Category: Economics

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… 

1. Here are two useful papers on applied econometrics, courtesy of Andrew Gelman.

2. That which does not kill us…

3. The ever-intelligent Timothy Smith writes on what is wrong with Europe.

4. People are spending more on experiences, less on possessions.

5. Emotions interfere with how you form your memories.

Rick Harbaugh and Theodore To offer an abstract:

Is it always wise to disclose good news?  We find that the worst sender with good news has the most incentive to disclose it, so reporting good news can paradoxically make the sender look bad.  If the good news is attainable by sufficiently mediocre types, or if the sender is already expected to be of a relatively high type, withholding good news is an equilibrium.  Since the sender has a legitimate fear of looking to anxious to reveal good news, having a third party disclose the news, or mandating that the sender disclose the news, can help the sender.  The predictions are tested by examining when economics faculty at different institutions use titles such as "Dr" and "Professor" in voicemail greetings and course syllabi.

Here is the paper.  Harbaugh’s home page has many interesting papers, most of all "Too Cool for School," which concerns the underexplored topic of "countersignaling."  He also has a paper on why the favorites save up their effort for the final round, and why status can make you risk-averse in gains but risk-loving in losses.  He is an underappreciated economist, and I thank Robin Hanson for the pointer to his work.

The bottom line: When it comes to titles, if the book lists "Ph.d." after the author’s name, run the other way.  Gregory Stock’s The Book of Questions is one notable exception to this rule.

1. The staff which writes these reports is excellent in quality, and has been so throughout the Bush Administration.

2. What exactly is the function of the report?  To persuade the media?  Congress?  To subtlety redefine the position of the White House, and push it in a more market-oriented direction, perhaps without the White House itself noticing?  Lay out markers for future policy initiatives?  This is a critical question for evaluating the report.

3. The report is heavy on Health Savings Accounts and the Global Savings Glut.  I would have preferred a more forward-looking approach, less tied up in the politics of the day.

4. I am a market-oriented economist who believes that capital income, ideally, should not be taxed.  If I am not persuaded that HSAs are the major way to go for health policy reform, something is wrong.  Furthermore other health care reforms should be considered, such as improving the performance of insurance companies, whether through regulatory or deregulatory means.

5. There is no serious talk of a gas tax, economic preparations for a pandemic, global warming, or research and development.

6. The chapter on copyright reads like someone is tiptoeing around, afraid to offend anybody by speaking the truth and afraid to offend God by writing any falsehood.

Here are Setser and Roubini on the report. Arnold Kling has several posts on the health care section.  DeLong and Sawicky snort and guffaw.

Exercise is statistically correlated with better health, but weight is not.  That suggests you should exercise more.  Furthermore some exercise is much better than no exercise at all, so you can be happy with a modest achievement. 

Why don’t we rely more on markets to force ourselves to exercise?

Post a bond with your friend, your spouse, your exercise partner, or someone you won’t (or can’t) lie to.  You lose the money if you don’t exercise according to a pre-arranged plan with well-defined quantitative goals.  If need be, I will serve in this role and cash your check when it comes in the mail (hey, would you lie to your blogger?).   

Or why not have the gym collect a bigger upfront fee, and they pay you each time you show up and complete an exercise program under their supervision?

What are the problems with these arrangements?

1. The roles of friend or spouse do not mix with that of "Enforcer."  That being said, I bet your spouse is willing to enforce her requirements on you.  And surely she wants you to live longer, so why not extend the scope of her enforcement just a wee bit?

2. The payment, if you lose, is not a real transfer.  You share funds with your spouse and your friend will treat is as a gift to be returned.  Fair enough, but then find a real bastard, a corporation, or an amiable but distant blogger.

3. You enjoy exercise, but not if you feel obliged to do it.  Introducing too many external incentives takes away the possibility of developing internal motivation.  (Similarly, if you pay your kid to do the dishes, she will no longer feel obliged and the total quantity of labor may fall.)  If the exercise arena becomes a regular sphere of money loss and humiliation, you will avoid the exercise idea altogether.  After a while you will stop making these contracts.

4. You don’t really want to exercise more in the first place.

I put most of my money on #3.

We hear all this superficial blather about "life being a process."  This is true, but it is less well-recognized that this is a source of institutional failure.  Most good things you do — and I include charity on this list — you do not for the ends themselves, but because you have somehow managed to enjoy the process of regular engagement and self-discipline.  You then deceive yourself into thinking you value the end more than you do.  This creates social order, but it also makes those same commitments fragile.  Whether you are meta-rational or not, you are unlikely to seek brutal market discipline (or advice columnists, for that matter) to enforce your good behavior.  You prefer to play the happy fool, even though you will die earlier and refuse to break up with the creep you are currently dating, no matter how many of your friends tell you he is ultimately a loser.

The alternative methods?: Fantasize about the relationship between exercise and more and better sex, whether or not it is there at the margins you face.  Build fantasy upon fantasy to make the area a source of fun.  Or try self-prophecy.

Addendum: Economist Art DeVany has intricate theories about exercise, based on his understanding of evolutionary biology.  Run sprints, not marathons.  Art reports on his blog how devastated he is from the recent death of his wife; do read this moving tale.

Although Ikea stores have yet to arrive in India, its catalogs are sold by
street hawkers and bookstores in many major cities….

