A polemic against New York City
New York’s entire economy is based on monopolies of information. Wall Street banks make a mint trading because they have inside information on the market flows of the products they trade. Literary agents arbitrage scarce access to book publishers against a mass of hopeful authors. Real estate brokers (and these are brokers on rental properties, not properties for sale) routinely make a 15% commission when you sign a lease, pocketing a good two-months salary (read, upwards of $5000) for the privilege of telling you where there’s an apartment free.
In New York, those monopolies go unchallenged.
The claim is that New York will never have a vibrant tech community, because of its hustler mentality and discomfort with "open information" models. The article seemed overstated to me (for one thing he has a Manhattan bias and neglects the importance of manufacturing to NYC), but still it is making a basic point of interest.
I liked this line, though I wonder about the cheap living:
Basically, startups flourish in the Bay Area the same reason the homeless do: decent weather, relatively cheap living, and no stigma attached to your lifestyle.
For the pointer I thank Chris F. Masse.
My 2010 Industrial Organization reading list
Industrial Organization I, Tyler Cowen (x2312, 4910), [email protected]
METHODS OF EVALUATION:
There will be weekly quizzes, a paper, and a final exam.
I. Firm behavior, antitrust, and vertical and horizontal control.
Asker, John, “A Study of the Internal Organization of a Bidding Cartel,” American Economic Review, (June 2010), 724-762.
Bresnahan, Timothy F. “Competition and Collusion in the American Automobile Industry: the 1955 Price War,” Journal of Industrial Economics, 1987, 35(4), 457-82.
Bresnahan, Timothy and Reiss, Peter C. “Entry and Competition in Concentrated Markets,” Journal of Political Economy, (1991), 99(5), 977-1009.
Timothy Bresnahan, “Empirical Studies of Industries with Concentrated Power,” Handbook of Industrial Organization, vol.II.
Tirole, Jean. “Vertical Control.” In Theory of Industrial Organization, Chapter 4.
Klein, Benjamin and Leffler, Keith. “The Role of Market Forces in Assuring Contractual Performance.” Journal of Political Economy 89 (1981): 615-641.
Breit, William. “Resale Price Maintenance: What do Economists Know and When Did They Know It?” Journal of Institutional and Theoretical Economics (1991).
McKenzie, Richard B. and Lee, Dwight, In Defense of Monopoly, chapter four, “Welfare-Enhancing Monopolies,” on reserve.
Tirole, Jean. “Information and Strategic Behavior: Reputation, Limit Pricing, and Predation.” In Theory of Industrial Organization, Chapter 9, on reserve.
Sproul, Michael. “Antitrust and Prices.” Journal of Political Economy (August 1993): 741-754.
McCutcheon, Barbara. “Do Meetings in Smoke-Filled Rooms Facilitate Collusion?” Journal of Political Economy (April 1997): 336-350.
Hazlett, Thomas W. “Is Antitrust Anticompetitive?” Harvard Journal of Law and Public Policy, (Spring 1986).
Crandall, Robert and Whinston, Clifford, “Does Antitrust Improve Consumer Welfare?: Assessing the Evidence,” Journal of Economic Perspectives (Fall 2003 ), 3-26, available at http://www.brookings.org/views/articles/2003crandallwinston.htm.
Holmstrom, Bengt and Tirole, Jean. “The Theory of the Firm,” in Handbook of Industrial Economics, vol.I.
Holmstrom, Bengt and Roberts, John. “The Boundaries of the Firm Revisited.” Journal of Economic Perspectives 12, 4 (Fall 1998): 73-94.
Gibbons, Robert. “Incentives in Organizations.” Journal of Economic Perspectives (Fall 1998): 115-132.
Montgomery, Cynthia. “Corporate Diversification,” Journal of Economic Perspectives (Summer 1994): 163-178.
Hansemann, Henry. “The Role of Non-Profit
Lazear, Edward P. “Leadership: A Personnel Economics Approach,” NBER Working Paper 15918, 2010.
Oyer, Paul and Schaefer, Scott, “Personnel Economics: Hiring and Incentives,” NBER Working Paper 15977, 2010.
