Category: Economics

Jeff Miron has a new blog.  Miron is the author of Drug War Crimes: The Consequences of Prohibition, a superb economic analysis of the war on drugs (I was the editor).  He is also known for his work on seasonal business cycles (see also here for Tyler’s take).  The new blog, based in part on a course Jeff is teaching at Harvard has three themes.

The
first is that consequential libertarianism is consistent in its
approach to the issues. Modern liberalism and conservatism are not.

The
second theme is that both liberals and conservatives advocate massive
amounts of government intervention. The two perspectives disagree about
precise policy choices, but overall they are far more similar than
different. The libertarian perspective, however, is truly distinct from
either mainstream view.

The third theme is that most economic
and social problems are best addressed by eliminating the government
interventions that caused or exacerbated the problem in the first
place. Creating even more government is never a sensible approach.

Welcome to the blogosphere Jeff!

Excellent article, the focus is urban economics.  Best sentence: "…he notes that cars per capita in 1990 is among the best indicators of how well a city has fared over the past 15 years."

From the same NYT magazine issue, here is Levitt and Dubner on the poverty and decline of real estate agents.  See also Alex’s previous post, Real Estate Rent-Seeking.

Five hundred and forty-eight graduating students from 11 universities were categorised as maximisers or satisficers based on their answers to questions like “When I am in the car listening to the radio, I often check other stations to see if something better is playing, even if I am relatively satisfied with what I’m listening to”.

When questioned again the following summer, the maximisers had found jobs that paid 20 per cent more on average than the satisficers’ jobs, but they were less satisfied with the outcome of their job search, and were more pessimistic, stressed, tired, anxious, worried, overwhelmed and depressed.

“We suggest that maximisers may be less satisfied than satisficers and experience greater negative affect with the jobs they obtain because their pursuit of the elusive ‘best’ induces them to consider a large number of possibilities, thereby increasing their potential for regret or anticipated regret, engendering unrealistically high expectations”, the researchers said. Indeed, the researchers found that maximisers were more likely to report fantasising about jobs they hadn’t applied for and wishing they had pursued even more jobs than they did.

Here is the link, and by now you know the usual caveats for such research.  Number one is whether the survey evidence measures true commitment to maximization, or whether it simply picks up grumps who are fussy and determined to portray a fussy image to the world.  Number two is whether they properly adjust for IQ, which may be causing both superior results and greater returns to search behavior.

From the Richmond Fed, here it is, on the path of my career, how macro has changed, avian flu, blogging, the arts, and of course cuisine, among other topics.  Excerpt:

My prediction is that, in general, welfare states will increase in size in most places around the world.  We can expect most areas of the world to become wealthier because of globalization as well as other reasons.  And if you look at countries that are wealthy, they tend to have very generous welfare states.  Also, I believe that the human desire for security is extremely strong, even when it is not efficient or rational.  So as long as we experience economic growth, I think we can expect welfare states to grow.

This article is a good introduction.  Beneath the fold you will find an excerpt with an interesting example of the power of photographs…

Scott Cunningham directs our attention to "The Piracy Paradox," a new law and economics paper on the economics of fashion.  The authors argue that the fashion sector has more innovation because of its near-absence of copyright protection.  Here is some brief background on the issue. 

Fashion is a status good.  You wear a new design if some other people do (it must be focal as an object of status), but not if too many other people do.  You want some degree of exclusivity to your wardrobe.  So let’s say a new design comes out.  There will be some early adopters, but then a rapid series of rip-offs from other companies.  Once the rip-offs come, companies invest in making further designs.  Fashion is ephemeral and the rip-offs spur the next round of innovation.  (BTW, here is an economic model of innovation in the fashion sector, and here are some common-sense critiques.  Here is a piece on the ethics of fashion copying.)

Ex ante, the companies invest in production capacity.  They don’t know if they will be copied or copiers, but the costs and benefits wash to keep normal rates of return.  There is more to the argument but read the paper if you are interested.  By the way, the authors claim that European fashion industries receive much more copyright protection, but do not seem to be more efficient. 

Micro question: For this model to work, what underlying assumptions are needed about the costs of design relative to the dollar flow of fashion demand?  A low ratio of fixed to marginal costs?  A lingering cache from having been the first with a new style?  Here is one unconvincing attempt to answer the question; do tackle this in the comments if you have further ideas.

The authors list a few other areas where copyright protection is weak or non-existent: food recipes, furniture design, tattoos (until recently), trendy hairstyles, and perfume scents.  I would add to the list calligraphy, topiaries (I love that word), and chess games.  The point is not that these can serve as models for the music or movie industries but rather to figure out how they differ and why the absence of IP protection has led to (apparently) acceptable results.

Here is the legal reasoning why fashion is not well-protected.

Kathleen Fasanella, one of my favorite MR readers, directs our attention to this IP-related fashion blog.

The new HBO series Big Love presents a polygamous family, raising the obvious questions.  Here is Ted Bergstrom on the economics of polygamy.  Here is Tim Harford on polygamy.  Excerpt:

It’s hardly surprising that in most polygynous societies, the bride’s
family gets large payments in exchange for her hand in marriage. If
polygyny combined with women’s rights, I bet we’d see more promises to
wash the dishes. Not everybody would have to share a husband, but I can
think of some who might prefer half of Orlando Bloom to all of Tim
Harford–including my wife.

