Category: Uncategorized
Oliver Williamson, RIP
Oliver Williamson won the Nobel in 2009 with Elinor Ostrom. My post on that event is reprinted below (no indent). See also Tyler here.
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In Adam Smith there is the pin factory and the market and from that beginning we trace the long literature in economics focused on the twin questions, What price to set? How much to produce? Following Coase, Williamson asks different questions, Why a pin factory? Why are the 18 steps to make a pin performed by a single firm rather than two or more? Why are there many firms instead of one large firm? Why does the pin factory not vertically integrate upwards to buy the steel factory and downwards to buy the retail hardware shop?
Williamson’s answers rest on the notions of bounded rationality, contract incompleteness, asset specificity and opportunism. Start at the end, asset specificity and opportunism. When a deal has been sealed the parties typically move from having many potential partners to being locked in. That’s bad because it raises the possibility of opportunism–one party can exploit the other. But it’s also good because when the lock-in is credible each party may be more willing to invest in assets which are extra-productive but specific to the relationship.
Marriage, for example, takes away some possibilities but it adds others. With marriage, for example, comes a greater willingness to invest in children (n.b. asset specificity, the child is of extra value but only to the specific parties involved in the marriage) but that very benefit also means that one of the parties has the leverage to be opportunistic. Knowing all of this when they enter the contract the parties bargain ex-ante, they exchange promises and make investments (the ring), they establish rules for ex-post bargaining or decide on the background rules to apply in that eventually (pre-nup, no fault divorce, covenant marriage). The rules are never perfect and the contacts are always incomplete.
Transaction cost economics is all about applying these ideas in different settings to figure out the best governance structures (marriage, vertical integration etc.) in different circumstances. How does one deal with expensive investments (such as highly individual dies or plant construction) that are specific to a given
trade and put the investor at risk yet which increase productivity? Williamson analyzes how firms come to rely on long term contracts or vertical integration or other seemingly non-competitive solutions to enhance market productivity. Early generations of antitrust enforcers often saw these as monopolistic dealings, but scholars such as Williamson helped us understand how these are essential to the workings of the invisible hand.
Williamson’s paper, The Economics of Governance is an excellent recent summary of his views in the area.
Williamson’s work is notable for inspiring a large body of empirical and theoretical work in modern industrial organization and having influence in law, political science, and management. His work has been widely cited, and by some counts he was the most widely cited economist in the world.
I especially thank John Nye who contributed to this post.
Which NBA teams will gain in relative prospects from the shutdown?
The Los Angeles Lakers, far and away.
The most valuable stars, such as LBJ, have their own private gyms and work-out rooms, often in their homes. They have stayed in the best shape, and of course LBJ has the discipline too. Those star players also are the most used to unusual circumstances (All-star games, Olympics, etc.) and being accustomed to higher than average levels of pressure. They rely less on crowd support than do the role players, noting it is the latter who benefit much more from home court advantage. If the games are played in Las Vegas and Orlando, and without crowds, no one will have home court advantage (except the Orlando Magic, sort of).
So teams built around star veterans will have higher chances of doing better in the playoffs.
The interrupted and probably shortened season also will be easier on the older players, which again covers LeBron. Anthony Davis is not so old but the Lakers would love to play him as many minutes as possible.
The teams with “many necessary complementary parts” will fare worst in relative terms. With such a long break, surely at least 10-20% of those players have “gone off the reservation,” so to speak, and will not return to quality form for some time. Those teams will not gel so easily and find their groove.
Who might that be? I know the Clippers have two big stars, but they seem to rely a lot on the team as a whole. Who else? The Celtics maybe? Indiana?
What are the implications of this analysis for management and business firms? Will teams built around a superstar have an advantage there too?
Should you worry about the rate of price inflation being too high?
Of course you should worry, not withstanding all of the dogmatism on Twitter and the pre-Lucasian framing of various charts and graphs.
Here is a simple way to look at it. Let’s say the Fed does the very best job possible with its monetary policy (and in my view the Fed has done a very good job so far). That would mean in terms of the loss function a Fed error in one direction would mean a too low rate of price inflation, and a Fed error in the other direction would mean a too high rate of price inflation.