Van den Steen, Eric, “Interpersonal Authority in a Theory of the Firm,” American Economic Review, 2010, 100:1, 466-490.
Ben-David, Itzhak, and John R. Graham and Campbell R. Harvey, “Managerial Miscalibration,” NBER working paper 16215, July 2010.
AER Symposium, May 2010, starts with “Why do Firms in Developing Countries Have Low Productivity?,” runs pp.620-633.
Glenn Ellison, “Bounded rationality in Industrial Organization,” http://cemmap.ifs.org.uk/papers/vol2_chap5.pdf
Xavier Gabaix and David Laibson, “Shrouded Attributes, Consumer Myopia, and Information Suppression in Competitive Markets,” http://papers.ssrn.com/sol3/papers.cfm?abstract_id=728545.
Charness,
Cowen,
III. Capital structure and control
Miller, Merton, and commentators. “The Modigliani-Miller Propositions After Thirty Years,” and comments, Journal of Economic Perspectives (Fall 1988): 99-158.
Myers, Stewart. “Capital Structure.” Journal of Economic Perspectives (Spring 2001): 81-102.
Hart, Oliver. “Financial Contracting.” Journal of Economic Literature (December 2001): 1079-1100.
Easterbrook, Frank H. “Two Agency-Cost Explanations of Dividends.” American Economic Review (September 1984).
Baker, Malcolm and Wurgler, Jeffrey. “A Catering Theory of Dividends,” Journal of Finance (2004), available at http://pages.stern.nyu.edu/~jwurgler/.
Baker, Malcolm and Ruback, Richard. “Behavioral Corporate Finance: A Survey,” found at http://www.wcfia.harvard.edu/seminars/pegroup/BakerRubackWurgler.pdf
MacKinlay, A.C. (1997), “Event Studies in Economics and Finance”, Journal of
Economic Literature 35(1), 13-39.
Andrade, Gregor, et. al. “New Evidence and Perspective on Mergers.” Journal of Economic Perspectives (Spring 2001): 103-120.
Holmstrom, Bengt and Kaplan, Steven. “Corporate Governance and Merger Activity in the
Gompers, Paul and Lerner, Josh. “The Venture Capital Revolution.” Journal of Economic Perspectives (Spring 2001): 145-168.
Stein, Jeremy C. “Efficient Capital Markets, Inefficient Firms: A Model of Myopic Corporate Behavior.” Quarterly Journal of Economics 104 (November 1989): 655-670.
Stein, Jeremy C. “Takeover Threats and Managerial Myopia.” Journal of Political Economy (1988): 61-80.
Scharfstein, David S. and Stein, Jeremy C. “Herd Behavior and Investment.” American Economic Review 80 (June 1990): 465-479.
Hall, Brian and Murphy, Kevin J, “The Trouble with Stock Options,” Journal of Economic Perspectives, Summer 2003, also at http://www-rcf.usc.edu/~kjmurphy/HMTrouble.pdf.
Murphy, Kevin J. and Zaboznik, Jan. “CEO Pay and Appointments,” American Economic Review, May 2004, also at http://www-rcf.usc.edu/~kjmurphy/CEOTrends.pdf
Jensen, Michael, Murphy, Kevin J., and Eric Wruck. “Remuneration: Where We've Been, How We Got to Here, What are the Problems, and How to Fix Them,” available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=561305#PaperDownload.
Robert J. Gordon and Ian Dew-Becker, “Unresolved Issues in the Rise of American Inequality,” http://www.people.fas.harvard.edu/~idew/papers/BPEA_final_ineq.pdf
McKay, Alisdair and Reis, Ricardo, “The Brevity and Violence of Contractions and Expansions,” NBER Working Paper, 12400, 2010.
Gorton, Gary B. Slapped in the Face by the Invisible Hand: Banking and the Panic of 2007, http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1401882, published on-line in 2009.
IV. Theory and Regulation of Natural Monopolies
pp. 21-275.
Demsetz, Harold. “Why Regulate Utilities?” Journal of Law and Economics (April 1968): 347-359.
Williamson, Oliver. “Franchise Bidding for Natural Monopolies – in General and with Respect to CATV.”