When Arundhati Ray redecorates her home, she picks up an Ikea catalog to
search for that perfect piece of furniture….she clips a photo of the desired item, which typically includes measurements,
and then takes it to a local carpenter.

The welfare economics of Ikea knockoffs in India, like those of pharmaceutical knockoffs, are not clear-cut.  On the surface, Ikea appears to be losing out to design theft but India’s emerging middle class generates media attention far in excess of its numbers.  India is still a very poor country that probably could not currently support the low-price, high volume Ikea model.  Thus, knockoffs allow a few Indian consumers to take advantage of good design and Ikea loses little to nothing.

Thanks to Carl Close for the pointer.

Dan Akst on how best to spend a dollar to help the world.  He suggests micro-finance as the most potent means of charity.

James Hamilton and Mark Thoma and Martin Feldstein on why higher oil prices have not created a recession.

Fatalities from sharks may be falling because people are fighting back and punching the sharks.

Here is a new book on how to fight back if the robots rebel.  Hint: go for its "eyes" (cameras), punching is not the key.  Don’t give them the security codes to your defense computers.

Why email communication is so problematic, and how we overrate how much others understand us in that medium.

Markets in everything, magazine edition, courtesy of Cynical-C blog.

Forbes magazine, short essays on money and happiness.

"I don’t know if Wal-Mart would be good or bad for banking in the long run. But I’ll bet ATM fees would come down pretty quick."

Here is more detail.  Wal-Mart has applied for deposit insurance protection in the state of Utah, so it can open an industrial loan corporation.  Surprise, surprise, American banks don’t like the idea.

My take: Since the New Deal the United States has upheld a legal separation between banking and commerce.  The banking sector receives deposit insurance and access to the Fed as lender of last resort, but is placed under special supervision and must meet capital requirements.  You — especially my libertarian readers — may not like this deal but in the short-run, medium-run and perhaps the long-run as well, it is a fact.

As a first-cut approximation, this deal is for banks a tax in good times but a subsidy in bad times.

So what happens if you let banking and commerce blend too much?  One danger is that you extend Fed subsidies to the commercial sector.  Should we have to bail out banks because their commercial arms have gone under?  (Don’t expect too much of Chinese walls in a crisis.)  What if GM had a bank and the whole concern went under next year?  Widespread chicanery with pension funds is not reassuring in this regard.

A quite different danger is that the less-regulated commercial firms can outcompete  banks.  I suspect Wal-Mart is run much better than most banking firms, which don’t seem to care much about customer service.  But if enough deposits shift to the commercial sector, banks-as-we-know-them might drop like rotten apples.  Creative destruction is all well and fine, but here the taxpayer is holding the bag.  And if traditional banks approach extinction, they might take excess risk as their capitalization falls, as happened with many S&Ls in the 1980s.

How far can we let commerce and banking mix?  The lending arms of automobile companies so far have worked fine.  The old "non-bank banks" — most prominently Sears Roebuck — did not create major troubles for the Fed, although banks hated the lesser regulated competition.  But somewhere along the line, enough stones add up to form a pile.

View one: Wal-Mart is a big enough stone to constitute a pile.  Don’t let it happen.  Greenspan himself was skeptical of the ILC exemption.

View two: Wal-Mart in Utah is just one stone.  This reform will make customers better off, while keeping us on the safe side of the line.

View three: Letting Wal-Mart into banking will force other beneficial banking reforms, such as pricing deposit insurance for risk, or greater reliance on private insurance.

View four: All the worries are hogwash, full steam ahead.

Right now your risk-averse blogger is hovering between views one and two.  Stay tuned…

Ricardo Caballero & Co. put it so:

Three of the most important recent facts in global macroeconomics — the sustained rise in the US current account deficit, the stubborn decline in long run real estate, and the rise in the share of US assets in global portfolio — appear as anomalies from the perspective of conventional wisdom and models. Instead, in this paper we provide a model that rationalizes these facts as an equilibrium outcome of two observed forces: a) potential growth differentials among different regions of the world and, b) heterogeneity in these regions’ capacity to generate financial assets from real investments. In extensions of the basic model, we also generate exchange rate and FDI excess returns which are broadly consistent with the recent trends in these variables. Unlike the conventional wisdom, in the absence of a large change in (a) or (b), our model does not augur any catastrophic event. More generally, the framework is flexible enough to shed light on a range of scenarios in a global equilibrium environment.

Here is the paper.  Of course this model is jury-rigged, but the whole point is that it can be jury-rigged to yield something other than imminent economic destruction and the United States as the next Argentina. 

Systematically negative real rates of return are rare but possible.  This differs from unexpected negative real rates on debt instruments, due to earlier underestimations of inflation.  True negative real rates of return imply the economy cannot put resources to productive use.  Decay and deterioration rule.  Of course there must be storage costs for goods.  Otherwise people could hold those goods and receive a zero rate of return.  There must be price inflation, otherwise people could hold currency and receive a zero rate of return.

For examples, look to spoilage-vulnerable agricultural economies during times of war and siege.  I also believe they have negative real rates of return in Battlestar Galactica.  That is one reason why neither discretionary monetary nor fiscal policy will improve their lot.

Negative nominal rates of interest on money are harder to come by, but deteriorating paper or risk of theft could in principle do it.  You must prefer to lend out your money at negative return than to hold it at an even more negative return.  I have yet to see an example of this, not even on TV.