Now, supply conditions have never been so volatile in my lifetime, and perhaps never in American history. We don’t know how the virus will spread, how reopenings will go, when a vaccine will arrive, how good the vaccine will be, how much a climate of fear will persist, and so on. Demand conditions in turn depend on how these supply conditions will evolve.
The Fed thus could make an error on either side of its target, through no procedural fault of its own. As a result, as a simple matter of logic, the rate of price inflation could be too high, or it also could be too low.
if you think you know the direction of the error in advance, you aren’t paying enough attention to the underlying unpredictable uncertainties.
And if your response is to cite old open letters to the WSJ and the like, that is the same dogmatic error that the inflation hawks from the 1970s have been making.
There are other, more substantive arguments why the rate of price inflation might end up too high (the fiscal side really matters!), but that is the simplest one and you won’t see it on Twitter. And it is fine to argue, by the way, as does Matt Yglesias, that you would rather see it too high than too low.
I was glad to see Martin Wolf tackle this whole question (FT) and not be too scared off by the yappers.
Friday assorted links
1. Paul Kedrosky assorted comments.
3. The Florida strategy. Too early to say in my view, but still this piece is of interest.
4. “Magnus the platform” lets it rip.
5. America’s top spelling searches: in Virginia, they don’t know how to spell “Virginia.” Recommended.
6. Volunteer history booming during the lockdown.
8. Plexiglass vs. Plexiglas(TM).
9. The polity that is Dutch: grandmother ordered to delete Facebook photos. At least they didn’t kill her.
10. A real smokescreen. Really.
11. The new seroprevalence studies show relatively low rates of infection.
12. Fast Grants active at UC Berkeley. Good coverage.
13. TreatEarly, a new biomedical initiative (possibly influenced by Fast Grants?), looks interesting note I have no direct knowledge of their work.
Alan Merten, RIP
Alan Merten, former President of GMU, has died after a battle with Parkinson’s disease. I got to know Alan just a little when we visited China together in 2008. Our visit was part of GMU’s 1+2+1 program in which students in China earned their degree by doing 1 year at a partner university in China, 2 years at GMU and then a final year in China. We were touring the partner universities to participate in their graduation ceremonies. It was a great trip. I visiting the Great Wall, stayed in a Hutong in Beijing, and visited Kunming in Yunan province.
I also found it exhausting as we traveled from graduation ceremony to graduation ceremony. One night at the beginning of another such ceremony I said to Alan “I guess your job is to go to a lot of these events” and he turned to me beaming and full of energy and said “Oh yes, I love seeing the students so happy and their parents so proud. It’s the best part of my job.” And he meant every word. I’ve never forgotten that. He was a good university president.
Income Share Agreements Looking Up
The Federal Reserve Bank of Richmond has a good piece reviewing income share agreements, aka income-contingent loans, including a timely example:
ISAs provide students with funding to cover their education expenses in exchange for a portion of their income once they start working. Under a typical contract, recipients pledge to pay a fixed percentage of their incomes for a set period of time up to an agreed cap. For example, a student who has $10,000 of his or her tuition covered through an ISA might agree to repay 5 percent of his or her monthly income for the next 120 months (10 years), up to a maximum of $20,000. ISAs typically also have a minimum income threshold before payments kick in; if the recipient earns less than the minimum, he or she pays nothing. This means that ISAs offer students more downside protection than a traditional loan.
This downside protection is what attracted Andrew Hoyler to Purdue’s “Back a Boiler” ISA program, which launched in the fall of 2016. Hoyler, who graduated from Purdue’s professional flight program in 2017, signed up for Back a Boiler in his senior year. He received $21,263 in reduced tuition and flight fees in exchange for agreeing to repay 7.83 percent of his monthly income for 104 months, or until he had paid back 2.5 times the amount he originally received. Now a pilot for PSA Airlines, a subsidiary of American Airlines, he has been making payments on his ISA for about 30 months.
…Hoyler is particularly grateful to have that safety net now, as the airline industry is being rocked by the COVID-19 outbreak. “The ISA is giving me a sense of relief. If I find myself furloughed, my payments stop with zero interest,” he says.
