Why blogging will survive

by  Tyler Cowen in

More and more, I find that if I can’t share something (that is, can’t point to something using e-mail or my own web site), it’s not worth my time.

Just imagine, the asocial bloggers free ride upon the social propensities of others.  What a marriage of convenience. 

The quotation is from John Battelle’s The Search, his new book on Google, worth a quick read for the asocial.

Fear of Floating

by  Alex Tabarrok in

The Washington Post has a good article on an interesting email scam. 

Typically, here’s what happens: You advertise a car for sale
online. A fraudster posing as a buyer responds via e-mail agreeing to
purchase the car for the asking price…

Next, the scammer persuades the buyer to
accept a cashier’s check or personal check for significantly more than
the agreed-upon price. The excess is allegedly to cover the cost of
shipping the car abroad. Or the check’s too big, he claims, because it
had already been cut for a car deal that fell through. Or the buyer
simply apologizes for the mistake.

The key to the
scam is duping the seller to deposit the check and, once it clears in
the seller’s account, return the excess money via an irreversible wire
transfer, such as Western Union.

Now what always confused me about this scam is that it seems very easy to avoid.  Just wait for the check from the scammer to clear, right?  Wrong.

The scam turns on most people’s misunderstanding of the
check-clearing process. Bank clerks and managers usually aren’t experts
at identifying counterfeit checks. So they deposit the check and tell
the seller it requires 48 hours to "clear." Then the money appears on
the seller’s account statement and can be withdrawn.

Most
people assume that means the check is valid. But the real
check-clearing process can take weeks. Phony checks generally aren’t
nabbed until after the seller has wired the overpayment to the scammer.
And after the wire transfer is picked up, it’s gone.

What is the value of think tanks?

by  Tyler Cowen in

So asks Daniel Drezner, read his post.  I see no need to focus on think tanks per se, but I see four critical gaps in our current understanding.  Someone (moi?…no, you) should be working on these problems:

1. Applying frontier social science to issues of disaster preparedness.  This includes how to respond and be ready for avian flu, terrorist attacks, and the next Katrina.

2. A good health care plan that is practical, not too far from politically feasible, and applies competition to lower costs and improve service quality.  It must be incentive-compatible, yet at the same time it can’t be seen as heartless and simply letting people die.  That probably rules out "cut health care spending in half and have everyone eat better and exercise more," otherwise an appealing option.

3. How should we respond to the possibility that very small groups will have the ability to attack or blackmail us, using nuclear weapons or other decentralized sources of extreme power?  What does this equilibrium look like, and how can we make it better rather than worse?

4. How can Africa actually develop?  Don’t beg the question by listing the needed outputs — such as markets, democracy, or the rule of law — as the inputs of your policy recommendation.

Any institution — think tank or not — which tackles those problems has earned my respect.  And note that all four overlap to some extent.  All relate to how a centralized sphere of control should respond to a decentralized abuse of incentives, or how we can stop those decentralized abuses in the first place. 

Rebuilding New Orleans: what does it signal?

by  Tyler Cowen in

Read a critique of rebuilding here, Richard Posner raises doubts as well.  Ed Glaeser notes:

"We have an obligation to people, not to places," says Edward Glaeser, a Harvard professor who specializes in urban economics. "Given just how much, on a per capita basis, it would take to rebuild New Orleans to its former glory, lots of residents would be much [better off] with $10,000 and a bus ticket to Houston."

My predictive view is closest to that of Joel Garreau: the core tourist sites of New Orleans will be restored, but like Galveston, Texas (hurricane of 1900), the city will not return to its previous prominence.  How many major corporations had their headquarters there as it was?  You could service the port with a city half of New Orleans’ previous size or less.

For better or worse, the necessity of signaling "political will" suggests a significant rebuilding effort will be made.  What kind of rebuilding must we do to convince ourselves we have tried hard enough?  I see a few options: 

1. The rebuilding effort will give central attention to culture, a main source of pride in the city.  That being said, the actual rebuilding will complete the transformation of New Orleans into a dead museum of past glories.  The city’s poor neighborhoods — which bred many of the ideas — will never be the same and in fact had already lost much of their creativity.

2. The rebuilding effort will give central attention to race.  This will attempt to convince voters that our government really does care about poor blacks.  The attempt will fail.

3. The rebuilding effort will give central attention to spending money for the sake of spending money.  When that does not suffice to restore the city, many Americans will blame the residents, thinking back on the looting and collapse of order.

None of these efforts will in fact signal that we are ready for the next disaster headed our way.

The worst business regulations in the world

by  Tyler Cowen in

The "winner" is Democratic Republic of the Congo, the loser New Zealand, here is a longer list.  Here is an excellent chart; for getting licenses the U.S. is only number seventeen, for getting credit the UK is number one.  Do take a look.  Here is the related document.  In 2004 Serbia and Montenegro reformed the most for job creation incentives.  Africa had the lowest propensity for reforms in 2004.  Thanks to Tim Harford for the pointer, this work should make a big splash.

