Category: Economics

It’s that time of year again, our NPR moment.  Do you enjoy Marginal Revolution’s blend of economic commentary, book reviews, art recommendations and fun ideas?  Please consider making a donation.  You can donate through Amazon or via the PayPal link in the upper left hand corner.  Any amount would be appreciated.  Use the PayPal link for donations over $50.  We are also happy to accept donations via snail mail.  Send to:

Marginal Revolution, c/o Alex Tabarrok
Department of Economics, MSN 1D3
George Mason Universtiy
Fairfax, VA, 22030

For donations of $100 or more we would be pleased to send you an autographed copy of one of our books, your choice (including my forthcoming book Judge and Jury available in February).

If you are in a position to be especially generous and wish to make a larger contribution through a legally recognized non-profit entity (for tax reasons),
please let us know, this can be arranged.

Why are we asking for donations?  MR is never going to be a paying venture but donations help us
to cover our costs.  More importantly, donations help to solve a serious economic problem.  Efficiency says that goods with zero marginal cost should have a zero price but without prices not only is the incentive to produce diminished but so is information about what to produce.  (See Coase’s 1946 classic, The Marginal Cost Controversy, JSTOR).  Donations allow prices to be set at MC while at the same time providing a (noisy) signal about where true economic value lies.  In particular, Tyler and I know that we can appropriate more of our marginal product from professional work than we can from blogging yet it is conceivable that our marginal product is higher in blogging.  Thus, to decide how much to invest in this venture we markup donations to get an estimate of our social value and we put positive weight on social welfare in our utility function.   

Happy Holidays!

Let us say, just for fun, that you woke up one morning to a world where everyone else’s demand curve — except yours — slopes upward.  But it is not common knowledge that  this is the case.  What is the first oddity you would notice? 

1. The most expensive radio stations would be filled with the most ads.  The music would never come.

2. Your house would have no electricity, due to grid overload.  (Is this true?  An upward-sloping curve does not mean you will demand more at the current price.  Think of twisting the demand curve around the current point of intersection.)

3. The most transparent agents would be found wandering the streets, bereft of all wealth, the victims of corporate price hikes.

4. You would wonder why so few people were reading your blog.

5. You would check ebay and find very high prices for items with active bidding.  (Hmm…what kind of auction markets are behind the scenes for our power supply?)  (Addendum: What is the Nash equilibrium here?  Will people hold off bidding, hoping that tomorrow’s price will be higher?)

6. You would be puzzled why the Nordstrom’s sale was so empty.

7. It would take you days to notice any significant difference at all.  After a few weeks, they would call in the econometricians to solve the identification problem in the data.

How long would it take you to figure out that other peoples’ demand curves were sloping upwards?  How long would it take for society to fall apart?

Comments are open.

Ed Glaeser writes in his new abstract:

Does bounded rationality make paternalism more attractive? This Essay argues that errors will be larger when suppliers have stronger incentives or lower costs of persuasion and when consumers have weaker incentives to learn the truth. These comparative statics suggest that bounded rationality will often increase the costs of government decisionmaking relative to private decisionmaking, because consumers have better incentives to overcome errors than government decisionmakers, consumers have stronger incentives to choose well when they are purchasing than when they are voting and it is more costly to change the beliefs of millions of consumers than a handful of bureaucrats. As such, recognizing the limits of human cognition may strengthen the case for limited government.

Yes, some NBER Working Paper Abstracts should be screamed from the rooftops.  Here is the paper itself.  Glaeser also offers some arguments against "soft paternalism":

1. Soft paternalism is an emotional tax on behavior which yields no government revenues.

2. Soft paternalism can cause bad decisions just as easily as hard paternalism.

3. Public monitoring of soft paternalism is much more difficult than public monitoring of hard paternalism.

4. While hard paternalism will be limited by public opposition, soft paternalism is particularly attractive because it builds public support.

5. Soft paternalism can build dislike or even hatred of subgroups of the population.

6. Soft paternalism leads to hard paternalism.

7. Soft paternalism complements other government persuasion. 

Get this:

Soft paternalism requires a government bureaucracy that is skilled in manipulating beliefs.  A persuasive government bureaucracy is inherently dangerous because that apparatus can be used in contexts far away from the initial paternalistic domain.  Political leaders have a number of goals, only some of which relate to improving individual well-being.  Investing in the tools of persuasion enables the government to change perceptions of many things, not only the behavior in question.  There is great potential for abuse.

Thanks to Daniel Klein for the pointer.

I went to Wegman’s less than 24 hours before Thanksgiving and purchased a turkey, yams, cranberries, a pumpkin pie, wine, cranberry cheese, fresh bread, peanut butter and some more wine.  Not a single item was in short supply let alone in shortage.  I give thanks for capitalism.