Thursday assorted links
1. The coffin culture that is Peruvian municipal politics.
2. Carmen Reinhart named new World Bank Chief Economist.
3. The Georgia reopening seems to be going OK.
5. Amateur archaeology from home during the lockdown.
6. The declining middle class and yes based on consumption data.
7. Economic Development in Puerto Rico after US Annexation: Anthropometric Evidence.
8. “I’m thrilled to announce a new online learning program in progress studies for high school students: Progress Studies for Young Scholars.” Link here.
How will Fairfax County evolve?
That is the topic of my latest Bloomberg column, here is one excerpt:
The immediate future of my region thus appears to be a major demand shock to the stores, acceptable continuing employment for the upper middle class, and economic devastation for lower-income individuals. The traditional mix of government-connected employment and retail will swing heavily in the direction of government. In essence, the federal government will pay its employees to click on Amazon while working from home.
And:
The ethnic dimension of Covid-19 in Fairfax County is especially noteworthy. Latinos make up 16.8% of the county’s population, but account for 62.7% of the diagnosed Covid-19 cases. And if you assume that perhaps lower-income Latinos are less willing or able to go to a doctor, the true percentage of the Latino cases may be higher yet.
I thus foresee a future where people are more reluctant to hire Latino immigrants for housework or for child care, and thus additional home responsibilities will fall on parents, probably disproportionately on women. In turn, I expect many Latinos to leave the area, at least temporarily, unable to afford the higher rents when there is little work. There may also be greater employer discrimination against Latino applicants, as unfair or unjust as that would be.
Those developments will lead to Fairfax County becoming whiter. (If you are wondering, blacks are a slightly lower Covid-19 case share in the county than population share).
Recommended, for all those who care.
My (second) Conversation with Paul Romer
Interesting throughout, here is the audio and transcript. Here is the summary:
Paul Romer makes his second appearance to discuss the failings of economics, how his mass testing plan for COVID-19 would work, what aspect of epidemiology concern him, how the FDA is slowing a better response, his ideas for reopening schools and Major League Baseball, where he agrees with Weyl’s test plan, why charter cities need a new name, what went wrong with Honduras, the development trajectory for sub-Saharan Africa, how he’d reform the World Bank, the underrated benefits of a culture of science, his heartening takeaway about human nature from his experience at Burning Man, and more.
I liked the parts about charter cities and the World Bank the best, here is one excerpt:
COWEN: How optimistic are you more generally about the developmental trajectory for sub-Saharan Africa?
ROMER: There’s a saying I picked up from Gordon Brown, that in establishing the rule of law, the first five centuries are always the hardest. I think some parts of this development process are just very slow. If you look around the world, all the efforts since World War II that’s gone into trying to build strong, effective states, to establish the rule of law in a functioning state, I think the external investments in building states have yielded very little.
So we need to think about ways to transfer the functioning of existing states rather than just build them from scratch in existing places. That’s a lot of the impetus behind this charter cities idea. It’s both — you select people coming in who have a particular set of norms that then become the dominant norms in this new place, but you also protect those norms by certain kinds of administrative structures, state functions that reinforce them.
And this:
COWEN: If you could reform the World Bank, what would you do?
ROMER: Oh, that’s an interesting question. I think the Bank is trying to serve two missions, and it can’t do both. One is a diplomatic function, which I think is very important. The World Bank is a place where somebody who represents the government of China and somebody who represents the government of the United States sit in a conference room and argue, “Should we do A or B?” Not just argue, but discuss, negotiate. On a regular basis, they make decisions.
And it isn’t just China and the US. It’s a bunch of countries. I think it’s very good for personal relationships, for the careers of people who will go on to have other positions in these governments, to have that kind of experience of, basically, diplomatic negotiation over a bunch of relatively small items because it’s a confidence-building measure that makes it possible for countries to make bigger diplomatic decisions when they have to.
That, I think, is the value of the World Bank right now. The problem is that that diplomatic function is inconsistent with the function of being a provider of scientific insight. The scientific endeavor has to be committed to truth, no matter whose feathers get ruffled. There’s certain convenient fictions that are required for diplomacy to work. You start accepting convenient fictions in science, and science is just dead.
So the Bank’s got to decide: is it engaged in diplomacy or science? I think the diplomacy is its unique comparative advantage. Therefore, I think it’s got to get out of the scientific business. It should just outsource its research. It shouldn’t try and be a research organization, and it should just be transparent about what it can be good at and is good at.
