More importantly, they keep poor workers in the private sector rather than letting them become wards of the state.  Try living on the minimum wage (much less beneath it), and without the safety net of your parents, if you don’t get my point.

Perhaps you think the minimum wage is an excessively blunt policy instrument, given that many near-minimum jobs are held by upper middle class teenagers.  Fair enough, but this also means that the minimum wage doesn’t put many of those people out of work.  We can go back to focusing on the net effects on the poor.

Tyler, what is really your problem with the minimum wage?  Free market economists love to bash it because they can posture as friends of the poor.  They can pretend that basic economics has great relevance.  They can claim to know something useful, rather than facing the fact that opposition to big government really means opposition to massive income transfers.  Since the American public is not willing to go this route, free market economists have to focus their yapping on the minimum wage and the (actually quite small) benefits of free trade.

Tyler, don’t you agree?  Tyrone signs off."

There he goes again.  As a child, he would never even sit straight at the dinner table.  Readers, if you now wish to refresh yourself, try this, or perhaps even this.  And maybe someone over at CrookedTimber is up for Opposite Day, but on some other topic…?

Referring to my post on drought insurance and the coming new financial order, Daniel Strauss Vasques alerts me to the fact that Argentina has recently issued some GDP-linked securities.

The payout to the Argentinian securities is complex it occurs only if Actual GDP exceeds "Base-Case GDP" and the growth rate of Actual GDP exceeds the growth rate of Base Case GDP.  Base-Case GDP is just a particular projection of GDP which is fixed in advance.  If these conditions are met then 5% of the difference between Actual and Base-Case GDP, called Excess GDP, is paid to the security holders in proportion to their holdings.  Total payments are also subject to a cap.  (Here is a very long PDF prospectus if you want further information).

The Argentinian securities are a good beginning but they are unnecessarily complex.  It would be much better to establish a market in which anyone could buy or sell a simple security based on GDP, e.g. every unit of a US GDP Share would pay out 1 trillionth of US GDP. 

Aside from allowing greater national and international risk-bearing, GDP Shares defined in this simple way would be very useful for decision markets.  If GDP Shares started to decline as the prospects for a Democrat/Republican victory increased, for example, we would have ample grounds for rethinking our decision.  Ultimately, we might use these markets to replace politics.

Comments are open.