Using randomized prospective trials in economic development policy is not new. Since the 1960s, the U.S. has occasionally implemented them to answer important practical questions in health care, welfare and education policy. By randomly splitting people into two groups, one of which receives an experimental intervention, researchers can set up potentially simple, unbiased comparisons between two approaches. But these evaluations typically cost hundreds of thousands to millions of dollars, largely putting them out of reach of academic researchers, says development economist Abhijit Banerjee of the Massachusetts Institute of Technology.

The emergence of cheap, skilled labor in India and other countries during the 1990s changed that, Banerjee says, because these workers could collect the data inexpensively. At the same time, nongovernmental organizations (NGOs) were proliferating and started looking for ways to evaluate their antipoverty programs.

In 2003 Banerjee and his colleagues Esther Duflo and Sendhil Mullainathan founded an M.I.T. institute devoted to the use of randomized trials, called the Poverty Action Lab. Lab members have completed or begun a variety of projects, including studies of public health measures, small-scale loans (called microcredit), the role of women in village councils, AIDS prevention, and barriers to fertilizer use. The studies typically piggyback on the expansion of an NGO or government program. Researchers work with the organization to select appropriate measures of the program’s outcome and hire an agency to collect or spot-check the data.

Here is the full story.  Here is the home page of Poverty Action Lab.  Here are their completed projects.  Here is the Primary School Deworming Project.  And on this Thanksgiving weekend, I once again express my gratitude for the link from www.politicaltheoryinfo.com.

In 1990 my colleague Robin Hanson wrote:

Imagine a betting pool or market on most disputed science questions, with
the going odds available to the popular media, and treated socially as the
current academic consensus.  Imagine that academics are expected to "put up
or shut up" and accompany claims with at least token bets, and that
statistics are collected on how well people do….

This would be an "idea futures" market, which I offer as an alternative to
existing academic social institutions.

More and more it looks like Robin was right on.  Consider this story from the London Times:

WHEN Ladbrokes teamed up with New Scientist magazine
in August last year to offer odds on five great breakthroughs being made by
2010, it looked like a typical silly-season stunt.

It is now expected to become a very expensive one. As soon as the book
opened, physicists began to put their money where their theories were and backed
themselves to find gravitational waves – ripples in space and time predicted by
Albert Einstein but not yet proven to exist.

Alan Watson, of the University of Leeds, was astounded
to see odds of 500-1 on a discovery that he considered a matter of when, not if,
and promptly wagered £50.

So many other scientists did likewise that by lunchtime Professor Jim Hough,
of the University of Glasgow, who leads a team seeking the waves, was allowed to
stake only £25 at odds that had fallen to 100-1. When his colleague Sheila Rowan
placed her bet in the early afternoon, the odds were down to 5-1, and when the
book was closed they were 2-1.

It’s amazing how far we have come since Robin proposed idea futures, especially given that the idea could have been implemented hundreds of years ago.  But Robin’s vision is even more radical than betting markets.  Robin proposes that betting markets can substitute for many of the funding arrangements that we use today.  Consider the part of the quote I excised above:

Imagine that funding
agencies subsidize pools on questions of interest to them, and that
research labs pay for much of their research with winnings from previous
pools. 

Imagine indeed!  We are not there yet but the odds are increasing in Robin’s favor.

Rufus Pollock draws the following conclusions from the literature on file-sharing:

The basic result is that online illegal file-sharing does have a
negative impact on traditional sales. The size of this effect is
debated, and ranges from 0 to 100% of the sales decline in recent
years, but a figure of between 20 and 40% would be a reasonable
consensus value (i.e. that file-sharing accounted for 20-40% of the
decline in sales not a 20-40% decline in sales).
Beyond this
basic result several other very interesting facts have emerged.

First
is the differential impact of file-sharing on an artist depending on
their existing popularity. According to Blackburn who investigates this
issue the ‘bottom’ 3/4 of artists sell more as a consequence of
file-sharing while the top 1/4 sell less.

Second is the first tentative estimates (by Waldfogel and Rob) of the
welfare consequences of file-sharing. Waldfogel and Rob’s dramatic
result is that file-sharing on average yields a gain to society three
times the loss to the music industry in lost sales.

The conclusion seems right to me – file-sharing increases social-welfare, so in theory a win-win solution is possible, but in practice the increase comes at the expense of music firms.  See here for the blog post and here for a summary of each of the main papers in the literature.

Hat-tip to Cory Doctorow at Boing-Boing Blog.

Scrawling a patriotic message on a restaurant tab is a great way to boost tips — at least in northern Utah.  Communications professors John S. Seiter of Utah State University and and Robert H. Gass of California State University at Fullerton instructed two waitresses to serve up four different types of bills to 100 diners at two local restaurants.

The servers wrote "United We Stand," and "God Bless America" or "Have a nice day" on the bills.  A control group received no personal note.