Crandall, Robert W. “An End to Economic Regulation?” available at http://www.brookings.org/views/papers/crandall/20030721.pdf.
Parente, Stephen L. and Prescott, Edward. “Monopoly Rights: A Barrier to Riches.” American Economic Review 89, 5 (December 1999): 1216-1233.
Shleifer, Andrei. “State vs. Private Ownership.” Journal of Economic Perspectives (Fall 1998): 133-151.
Chang, Roberto, Constantino Hevia, and Norman Loayza, “Privatization and Nationalization Cycles,” NBER Working Paper 16126, June 2010.
Berg and Tschirhart, pp. 480-522.
Associated other topics in regulation, depending on your interests; reading suggestions will follow later in the semester.
*The Korean War*
That's the new book by Bruce Cumings and it is as good as the reviews indicate (criticisms here). Here are a few choice excerpts:
For decades the South Korean intelligence agencies put out the line that Kim Il Sung was an impostor, a Soviet stooge who stole the name of a famous Korean patriot. The real reason for this smoke screen was the pathetic truth that so many of its own leaders served the Japanese…
And:
…Two Koreas began to emerge in the early 1930s, one born of an unremittingly violent struggle in which neither side gave quarter; truths experienced in Manchukuo burned the souls of the North Korean leadership. The other truth is the palpable beginning of an urban middle class, as peole marched not to the bugle of anti-Japanese resistance but into the friendly confines of the Hwashin department store, movie theaters, and ubiquitous bars and tearooms.
And:
…Most Americans seem unaware that the United States occupied Korea just after the war with Japan ended, and set up a full military government that lasted for three years and deeply shaped postwar Korean history.
And:
What hardly any Americans know or remember, however, is that we carpet-bombed the North for three years with next to no concern for civilian casualties…The air assaults ranged from the widespread and continual use of firebombing (mainly with napalm), to threats to use nuclear and chemical weapons, finally to the destruction of huge North Korean dams in the last stages of the war.
And, from the entire war:
Perhaps as many as 3 million Koreans died, at least half of them civilians (Japan lost 2.3 million people in the Pacific War).
You can buy the book here.
Further assorted links
*More than Good Intentions*
Dean Karlan is one of my favorite young economists and in April he will publish a popular economics book, co-authored with Jacob Appel. The subtitle is How a New Economics is Helping to Solve Global Poverty.
Consider the book an accessible account of "the new development economics," based on field experiments and randomized control trials. Much of the text focuses on micro-credit, where Karlan has done considerable work, but there is also material on public health, cell phones, and how to get parents to send their kids to school (pay them!).
Anyone interested in a readable treatment of the new development economics should pick up this book.
Assorted links
1. The art of money.
2. Posters for the fiftieth anniversary of Brasilia.
3. Werner Herzog reads Madeline.
4. Werner Herzog reads Curious George.
5. How bad are things for the long haul? A critique of Luce's FT piece.
6. Visual history of Las Vegas urbanization, from a new blog on urban demographics.
Sentences to ponder
A report from Harvard's Kennedy Center last year found that the world could cut global CO2 emissions by about 6 percent simply by scrapping price supports for fossil energy.
Hat tips go to Sullivan and Plumer.
Larry Kotlikoff responds on limited purpose banking
You can read his reply here. Note however that my criticisms explicitly are directed at narrow banking more generally, most of all my own (previous) version of the idea, not at the specific version of Kotlikoff's proposal. There is one particular topic I did not deal with, and on it I will quote Kotlikoff reproducing my critique and responding to it:
TC: A lot of what current banks do would be replicated by non-bank commercial lenders and the risk of the banking sector would be transferred somewhere else.
LK: You missed the key point that all incorporated financial intermediaries have to operate as mutual fund companies. There are no “non-bank commercial lenders” unless they operate as proprietorships and partnerships and their owners have their houses and yachts on the line. The risk of the banking sector is reduced because we set it up to eliminate any chance of bank runs and gambling by the banks with the taxpayers’ chips. Recall, the mutual funds are 100 percent equity financed at all times and in all situations.
TC: Ideally, these non-bank lenders would engage in greater “maturity-matching,” but if banks will exploit the moral hazard problem won’t these lenders exploit it too?
