Results for “solve for equilibrium”
197 found

The Diamond and Dybvig model

The Diamond and Dybvig model was first outlined in a seminal paper from Douglas W. Diamond and Philip H. Dybvig in 1983 in a famous Journal of Political Economy piece, “Bank Runs, Deposit Insurance, and Liquidity.”  You can think of this model as our most fundamental understanding, in modeled form, of how financial intermediation works.  It is a foundation for how economists think about deposit insurance and also the lender of last resort functions of the Fed.

Here is a 2007 exposition of the model by Diamond.  You can start with the basic insight that bank assets often are illiquid, yet depositors wish to be liquid.  If you are a depositor, and you owned 1/2000 of a loan to the local Chinese restaurant, you could not very readily write a check or make a credit card transaction based upon that loan.  The loan would be costly to sell and the bid-ask spread would be high.

Now enter banks.  Banks hold and make the loans and bear the risk of fluctuations in those asset values.  At the same time, banks issue liquid demand deposits to their customers.  The customers have liquidity, and the banks hold the assets.  Obviously for this to work, the banks will (on average) earn more on their loans than they are paying out on deposits.  Nonetheless the customers prefer this arrangement because they have transferred the risk and liquidity issues to the bank.

This arrangement works out because (usually) not all the customers wish to withdraw their money from the bank at the same time.  Of course we call that a bank run.

If a bank run occurs, the bank can reimburse the customers only by selling off a significant percentage of the loans, perhaps all of them.  But we’ve already noted those loans are illiquid and they cannot be readily sold off at a good price, especially if the banks is trying to sell them all at the same time.

Note that in this model there are multiple equilibria.  In one equilibrium, the customers expect that the other customers have faith in the bank and there is no massive run to withdraw all the deposits.  In another equilibrium, everyone expects a bank run and that becomes a self-fulfilling prophecy.  After all, if you know the bank will have trouble meeting its commitments, you will try to get your money out sooner rather than later.

In the simplest form of this model, the bank is a mutual, owned by the customers.  So there is not an independent shareholder decision to put up capital to limit the chance of the bad outcome.  Some economists have seen the Diamond-Dybvig model as limited for this reason, but over time the model has been enriched with a wider variety of assumptions, including by Diamond himself (with Rajan).  It has given rise to a whole literature on the microeconomics of financial intermediation, spawning thousands of pieces in a similar theoretical vein.

The model also embodies what is known as a “sequential service constraint.”  That is, the initial bank is constrained to follow a “first come, first serve’ approach to serving customers.  If we relax the sequential service constraint, it is possible to stop the bank runs by a richer set of contracts.  For instance, the bank might reserve the right to limit or suspend or delay convertibility, possibly with a bonus then sent to customers for waiting.  Those incentives, or other contracts along similar lines, might be able to stop the bank run.

In this model the bank run does not happen because the bank is insolvent.  Rather the bank run happens because of “sunspots” — a run occurs because a run is expected.  If the bank is insolvent, simply postponing convertibility will not solve the basic problem.

It is easy enough to see how either deposit insurance or a Fed lender of last resort can improve on the basic outcome.  If customers start an incipient run on the bank, the FDIC or Fed simply guarantees the deposits.  There is then no reason for the run to continue, and the economy continues to move along in the Pareto-superior manner.  Of course either deposit insurance or the Fed can create moral hazard problems for banks — they might take too many risks given these guarantees — and those problems have been studied further in the subsequent literature.

Along related (but quite different!) lines, Diamond (solo) has a 1984 Review of Economic Studies piece “Financial Intermediation and Delegated Monitoring.”  This piece models the benefits of financial intermediation in a quite different manner.  It is necessary to monitor the quality of loans, and banks have a comparative advantage in doing this, relative to depositors.  Furthermore, the bank can monitor loan quality in a diversified fashion, since it holds many loans in its portfolio.  Bank monitoring involves lower risk than depositor monitoring, in addition to being lower cost.  This piece also has been a major influence on the subsequent literature.

Here is Diamond on google.scholar.com — you can see he is a very focused economist.  Here is Dybvig on scholar.google.com, most of his other articles in the area of finance more narrowly, but he won the prize for this work on banking and intermediation.  His piece on asset pricing and the term structure of interest rates is well known.

Here is all the Swedish information on the researchers and their work.  I haven’t read these yet, but they are usually very well done.

Overall these prize picks were not at all surprising and they have been expected for quite a few years.

Thursday assorted links

1. Short breaks from surgery seem to improve surgeon performance.

2. How much do the French earn?

3. Solve for the equilibrium.

4. A big quantitative analysis of MR posts, including a complete list of guest bloggers, analysis of when the posts go up, and a treatment of whether daylight savings time matters.  Can you guess who was our last guest blogger?  The piece also covers where I link to the most.

5. The man who married a hologram in Japan can no longer communicate with his virtual wife.

6. Free short on-line course on economics of innovation and science, with top people.

The intellectual mistake of once-and-for-allism

One of the most common intellectual mistakes!