Are autocratic successors less fierce?

by  Tyler Cowen in

Hypothesis A: Successors to tyrants will be less fierce, because tyrants themselves fear fierce wanna-bee underlings. 

Hypothesis B: Hereditary monarchy does not breed for love of power, therefore successors will become less fierce than the first usurper monarch.  Bryan Caplan attributes this view to Gordon Tullock.

Hypothesis C: Any method of orderly succession is better than recurring contests for national leadership.

Hypothesis D: Over time orderly succession becomes difficult to maintain, given the lack of fierceness of the rulers.

Hypothesis E: If you can prevent repeated coup d’etats, you are on your way toward economic growth.

Rauch

Here is a Jonathan Klick paper on autocracy.  Here is a Daniel Sutter piece on the transition from autocracy.  Here is another painting by Neo Rauch.

What has happened to job growth?

by  Tyler Cowen in

Daniel Gross writes:

Mystified economists have pointed to various possible culprits: outsourcing, competition from China, high health care costs and lower work-force participation, to name a few. But there’s one force that so far has managed to avoid blame for the sluggish pace of job growth: Enron.

In 2000 and 2001, as the bull market imploded, there was a spike in accounting problems – a mix of outright fraud, earnings manipulation and more benign restatements necessitated by changes in business conditions. Clearly, investors were burned by earnings restatements at Enron and WorldCom, and at hundreds of smaller and less infamous companies. "Nobody had actually explored the real consequences of earnings management, as opposed to the financial ones," says Thomas Philippon, assistant professor of economics at New York University’s Stern School of Business.

In a recent National Bureau of Economic Research working paper, Professor Philippon and a colleague, Simi Kedia, assistant professor of finance and economics at Rutgers, argued that the widespread accounting problems for which Enron was emblematic might have helped suppress employment growth – in the affected companies, and in the industries in which the misreporting was concentrated.

Professors Philippon and Kedia examined the roster of companies that restated earnings from January 1997 to June 2002, as compiled by what is now the Government Accountability Office, and matched it up with available employment data. It was a regrettably large sample: 919 restatements by 845 public companies. About one-tenth of publicly traded companies announced at least one restatement.

Not surprisingly, companies that were misrepresenting their financial results – intentionally or inadvertently – helped juice employment growth in the late 1990’s as they added employees. "During periods of suspicious accounting, firms hire and invest excessively," the professors said. From 1997 to 1999, the restating companies added 500,000 jobs, a 25 percent increase.

When these companies restated their earnings, the growth they had reported often turned out to be an illusion. As a result, the same companies shed labor quickly. At its peak, Enron employed 20,000 people. But in the weeks after its earnings restatement in November 2001, this new-economy profit machine was suddenly revealed to be an old-fashioned money pit. Within months, the company was down to about 500 employees. The authors label Enron a "typical – if somewhat extreme – example" of a company whose employment rose and fell rapidly.

On the whole, Professors Philippon and Kedia conclude, companies that had to restate earnings in 2000 and 2001 axed anywhere from 250,000 to 600,000 jobs in 2001 and 2002. That would account for a significant chunk of the jobs lost during the period.

What’s more, restatements create industrywide uncertainty that can inhibit future hiring. When WorldCom was revealed to have fudged its earnings, it became clear that the business model for telecommunications and data services wasn’t nearly as profitable as WorldCom had made it out to be. "All of the sudden, the entire industry appears to have excess labor," Professor Kedia said. And once many of the assumptions about the industry’s business models turned out to be false, executives and investors were naturally gun-shy about hiring and expanding.

It is too early to evaluate this research, and let us not get carried away by monocausal theories, but today I felt I learned something.  Here is the full story.

The Founding Fathers of Law and Economics

by  Tyler Cowen in

…the most neglected side of law and economics is empirical.  In most areas of law and economics, there is a dearth of empirical studies…  Recently, I surveyed articles published in the Journal of Legal Studies (the leading ‘new’ law and economics journal) during the 1972-2002 period, and found that 39 percent of the 571 articles had some empirical content [TC: a Chicago code word for "econometrics"?]…In contrast, 71 percent of the 604 articles published in the Journal of Law and Economics, (a leading economics journal in industrial organization) during the 1972-2002 period were empirical.  Similarly, 70 percent of the articles recently published in the Journal of Political Economy contained substantial empirical analysis.

That is William Landes, writing in The Origins of Law and Economics: Essays by the Founding Fathers, edited by my colleagues Charles Rowley and Francesco Parisi.  Other contributors to this important volume include Coase, Tullock, Becker, Epstein, Posner, Buchanan, Demsetz Williamson, and others.  Read more here.