LK: The only financial intermediaries who can operate under Limited Purpose Banking according to the current rules of the road are private banks with no limited liability. The lack of limited liability will eliminate the moral hazard problem.
I am not inclined to see unlimited liability as a practical alternative. How many businesses supply commercial credit? Trade credit? Credit by any other name? — namely contracts involving derivatives, annuities, insurance, repurchase agreements, etc., with intertemporal payments and embedded interest rates in the prices. Would they all have to give up limited liability? Or would we end up channeling more financial intermediation through indirect credit transactions, while maintaining limited liability? A version of this dilemma is experienced regularly by systems of equity-based Islamic banking..
Second, unlimited liability creates a pecuniary externality across shareholders. Who wants to be the remaining "fat cat" shareholder? Why should Bill Gates ever invest? Non-mutual fund banks will end up owned by thinly capitalized individuals or entities, thereby defeating the purpose of unlimited liability while at the same time raising transactions costs. Walter Bagehot made this point, see also Joseph Grundfest, here is Hansmann and Kraakman with a reply. Alex very ably surveys the main arguments in an MR post.
Unlimited liability is fine for small-scale, private banking, especially in the international sector where tax evasion is a motive and the banks aren't fully part of any standard regulatory network. It doesn't work to force it on such a large sector of the economy as most commercial credit and non-bank lending.
In sum, I do not believe that narrow banking proposals benefit from being bundled with unlimited liability for other lenders.
Downward Revision in 2nd Quarter GDP?
Secretary of the Treasury Geithner in the NYTimes on August 2:
While the economy has a long way to go before reaching its full potential, last week’s data on economic growth show that large parts of the private sector continue to strengthen.
Catherine Rampell at the NYTimes blog Economix on August 3:
On Friday, in its preliminary estimate of gross domestic product, the Bureau of Economic Analysis said it believed the economy grew at an annual rate of 2.4 percent last quarter.
…G.D.P. numbers go through several revisions as the bureau receives more complete data, and it now looks as if the revisions may be significant. According to the June factory order data, released today, the number the bureau used to calculated the inventory component of G.D.P. was way off.
As a result, economists are predicting that the second quarter G.D.P. number will be revised downward from 2.4 percent to somewhere around 1.7 percent.
Previous revisions to GDP show the recession began earlier and had a deeper trough than first thought. Moreover, on balance, the previous revisions also suggest that the recovery has been even weaker than first thought. If the argument above holds up, that trend will continue. The news is not good.
GDP is lower today than it was at its peak in 2007.
Why does anyone support private macroeconomic forecasts?
This question has come up a few times lately in the blogosphere. I've long found the market for such forecasts to be a puzzling practice. Sometimes the forecasts are purchased and other times they are given away, but either way money is being spent.
The first question is whether those forecasts are more accurate than naive "random walk" models. On average probably not, although you could argue that in a recession mean-reversion gives an edge to structural models. Still, the forecasts are paid for in both good times and bad. Note also that those who predicted our last crisis were, for the most part, giving that knowledge away for free.
Second, there are many such forecasts. Even if some forecasts are quite useful, what's the value of supporting a marginal or additional forecast? Is the next forecast to come along so much better? Forecasts would seem to be the classic example of a public good.
I would explore other models. Under one possibility, outsiders pay for the forecast to join a more exclusive club of clients with other privileges. It's a bit like how art galleries won't sell their best pictures to complete outsiders but instead ask that you "pay your dues" by being a loyal customer for years. In other words, it's an arbitrary fee to enforce price discrimination, backed by some plausible pretext.
Under a related model, the firm pays for the forecast as a means of generating publicity, signaling its size, seriousness, and audience, and in general marketing itself to outside clients. It is unclear who bears the final incidence of these expenditures, the firm or the clients, but still "forecasting isn't about knowledge," as Robin Hanson would have said to the oracle at Delphi.
Either way, I do not put much credence in what the forecasts say. They do usually represent "standard macroeconomic knowledge" and in that sense they are not a complete fraud. But the fact that they are being paid for does not, in my eyes, mean they are passing a market test in the traditional sense.
If anything, the persistence of the market in such forecasts should make you wonder about many of the other functions of these banks.