In my bones I am a square who believes this arrangement cannot be best.  Economists might question how polygamy makes women worse off, since they can always decline the arrangement.  You might try a story about how the family, not the woman, captures the dowry payment and uses it to help their sons buy more wives (see Bergstrom, noting also that the very presence of polygamy shifts the outcome of the bargaining game with the family).  Or you might try a story about sexually frustrated males who are led to revolt, thus destroying social order.

How about the trade-off between quality and quantity of children?  A genetically talented father with many wives will likely maximize the quantity of children rather than their quality.  This has a long-run negative externality, especially if you believe in the Lucas-Uzawa models of economic growth, or some approximation thereof.  You would rather be in a society with fewer but more talented people.  Switzerland rather than India.  The loser is not the wives but rather the next generation of children.  A piece in the February JPE also notes that the children may substitute for savings and thus polygamy can stunt capital formation; I take this as another version of the same argument.

The bottom line?  We should encourage family structures that spur human capital formation.  Polygamy does not do the trick.  Comments are open…

Would you rather pay $10 and have free shipping or pay $5 and pay $6 for shipping?  Answer: you prefer the latter.  Well, at least if you are like most bidders on eBay. 

Morgan and co-author Tanjim Hossain, an assistant professor at Hong
Kong University of Science and Technology, held 80 auctions of new
music CDs and Xbox video games to test how consumers respond to
different price schemes. In the eBay study, they varied the opening bid
price and shipping charges on identical CDs, ranging from Britney
Spears to Nirvana, and video games, including Halo and NBA 2K2.

…A
perfectly informed and fully rational consumer will merely add together
the two parts of a price to obtain the total out-of-pocket price for an
item and then decide whether to buy and how much to bid based on this
total price.

But that’s not what happened
in their eBay auctions. Instead, they found that lowering the opening
bid price while raising shipping charges attracts earlier and more
bidders and ultimately leads to higher revenues compared with doing the
reverse. Those findings suggest consumers pay less attention or even
completely overlook shipping costs when making bids…

The quote is from a writeup, the full paper is
…Plus Shipping and Handling: Revenue (Non) Equivalence in Field Experiments on eBay (subs required).

Also check out the interesting data on online pricing at Nash-equilibrium.com.

Thanks to Carl Close for the pointer.

According to this post the Japanese have a very strict system of auto inspection:   

The first ones to talk to the government about this were the car manufacturers,
and they convinced the government to enforce a rule that used cars have to go to
the technical inspection after 3 years, and this is a costly matter since a
check costs between 1500 and 3500 EUR. Once you’re in the system, you have to
get your car checked every 2 years, and once your car is 10 years old, you need
to go there every year. This is a reson why the Japanese change cars quite fast,
usually before the car is 3 years old. Important aspect is that you have no
control whatsoever on the cost of possible repairs, because after the technical
check, the car is driven to the garage and they do the repairs that the
technical check asked them to do, you just get the bill with your car. A very
nice rip-off… and this system is being envied by a lot of other domains, like
the electronics domain at this moment. So from April 1st 2006, ALL electronic
products sold in Japan before 2001 will be prohibited from the 2nd hand market!

Comments are open if you have more information on these interesting policies.  I guarantee there is a dissertation or two here.  Here is my previous post on state car "safety" programs.

Thanks to Boing Boing Blog for the link.

Addendum: An informed reader noted that the post is incorrect about electronic products being banned, major appliances will have to be inspected something like autos but the inspection doesn’t apply to computers. 

I am not an expert in international finance but I am going to agree with Brad DeLong on this one:

The late Rudi Dornbusch said that one of the infallible warning signs that we
are near the collapse of an overvalued currency associated with an unsustainable
trade deficit is when highly intelligent and respected economists begin evolving
plausible theories that–this time–the trade deficit is sustainable.

Here is the new version of the paper, for $5.  Here are older versions of the paper.  Here is a summary of the five questions.  Of these five, I worry most about getting uninformed traders to participate in a game with zero-sum (at best, assuming no trading costs) pecuniary returns.  I doubt if idea futures will be the sexiest form of gambling for most people.  Insofar as traders look for fun, only the celebrity-obsessed and current events-obsessed will find idea futures more attractive than Las Vegas or Baden-Baden.  (That is why contracts on politicians and Michael Jackson have been so popular.)  If you are simply looking to earn money for the longer run, Wall Street, with its positive expected rates of return, offers better odds.  That being said, as the fixed costs of market creation fall, a relatively small number of traders may suffice to keep most of the important idea futures going.

Let us say we passed a law banning some people from the shoe trade.  In particular, we would ban all people with last names starting with the letters A-D.

How much would this matter?  Surely the E-Z people are numerous enough to enforce a perfectly competitive solution, or as close to that solution as we would have come anyway.  But what if Mr. Brown would have been the Steve Jobs or the Bill Gates of the shoe trade?

This is a demarcation question for your vision of economics.  What is the chance that individual agents will matter for final outcomes, or do good rules suffice to set things right? 

If you think the A-D ban would matter, must you also believe in increasing returns to scale?

These queries are not unrelated to whether Wal-mart should be allowed to enter commercial banking.

Ilia Rainer and Jacqueline Passey direct my attention to this analysis, which you don’t really need to read.  Nor do I need to explain the problem…