And toward the end:
COWEN: Last question thread, what did you learn at Burning Man?
ROMER: Sometimes physical presence is necessary to appreciate something like scale. The scale of everything at Burning Man was just totally unexpected, a total surprise for me, even having looked at all of these pictures and so forth. That was one.
Another thing that really stood out, which is not exactly a surprise, but maybe it was the surprise in that group — if you ask, what do people do if you put them in a setting where there’s supposed to be no compensation, no quid pro quo, and you just give them a chance to be there for a week. What do they do?
They work.
For purposes of contrast, here is my first Conversation with Paul Romer.
Wednesday assorted links
1. How much do you need in the way of masks to stop an epidemic?
2. Robot dog herds sheep on a New Zealand farm.
3. Community labs and DIY biology (New Yorker, interesting piece).
4. John Cochrane talk on reopening.
5. Are airplanes actually pretty safe for Covid-19 risk? (Not endorsing this piece or offering it up as advice, I do not myself know one way or the other. Any opinions here?)
6. “More generally, the entire Yemeni monetary system has split on the basis of banknote age.” The older notes of course no longer can be increased in supply and thus, if priced separately, are more stable in value.
7. Sweden is not getting to herd immunity very quickly. This also seems to imply Swedish policy does not matter very much.
8. On the clustering of coronaviruses, recommended, important. And more here.
Incentivizing Plasma Donation for Convalescent Therapy
Kominers, Pathak, Sonmez, and Unver apply market design tools to incentivize convalescent therapy:
COVID-19 convalescent plasma (CCP) therapy is currently a leading treatment for COVID-19. At present, there is a shortage of CCP relative to demand. We develop and analyze a model of centralized CCP allocation that incorporates both donation and distribution. In order to increase CCP supply, we introduce a mechanism that utilizes two incentive schemes, respectively based on principles of “paying it backward” and “paying it forward.” Under the first scheme, CCP donors obtain treatment vouchers that can be transferred to patients of their choosing. Under the latter scheme, patients obtain priority for CCP therapy in exchange for a future pledge to donate CCP if possible. We show that in steady-state, both principles generally increase overall treatment rates for all patients|not just those who are voucher-prioritized or pledged to donate. Our results also hold under certain conditions if a fraction of CCP is reserved for patients who participate in clinical trials. Finally, we examine the implications of pooling blood types on the efficiency and equity of CCP distribution.
The idea is quite similar to the “no give, no take” rule for organ donation that I have promoted for many years. Namely, if you don’t sign your organ donor card you go to the back of the queue should you ever need an organ donation. Israel adopted the idea some years ago by giving points to people who signed their organ donor card. As with no-give, no-take, the point of the rules that Kominers et al. promote isn’t fairness per se but rather as an incentive to increase donations and thus increase the supply of plasma.
Covid career advice for young workers
Given COVID-19 and its accompanying economic issues, what do you think people in their early-mid 20s should be doing or thinking about right now in terms of saving, spending, career planning, etc.? What’s overlooked or wrong in the most obvious or common advice? (I.e., “sit tight”, “spend some money at local businesses”, “give to charity”, “learn a new skill”, etc.) Obviously, employment status matters and different skillsets, talents, etc. affect what one can and should do. Candidly, I’m not sure how best to disaggregate young workers in relation to my questions.
That is an email from Gregory Irving. I am not sure my point here is “overlooked,” but if I had to offer one piece of advice it would be this:
“Right now it is harder than usual to build out your “soft network” of acquaintances, loose ties, and other people who could help you or become your future partners. You just can’t go out and meet people in the old ways. Yet in spite of this greater difficulty, virtually everyone’s allocation of time has shifted pretty dramatically. So there ought to be entrepreneurial opportunities to build up soft networks in ways that would not have been possible pre-Covid. Try to take advantage of those opportunities.”
What do you all say?
The new economics of chess
I just finished watching one of Chess24.com’s Magnus Carlsen-affiliated rapid on-line chess tournaments, when today (a day later?) I see that another tournament has started. And with Magnus himself playing, as well as other world-class players. Note that Magnus both plays in these tournaments as the #1 attraction, and he owns an equity share in them, albeit with other investors.