Insurance markets in everything?
http://www.ticketfree.ca/, or try this site.
Like insurance for the very tickets that jack up your actual insurance, TF’ll cover the cost of nearly any violation you incur while driving (for a reasonable annual fee), so you can finally go too fast without getting all too furious. Current plans consist of the Mini, which exclusively covers speeding offenses; the Classic, which adds everyday scofflaw activities like light running and illegal u-turns; and the Enthusiast, which picks up the tab on parking tickets, plus miscellany like window tinting and noise violations, a necessary prophylactic for anyone playing the whistle tip game. Whoo WHOO! To recoup expenses, members simply enter their ticket info within 10 days of the court date and TF handles the rest, supplying an email confirmation when their payment goes through; if you choose to contest, they'll pay the fine in the event you lose, but should you actually win they'll cut you a check for the original ticket amount anyways (if crime truly doesn't pay, then speed drifting through the median must not be illegal, Dad).
Thrillist says it is real; is it? For the pointer I thank Joseph Calucci.
Macroeconomics is complicated and bewildering, installment #386
Andrew Rose and Mark Spiegel report:
We update Rose and Spiegel (2009a, b) and search for simple quantitative models of macroeconomic and financial indicators of the "Great Recession" of 2008-09. We use a cross-country approach and examine a number of potential causes that have been found to be successful indicators of crisis intensity by other scholars. We check a number of different indicators of crisis intensity, and a variety of different country samples. While countries with higher income seemed to suffer worse crises, we find few clear reliable indicators in the pre-crisis data of the incidence of the Great Recession. Countries with current account surpluses seemed better insulated from slowdowns.
There are ungated versions here.
What I’ve been reading
1. John Carey, William Golding: The Man Who Wrote Lord of the Flies. The subtitle gets at the point and I still can't finish his other books. Much of his life he wasted in a state of repression. Alcohol and boarding schools play roles in this story. Recommended.
2. Why Europe: The Medieval Origins of its Special Path, by Michael Mitterauer. How many of the preconditions for the European miracle were in place by the Middle Ages? This isn't a fun book (translated from the German), but specialists should pick it up. Here is one very serious review of the book (JSTOR).
3. Being Wrong: Adventuers in the Margin of Error, by Kathryn Schulz. Why do we so enjoy being right and thus so often end up being wrong? This is a good book for many people, but if you've been following Robin Hanson, you won't find it novel or rewarding.
4. Debra Satz, Why Some Things Should Not be for Sale: The Moral Limits of Markets. How many books are there now on this topic? Lots. How many of them take seriously the notion that our moral intuitions can be badly misguided for judging the operation of an impersonal market economy in the modern world? Not so many, though all seem to think they do.
5. Let me get this straight. You, the beautiful and brilliant
6. Super Sad True Love Story, by Gary Shteyngart. I didn't like his previous two books and I usually dislike pomo novels about cool-talking young people in major U.S. cities. Still, the flood of very good reviews nudged me to read this and I'm glad I did.
Don’t obsess over interest rates
After doing an extensive quantitative study, Glaeser, Gottlieb, and Gyourko report (ungated here):
Interest rates do influence house prices, but they cannot provide anything close to a complete explanation of the great housing market gyrations between 1996 and 2010. Over the long 1996-2006 boom, they cannot account for more than one-fifth of the rise in house prices. Their biggest predictive influence is during the 2000-2005 period, when long rates fell by almost 200 basis points. That can account for about 45 of the run-up in home values nationally during that half-decade span.
The second strangest headline I read today
Or is it the strangest? In any case, I never thought it would be so close:
Mongolian neo-Nazis: Anti-Chinese sentiment fuels rise of ultra-nationalism
Don't neglect the photo. The subheader is:
Alarm sounds over rise of extreme groups such as Tsagaan Khass who respect Hitler and reject foreign influence
Tsagaan Khass, by the way, means, rather incongruously, "White Swastika." I wonder if they know that Hitler was an Austrian ruling Germany? And, excuse me for sounding silly, but isn't respecting Hitler, in addition to all of its other problems, accepting foreign influence? I guess "foreign" here means "Chinese."