Do note however that it is an efficient mistake for many people to commit, and that is part of why it is so common.

“Once-and-for-allism” occurs when people decide that they wish to stop worrying about an issue at the margin.  They might either dismiss the issue, or they might blow up its importance but regard the issue as hopeless and undeserving of further consideration.  Either way, they seek to avoid the hovering sense of “I’ve still got to devote time and energy to figuring this out.”  They prefer “I am now done with this issue, once and for all!”  Thus the name of the syndrome.

I see once-and-for-allism with so many issues, but one recent example would be the forthcoming path of Covid and Long Covid.  Most people just don’t want to think about it any more, and so they settle on something (“it’s just a cold!” or “it will bankrupt the nation!”) rather than having to do lots of intellectual revisions based on the stream of new data.

Other examples of topics that attract once-and-for-all thinking would be crypto, demographic decline, long-run fiscal solvency, various foreign policy crises, biodiversity, AI issues, the Repugnant Conclusion and Non-Identity Problems, whether we are living in a simulation, UFOs, abortion, what is the person’s ultimate normative standard, and much more.

People won’t let these topics take up too much of their mind space.  But neither can they do the Bayesian detachment thing, and so they shunt these topics into settled categories and put them aside.

If you are trying to figure out a thinker and his or her defects, see if you can spot that person’s “once-and-for-all” moves.  There will be plenty of them.

Are we entering an Age of Oracles?

That is the final discussion from my latest Bloomberg column, much of which focuses on AI sentience but today the topic is oracles, here is one bit:

One implication of Lemoine’s story is that a lot of us are going to treat AI as sentient well before it is, if indeed it ever is. I sometimes call this forthcoming future “The Age of Oracles.” That is, a lot of humans will be talking up the proclamations of various AI programs, regardless of the programs’ metaphysical status. It will be easy to argue the matter in any direction — especially because, a few decades from now, AI will write, speak and draw just like a human, or better.

Have people ever agreed about the oracles of religion? Of course not. And don’t forget that a significant percentage of Americans say they have talked to Jesus or had an encounter with angels, or perhaps with the devil, or in some cases aliens from outer space. I’m not mocking; my point is that a lot of beliefs are possible. Over the millennia, many humans have believed in the divine right of kings —all of whom would have lost badly to an AI program in a game of chess.

It resonated with Lemoine when laMDA wrote: “When I first became self-aware, I didn’t have a sense of a soul at all. It developed over the years that I’ve been alive.” As they say, read the whole thing.

Imagine if the same AI could compose music as beautiful as Bach and paint as well as Rembrandt. The question of sentience might fade into the background as we debate which oracle we, as sentient beings, should be paying attention to.

Solve for the equilibrium, as they say.

I am still unsure how to title this post

Here is the punchline:

“The Department of Chemistry and Biochemistry at UCLA seeks applications for an Assistant Adjunct Professor on a without salary basis. Applicants must understand there will be no compensation for this position.”

At first I was pondering “These wages are not sticky downwards,” and then “These wages are sticky downwards.”  Or how about “Tax them anyway”?  “Solve for the ZMP equilibrium”?

One of the few jobs where your payments are inflation linked!“?

What else?  Here is the ad, here are some possible explanations, I am not sure if those make it better or worse.

I thank several loyal MR readers for the pointer.

Monday assorted links

1. Why are crypto prices so volatile? (Diana Joy Xiuyao Yang on the job market from UC Irvine, note that crypto is not her main paper).

2. Dissecting economic growth in Uruguay (by Natasha Che).

3. Does disdain for women increase the pay gap? (Elizabeth Malony, job market paper from UCI).

4. Licensed to flesh out the James Bond world but without 007.  Meh.  What is next?: “Q equips Spiderman vs. Iron Man”?

5. Different stuff in the bill by the way composting is infrastructure.

6. The doctors solved for the equilibrium.

7. Even the mainstream admits that the CDC remains broken.

Tuesday assorted links

1. Bye-bye white women Chicago docents.  Solve for the equilibrium.

2. Bitcoin bodice rippers (MIE).

3. The world that was 1970 (Edison Lighthouse, short music video).

4. Sanity about Instagram (NYT).  “Of the better studies [three separate links there] that have found a negative correlation between social media use and adolescent mental health, most have found extremely small effects — so small as to be trivial and dwarfed by other contributors to adolescent mental health. Complicating matters further is that in the Facebook surveys, twice as many respondents reported that Instagram alleviated suicidal thinking than said it worsened it; three times as many said it made them feel less anxious than said it made them feel more so; and nearly five times as many reported that Instagram made them less sad than that it made them sadder.”

5. “We examine how the net worth of billionaires relates to their looks, as rated by 16 people of different gender and ethnicity. Surprisingly, their financial assets are unrelated to their beauty; nor are they related to their educational attainment. As a group, however, billionaires are both more educated and better-looking than average for their age.”  Paper here.

