Category: Economics

The Justice Department may file suit against the National Association of Realtors (NAR) to prevent them from excluding discount brokers from access to the regional MLS systems.  I’m hardly a fan of antitrust but the market for realtors is a racket.  Six percent to sell a house?  Outrageous!

Putting aside the outrage the market for realtors is terribly wasteful.  Consider, house prices are much higher in California than in Idaho but commissions are stable at around six percent.  Thus, even though the realtor’s job, brokering a deal, is the same in California as in Idaho, a realtor in California will make much more per-house.  As a result, there are far too many realtors in California and many of them will spend an entire year selling only a handful of houses.  Indeed, many realtor’s spend most of their time prospecting for clients rather than actually selling houses – this is a huge waste of resources. 

The same relationship holds over time as over space.  That is, when house prices go up we don’t see a fall in commission rates.  Instead, we see more entry.  Since the same number of houses are being bought and sold, the extra realtors don’t make the buyer or seller better off and sadly the realtors aren’t better off either – instead the excess return is siphoned off in wasteful prospecting for clients.

Unfortunately, no one really understands why commissions are stable.  The answer is not monopoly.  It’s very easy to enter the market for realtors.  So why don’t commissions fall?  One can certainly point to some restrictive practices by the NAR but I don’t think that is the whole or even the major part of the story.

A clue to the puzzle is that we also see stable commission rates in law (contingency fees) and in services (tipping).  Why is the appropriate tip 15% at an expensive restaurant and at a cheap restaurant?  Does the tuxedoed waiter really have a harder job than the diner waitress?  Maybe (indeed, I have argued along these lines elsewhere) but the commonality across these very different markets tells me something else is going on.

Is it signaling?  Would you distrust a realtor offering lower commissions?  Again, maybe, but it’s hard to believe that with so much money at stake there aren’t enough people willing to take a risk on a discount realtor for long enough for reputations to be established.  I think part of the problem in the realtor market is that other realtors can easily discriminate against discount brokers by pushing their clients one way or the other – that says the antitrust actions will probably not be very effective.  But this doesn’t explain stable commissions in law or waiting.

It’s a puzzle and one worth solving.  Comments are open.

Take this quiz, courtesy of Alina Stefanescu (nor should you neglect her recent post, "What does the increase in Romanian exports really mean?). My results:

Your Moralising Quotient is: 0.10.

Your Interference Factor is: 0.00.

Your Universalising Factor is: 1.00.

In other words, I am pretty libertarian.  The questions about the dead cat and the dead chicken didn’t even make me break a sweat; after all, do I not think that people should have more sex?

The graph of marginal tax rates that I posted earlier has some regions of zero marginal rates and a larger version has negative marginal rates at low income.  How is this possible?  It helps to know that the graph is based on a four member family with one young child and one older child attending college.  Assumptions must also be made about 401ks, IRA contributions, education plans etc.  Kevin Hassett, one of the authors, lays out all the assumptions here.  Basic story – the earned income tax credit gets you negative marginal rates; zero rates are possible at higher incomes if you save some money for retirement and take advantage of education tax credits.  Of course, families in different situations would face different graphs but that too demonstrates that the tax system is a hodge-podge.

Thanks to John F. Eckstein for pointing me to the more detailed explanation.

Loyal MR reader Michael Vassar writes:

…all forms of consequentialism have a great deal of difficulty interpreting sexual behavior.  To put things short, there is an inexplicable shortage of sex.  Given that studies show that women and men enjoy it more than most other activities (on average, not on the margin I’ll grant), and given its intrinsically low cost, it appears that even a crude approximation of a utility maximizing person would probably spend much more time having sex than most do. Do you know of any economic discussion of this?

We need not just reasons, but rather gains-from-trade-defying reasons.  I can think of a few:

1. The long-run lifestyle costs of being "more open to sex" involve a loss of integrity and control.  (OK, but I know many married couples, not all of whom hate each other, who don’t seem to have much sex.)

2. The average utility of sex is high but the marginal utilities are falling off a cliff.  You just don’t want any more.  But how many people are at this margin?

3. Freud was right and we are all repressed.  The will is not unitary and the utility-maximizing part is not always in control.

4. There has been a market failure, but the Internet is remedying it.  People are having more sex and this will only go up.

5. Sex stops being fun when you do it to close a gap between your marginal utilities.  It requires spontaneity or some other quality inconsistent with the classical model of the consumer and the equation of marginal rates of substitution.

6. Sex isn’t as much fun as the studies indicate.  Perhaps people lie about their quality of their sex or remember only the better experiences.

7. People want their sex to consist of peaks, rather than seeking to maximize lifetime utility.  Tom Schelling once told me this is why he did not listen to Bach more.

8. The market-clearing price for more sex is positive, and people feel shame about paying too explicitly; see also #5.

9. We are biologically programmed to "stick to our guns," rather than just kiss and make up; read more here.  Or perhaps your wife has read my earlier post on why it is hard to avoid torture.