So I’ve been trying to model the production of chess services in my mind.
I start with the point that viewers care much more about live, fresh games than games from a week ago. Many sports of course operate on this same basis.
The second point is that most chess players have a relatively low opportunity cost of time, Rogoff and Kasparov excepted, plus some chess players can substitute into poker for profit (and may have quit chess already). In fact what they do in their spare time is to…play chess! Often with each other, and often on-line. So if you offer to pay them some amount for doing basically the same, they will sign up. Especially during a pandemic when many of them are trapped under relatively severe quarantines.
It is also the case that a chess player can play many days in the year, perhaps not every day, but you really can play a lot without tearing your rotator cuff.
It then seems the equilibrium is a much higher supply of chess tournaments, especially since on-line play removes some of the previous barriers to entry, such as needing a venue and some physical infrastructure.
You might even end up with a kind of Malthusian equilibrium, where the supply keeps on expanding to meet a fairly low marginal cost.
But this is a “superstars” kind of competition, and so the returns will go to the scarce factor. That scarce factor is Carlsen himself, who garners far more attention than any other player. And as noted he is an equity holder in this venture and as a player he has been winning the #1 prize money. Over time, you might expect the returns of some of the other players — maybe in the top ten but not so famous or glamorous — to approach the Malthusian level. Perhaps much of the public doesn’t care if Magnus plays #9 or #16, who in any case are only a small number of rating points apart.
Notice how well Magnus Carlsen understands reputation and internet production. He keeps on posting “Banter Blitz” videos on YouTube, which show him playing speed chess on-line and commenting on the games as they proceed. He dramatically expanded the supply of chess tournaments, which he earns income from. He already was “the scarce factor,” and he has dramatically expanded the supply of attention aimed his way. He understands that successful internet production is frequent production.
On-line chess viewing is way up (NYT) with the pandemic, and also because of these efforts.
Do not underestimate Magnus Carlsen. He has been #1 in classical chess, rapid, and blitz, all at the same time. He is a huge YouTube star in chess. He has won a tournament about chess trivia, and he has been #1 in fantasy football for the whole world (not an easy feat).
And now he is bringing an economic revolution to chess, with himself as the #1 labor and equity earner at the same time.
Will Covid-19 expose the ghost firms?
That is the topic of my latest Bloomberg column, here is one excerpt:
Demand for in-restaurant dining is likely to fall as well, though estimates vary. Since the average small business carries less than a month’s worth of liquid reserves, and the wait for a vaccine is likely to be at least a year, many restaurants will simply be unable to survive the shrinking of the market.
I call these places ghost restaurants because they are still walking around, so to speak, visible to us and listed on Yelp, but not really alive and without much of a future.
In a few months’ time, a significant number of these ghost enterprises will be gone. My drive around Northern Virginia, rather than being rich with culinary choice, will soon become fairly desolate — and the overall economic landscape will indeed be much emptier.
What else in our current capital structure might qualify as “ghost”?
And this:
And while an all-but-certain death awaits some businesses, others can look forward to mere stagnation. If you are a 23-year-old entrepreneur, how easy will it be to build up the network of “soft ties” that will help you launch the next phase of your career?
As many marginal businesses are going under, it is quite possible that the public-health situation will improve. Civic spaces will repopulate as commercial ones depopulate, giving urban landscapes a confusing feel. And because there will be fewer businesses to choose from, it will be all the harder for those remaining to enforce social distancing.
Many Americans have been clamoring lately for more freedom, and those desires are understandable. But as they emerge from lockdown, they might well be disappointed to discover that, above all else, what people will be exercising is the freedom to go out of business.
If you start by using the word “ghost” (better than zombie, in this setting), don’t be surprised if the column turns out a bit gloomy!
Tuesday assorted links
1. Richard Flanagan on the Australian response (NYT).
2. BuildAtmos.com — Home building, simplified.
3. Short essay on how an ex-CDC person sees things. From my point of view off base, but fascinating in any case and of course you should read that side of the story.
4. Why not more deaths in Pakistan? And poverty vs. age as mortality predictors in India.
5. Does voting by mail provide a partisan advantage?
6. How health care will change.
7. Wiblin podcast with Lipsitch.
8. Pizza arbitrage.