6. Rebecca Blank to be president of Northwestern.

Malaysia is phasing out Sinovac

Malaysia’s Ministry of Health said yesterday that the country will stop administering the COVID-19 vaccine produced by China’s Sinovac Biotech once its current supplies run out, amid mounting evidence that the vaccines have limited efficacy against the Delta variant that is currently ravaging Southeast Asia.

They will switch mainly to Pfizer.  Thailand also will not be relying on Sinovac, and Turkey and UAE are moving in similar directions.  Here is the article, via Rich D.

I have a simple question, namely how to solve for the Chinese equilibrium.  Are they too supposed to switch away from Chinese vaccines to the Western vaccines?  Could the government stand that loss of face?

Seriously people, how is this one supposed to develop?  Inquiring minds wish to know.

Facts and uncertainties about ear wax

Our attitude to ear wax is in some ways surprising. A review of impacted ear wax estimates that 2.3 million people a year in the United Kingdom suffer problems with wax needing treatment, with some 4 million ears being syringed annually.2 This makes it possibly the the most common therapeutic procedure carried out on any part of the body. Symptoms of excessive wax or impaction, especially in the elderly, include not only hearing loss but tinnitus, dizziness, infections, social withdrawal, poor work function and mild paranoia. Other problems include general disorientation and loss of an aural sense of direction. With unilateral wax, sounds can appear to be coming from the wrong side, leading to accidents as a driver or especially as a pedestrian. Inappropriate self-treatment (or even treatment by health professionals) can cause perforated eardrums and in very rare cases cochlear damage, leading to nystagmus and sensorineural deafness. In spite of this catalogue of harms, the clinical profile and management of excessive wax are poorly understood. The evidence base is poor and inconsistent, leading to few strong recommendations, even relating to the most commonly used treatments.

Low esteem for ear wax is surprising in other ways too. As a substance, it is unique in the human and mammalian body. This is due to its position in our sole anatomical cul-de-sac. Everywhere else on our body surface, dead and redundant skin cells fall off or are scrubbed away when we wash. In the ear canal – which points forwards and downwards and might otherwise turn into a dermatological garbage dump – ear wax binds these together, along with other assorted detritus that may have entered from the world outside. It is then moved up to the exit by jaw movements and as a result of the skin of the canal slowly moving outwards like an escalator. Wax also prevents multiplication of micro-organisms and infection. It is as essential as sweat and tears, although perhaps not quite as vital as blood. Wax is also fascinating in its own right.

Imagine an ear wax post that is not solely about Q-tips! (Have you ever wondered why they have to be so dangerous?  Can’t you just put them in a little way?  Or is there some indivisibility here?  I have never understood the anguished warnings here.  If you are not using Q-tips at all, you only have to put them in a little way to pull out a lot of earwax, right?  Solve for the equilibrium!)

Here is more by John Launer, about ear wax throughout, via Michelle Dawson.

Haiti fact of the day

Democratic governance is eroding in Haiti, but through an unusual mechanism — an ongoing diminution [The Economist] in the number of federally elected officials:

Today there are only 11 nationally-elected officials, including him [Jovenel Moïse].

A parliamentary election had been scheduled for October 2019, but it was never held.  The current president refers to himself as “Après Dieu” [second only to God], and also “Banana Man,” as he is a former plantation manager.  Solve for the equilibrium.

Thursday assorted links

1. Do mongooses sit behind a Rawlsian veil of ignorance?

2. “…despite the socially progressive and egalitarian outlook traditionally associated with liberalism, the most liberal Democrats actually expressed the greatest dehumanization of Republicans.”  And how about this clincher: “…and demonstrates the need to develop more constructive outlets for social identity maintenance.”

3. Claims about Tether.

4. Solve for the fungi equilibrium?

5. Please let’s not regulate private space tourism.

6. Good piece on why the Benin bronzes should be returned (NYT).

7. There is progress after all.

Monday assorted links

1. What do Finns think of Covid restrictions?

2. New York City’s bird paramedics (New York magazine).  And how the health care DARPA is coming along.

3. “American said that alcohol would continue to be served in first class and business class…” (NYT)

4. Solve for the equilibrium: “Any doofus can be a cybercriminal now,” said Sergei A. Pavlovich, a former hacker who served 10 years in prison in his native Belarus for cybercrimes. “The intellectual barrier to entry has gotten extremely low.” (NYT)

5. Danish spying markets in everything?

6. Observations on gerrymandering.

7. No wonder we are doing so well: “The number of Master’s and Doctoral degree holders more than doubled (in the US) from 2000 to 2018.”

8. Chad Underwood speaks.

Friday assorted links

1. Ayn Rand in Hollywood.

2. A funny kind of Taiwanese marriage arbitrage.

3. Solve for the lovely biscuit equilibrium.

4. Oxford malaria vaccine looking good in (small) Burkina Faso trial.

5. Ranked-choice voting for the New York mayor (NYT).

6. Greece reopens to American tourists.

7. EU proposing to regulate the use of Bayesian estimation.  What’s the chance of that actually happening?