Seth Roberts in NYTimes

by  Alex Tabarrok in

Seth Roberts may soon be waking up to see his own face on television.  That ought to make him happy!  Roberts, as you may recall, is the Berkeley psychologist whose novel self-experiments have led to some strange but important new ideas.  Stephen Dubner, who read about Roberts on MR, and Steve Levitt have just profiled him in the NYTimes Magazine; they do an especially good job of explaining Seth’s theory of weight loss:

[Roberts] had by now come to embrace the theory that our bodies are
regulated by a "set point," a sort of Stone Age thermostat that sets an
optimal weight for each person. …But according to Roberts’s
interpretation of the set-point theory, when food is scarcer, you
become less hungry; and you get hungrier when there’s a lot of food
around.

This may sound backward, like
telling your home’s furnace to run only in the summer. But there is a
key difference between home heat and calories: while there is no good
way to store the warm air in your home for the next winter, there is a
way to store today’s calories for future use. It’s called fat….

During an era of scarcity –
an era when the next meal depended on a successful hunt, not a
successful phone call to Hunan Garden – this set-point system was
vital. It allowed you to spend down your fat savings when food was
scarce and make deposits when food was plentiful. Roberts was convinced
that this system was accompanied by a powerful signaling mechanism:
whenever you ate a food that was flavorful (which correlated with a
time of abundance) and familiar (which indicated that you had eaten
this food before and benefited from it), your body demanded that you
bank as many of those calories as possible….

So
Roberts tried to game this Stone Age system. What if he could keep his
thermostat low by sending fewer flavor signals? One obvious solution
was a bland diet, but that didn’t interest Roberts. (He is, in fact, a
serious foodie.) After a great deal of experimenting, he discovered two
agents capable of tricking the set-point system. A few tablespoons of
unflavored oil (he used canola or extra light olive oil), swallowed a
few times a day between mealtimes, gave his body some calories but
didn’t trip the signal to stock up on more. Several ounces of sugar
water (he used granulated fructose, which has a lower glycemic index
than table sugar) produced the same effect. (Sweetness does not seem to
act as a "flavor" in the body’s caloric-signaling system.)

The results were astounding. Roberts lost 40 pounds and never gained it back.

I can verify the appetite suppressing properties of the fructose water.  A glass of fructose water and I can easily go without lunch.  The only problem is that the sophists lure the unsuspecting to lunch anyway.

UHaul Pricing and Free Drinks for Women Nite

by  Alex Tabarrok in

Here is my analysis of UHaul pricing and the larger implications for not only ‘women drink free nites’ but many other markets.

Why is it so more expensive to rent a UHaul van to travel from  LA to Las Vegas ($454) than from Vegas to LA ($119) (more here).  Since the direct cost is similar the first thing an economist might think of is price discrimination.  But the rental market is highly competitive, especially when we take into account substitutes such as train, private car etc., so that seems like a non-starter.  A good answer needs to recognize that UHaul operates a network with significant inter-customer externalities.

Let us suppose that as the day dawns UHaul has the optimal number of trucks at each of its locations.  At the end of the day, UHaul would like the same number of trucks at each of its locations.  But this is possible only if departures equal arrivals and to help achieve that balance UHaul lowers the price on the low demand Vegas to LA trip and raises it on the high demand Vegas to LA trip.  (It’s more complicated than this because there are many more than bi-directional considerations but you get the idea.)

Put differently, a customer who travels from Las Vegas to LA reduces the cost to UHaul of running its network because it lets UHaul sell an LA to Las Vegas trip.  The direct costs may be similar but the indirect costs related to running the network are very different. UHaul’s pricing strategy reflects both the direct and indirect costs.

Network economics has some similarities to platform economics.  A bar, for example, is a platform which mediates transactions (pecuniary and non-pecuniary!) between two sorts of customers, men and women.  If men have a higher demand for going to a bar with many women (LA to Las Vegas) than women have of going to a bar with many men (Las Vegas to LA) then in a competitive market the bar must set a higher price for men than for women.  In this context, far from being an example of monopoly power, differential pricing is a result of competition.

More generally, there are many examples of platform markets.  The developer of a mall has as customers shoppers and shops.  A video game console sells itself to players and programmers.  A credit card must have users and merchants.  In some places differential pricing for men and women at nightclubs is illegal.  But in a platform market such differential pricing can make both men and women better off.  Similar things can be said about practices in other platform markets which look anti-competitive at first glance but in fact are the result of competition in the context of a platform.

More on platform economics, also called two-sided markets, in Rochet and Tirole.

Bonus points to Larry White, Mark Weaver and Michael Stack for sending in answers and double bonus points to Larry for suggesting that some of theory could be tested by looking at drink pricing at gay bars.

Today, I am an American

by  Alex Tabarrok in

On Friday, I took the oath and became an American citizen.  I can’t claim to be escaping an authoritarian regime or hopeless poverty.  Indeed, the security guard at the INS saw my passport and said "What you doing here?  Why you want to be American?  Free medical care, free welfare.  I want to be Canadian."   So why did I make the leap?  There are plenty of pragmatic reasons.  I have a home here, a job, a life.  The United States has been good to me.

But the deciding factor in my choice was emotional.  Four years ago when I awoke to the devastation, I felt that my country had been attacked.  And if that is how you feel then what more needs to be said?