Patrons gave a 20 percent tip on tabs that included "United We Stand" but only 15 percent when they got no message at all.  The other two messages garnered slightly more than 15 percent, Seiter and Gass reported in a recent article in the Journal of Applied Social Psychology.

That is Richard Morin from The Washington Post, someday the link will show up here.  You can buy the article here.  Here is my previous post about tipping.

While most scholars of the Interwar Debate on Socialism interpret Lange as having offered an answer to the problem of socialist economic calculation, evidence exists to the contrary. Lange’s thinking on calculation was more complex and less settled than commonly recognized. His 1936 and 1937 articles actually admitted to the impossibility of socialist calculation, but also asserted the impossibility of capitalist calculation. Lange’s thinking evolved further on this subject, due in part to Lerner’s influence, but he never answered the challenge posed by Mises and Hayek.

That is from my student Doug McKenzie, read more here.  Elsewhere on the Mises site you will find this proposal for a Misesian pocket calculator, and an on-line version of Robert LeFevre’s classic libertarian anarchist essay on government.

Just in time for the apparent top of the housing market, the Chicago Mercantile Exchange is introducing futures and options on housing prices in 10 cities for the second quarter of 2006. (Here’s an overview of the products, and CME’s White Paper on the topic.)

Here is the Slate article.

Addendum: Here is further analysis, from a new blog on risk markets.

While most countries are committed to increasing access
to safe water and thereby reducing child mortality, there is little consensus
on how to actually improve water services. One important proposal under discussion
is whether to privatize water provision. In the 1990s Argentina embarked
on one of the largest privatization campaigns in the world, including the privatization of local water
companies covering approximately 30 percent of the country’s municipalities.
Using the variation in ownership of water provision across time and space generated
by the privatization process, we find that child mortality fell 8 percent in
the areas that privatized their water services and that the effect was largest (26 percent) in the poorest areas.  We check the robustness of these estimates using cause-specific mortality.
While privatization is associated with significant reductions in deaths from
infectious and parasitic diseases, it is uncorrelated with deaths from causes
unrelated to water conditions.

That is the abstract to a very important paper, Water for Life: The Impact of the Privatization of Water Services on Child Mortality, by Sebastian Galiani, Paul Gertler and Ernesto Schargrodsky in the February 2005 issue of the JPE.  (free working paper version).

In theory, water services are not an easy thing to privatize well because of natural monopoly problems and because some of the benefits of clean water are externalities.  In practice, however, governments in developing countries do such a poor job at providing water that there are large potential gains to privatization even given such problems.

See also Tyler’s post Will the Middle East run out of water? for more on where water privatization may have benefits.

…our current fiscal policy has the potential to make it much more difficult for the Fed to carry out its job. Senator Chuck Schumer (D-NY) recently expressed his enthusiastic support for Bernanke on the expectation that Bernanke would speak out about the need to reduce deficits. Indeed I think Bernanke will do so. But one can speak about the need to reduce deficits (something on which I would like to see both parties come to an agreement) without taking a stand on exactly how that should be done (something on which feathers in the political fight will continue to fly). If Bernanke does speak up on deficits in this limited, bipartisan way, the influence of the Fed Chair’s tongue could grow even greater and the deficit problem might be raised front and center.

That is from EconBrowser.  Nouriel Roubini also offers an excellent analysis.

I think Bernanke should tread very carefully.  The danger comes if Bernanke signals a problem and nothing good happens in response.  That would make it clear that matters will get worse.

True, you cannot fool markets forever.  But if we cannot get out of our current fiscal mess, I don’t want markets to learn that all at once.  I don’t want markets to learn — again all at once — that our very bright Fed chair is ineffective and that no one in the administration is listening.

Bernanke needs to signal concern about the deficit in exactly the right way.  Ex post, he needs plausible deniability about having complained too loudly.  Ex ante, he needs to signal he is complaining.  (That’s a tough combination, eh?)  Too much squawking, too soon, would be a mistake.  Instead he should play the chess strategy — "The threat is stronger than the execution" — and over time subtly shift the rhetorical bargaining power in Washington toward fiscal sanity.  A "do or die" stance won’t turn out well when the Administration cannot coordinate with an increasingly rebellious Congress, and that is assuming the Administration wants to do something good in response.  Finally people who play "showdown" or "chicken" with the Bush Administration don’t, er, always come out so well…

Liu and her five-member Filial Daughters’ Band are part of a thriving mourning business in Taiwan. They’re professional entertainers paid by grieving families to wail, scream and create the anguished sorrow befitting a proper funeral.

The performances are as much a status symbol for the living as a show of respect for the dead on this island of 23-million people lying 145 km off the Chinese coast.

Weary, grieving relatives hire groups like the Filial Daughters’ Band to perform their mournful stuff for $600 for a half day’s work.

Here is the link, and thanks to Pablo Halkyard for the pointer.