10. People are having sex in other ways.  Maybe that is really good too.

11. Everyone else is having sex all the time — Michael Vassar simply doesn’t know about it.

12. You’re all addicted to reading blogs.

My wife’s question: "Should you be flattered or insulted that you are considered an expert on this?"

Here is the link, courtesy of the Richmond Fed.  Tom talks about Bob Frank and relative status, what is right and wrong with mainstream economics, how he came up with the ideal of focal points, whether we can deter terrorists, and his role in the Copenhagen Consensus.  Although over eighty years old, Tom remains one of the smartest people I have met.

Thanks to Dan Klein for the pointer.

This I would not have expected…aren’t vending machines for impulse purchases, or could this be one…?

And if you are wondering, Savannah is superb for seafood (grouper, most of all) and only so-so for barbecue.

A recent 60 Minutes segment took a look at medical tourism.  The spanking-new hospitals in Thailand and India look like truly wonderful places to be sick.  The technology is cutting-edge, the doctors American trained, and the nurses are cheap.

    Many of the doctors interviewed by 60 Minutes worked in the United States before they returned to their home country.  Ten years ago these same doctors would not have left the United States.  These doctors are returning to their home countries precisely because they now have the opportunity to work in spanking-new hospitals with the latest technology.  The outsourcing story is thus more complex than it at first appears.  Ten years ago the foreign radiologists we now use to read X-rays might not have been foreign at all – they would have been living and working in the United States.   The world is flattening.

Here is a resource on property rights and economic development, with all the important points in one place.  Yes this can be used for students but at least half of AID should read it as well.  The author is Karol Boudreaux at the Mercatus Center, George Mason University. 

Hal Varian has a short article on tax reform in his NYTimes column.  I agree with him that one of the most desirable but also achievable reforms would be to expand and simplify "the current messy system of tax-deferred savings, including I.R.A.’s,
401(k)’s, 403’s and Keough plans. We do not really need all those
different plans and having one, simple tax-deferred savings plan would
make a lot of sense."

The graphic below shows how under the current system the marginal tax rate rises and falls arbitrarily.

Spill all the beans as quickly as possible.  Here is the perspective of one interrogator.  Two key reasons: you don’t signal that torture works on you, and false information can be checked against other sources.  Here is my earlier post posing the question.

Addendum: I am discernibly outraged over torture (read here), but at this point I figure getting people to think about how terrible torture must be will be more effective than simply attacking it.

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Here is the link, and that is via BoingBoing, thanks to Jason van Bruaene for the pointer.

Addendum: Here is an extension of the first idea.

For the curious, and perhaps the prurient, here it is.  I don’t recall having said anything I regretted, but I’m not going to watch it to find out either.  I do talk about barbecue and why terrorism may not be a stable micro-culture.

If you are willing to watch a video, the people are more attractive in the trailer for Serenity.

Let us say that you have been captured and threatened with torture.  You are, for whatever reason, entirely willing to betray the information you hold.  Your primary goal is to avoid pain, and perhaps you positively want to squeal.  How should you present what you know?  I see a few options:

1. Break down immediately, beg for mercy, humiliate yourself, and spill the beans.  (If you talk right away, will they torture you anyway?  And since no further good information can be offered why should they stop?)

2. Go in acting tough, really tough.  At the first sign of serious pain, start crying and switch to strategy #1.

3. Wait until they apply their "best shot" torture, and then talk.  They will feel they have done their job and stop.

4. First offer (or make up) compromising information to show your disloyalty to the cause your torturers are fighting.  Your confession will then be more credible.

5. Say you don’t know anything, try to fight the torture, but break down when you can’t stand it any more.  You can’t fool them, so the best you can do is to actually "go through the wringer."  You are stuck in the pooling equilibrium, and trying to deviate only makes you worse off.

Which of these is the most credible signal that you have told all you know?  Can you do any better than number five?  And how does your best answer depend upon the hypothesized motives of the torturers?  Is there anything you can say to the U.S. to avoid being sent out for rendition?  I do’t see any simple answer here, the question is which behavior your torturers will interpret as an unlikely tactic from a truly determined trickster.

Here is Brad DeLong’s reason number 4 to favor private accounts for social security:

We need to raise our national savings rate. But if we just raise Social
Security taxes, Congress will treat these taxes as general revenue and
spend them. Only by funneling Social Security contributions into some
vehicle that Congressional representatives cannot interpret as a
resource available to fund current spending can we raise the national
savings rate. And private accounts are the best vehicle we can find to
(a) accumulate contributions without (b) allowing Congressional
representatives to seize them as resources available to fund current
federal spending.

That reason receives new support from Nataraj and Shoven who present evidence that:

…the trust fund build-up may not help future generations due to the
adoption of the Unified Budget in 1970. The Unified Budget includes
trust fund receipts as income and trust fund payments as expenditures.
The empirical evidence suggests that attempts to balance the Unified
Budget while the trust funds were generating surpluses has led to
increased government spending and personal and corporation income tax
cuts within the rest of the federal government. There is no evidence of
increased government saving as a result of the trust fund accumulations.