Results for “solve for equilibrium” 136 found
Tuesday assorted links
The fiscal future of the West, the culture that is inheritance
Heaven forbid that people of means should pay for their own health care, what a sensible idea this was:
Last week, she [Theresa May] came up with a flawed but constructive answer to the crisis of funding in social care. The elderly would finance their care out of their own estate upon death. The upper limit on their contribution would go but they could keep £100,000 for their children. In the mixed metaphors that proliferate in politics, a floor would replace a cap.
The idea turned old age into a high-stakes game of chance — die suddenly and your estate would go untouched, contract dementia and it would shrivel over time — but it confronted voters with the principle that things must be paid for and challenged the Conservative cult of inheritance. Mrs May made it central to her election manifesto. Her self-image as a firm leader hinged on her fidelity to this brave, contentious idea.
A few days of popular disquiet and the cap is back.
That is from Janan Ganesh at the FT. Solve for the fiscal equilibrium!
What if they can clone your voice?
It’s a Canadian company that specializes in speech synthesis software. They’ve developed software they claim can copy anyone’s voice and make it say anything.
The founders tell me if they can get a high-quality recording of you speaking for just one minute, their software can replicate your voice with very high accuracy.
If they get a recording of you speaking for five minutes, they say it would be difficult to tell the difference between your voice and their computer-generated mimic. That’s where the name Lyrebird comes from: a lyrebird is an Australian bird that’s noted for its mimicry.
Here is the story, as they say solve for the equilibrium…
Confidential business conversations over the telephone might dwindle, and perhaps we will have Peter Cushing and Humphrey Bogart movies for a long time to come. What else?
For the pointer I thank Michelle Dawson.
Why is there dynamic surge pricing *for rides*?
“Surge Pricing Solves the Wild Goose Chase” is the title of the new paper by Juan Camillo Castillo and E. Glen Weyl, here is the abstract:
Why is dynamic pricing more prevalent in ride-hailing apps than movies and restaurants? Arnott (1996) observed that an over-burdened taxi dispatch system may be forced to send cars on a wild goose chase to pick up distant customers when few taxis are free. These chases occupy taxis and reduce earnings, effectively removing cars from the road and exacerbating the problem. While Arnott dismissed this outcome as a Pareto-dominated equilibrium, we show that when prices are too low relative to demand it is the unique equilibrium of a system that uses a first-dispatch protocol (as many ride-hailing services have committed to). This effect dominates more traditional price theoretic considerations and implies that welfare and profits fall dramatically as price falls below a certain threshold and then decline only gradually move in price above this point. A platform forced to charge uniform prices over time will therefore have to set very high prices to avoid catastrophic chases. Dynamic “surge pricing” can avoid these high prices while maintaining system functioning when demand is high. We show that pooling can complicate and exacerbate these problems.
Perhaps it is an analogy to suggest movie theaters might use more surge pricing if a low valuation buyer took up the seat for several showings of the movie rather than just one.
Bot wars
In particular, Yasseri and co focus on whether bots disagree with one another. One way to measure this on Wikipedia is by reverts—edits that change an article back to the way it was before a previous change.
Over a 10-year period, humans reverted each other about three times on average. But bots were much more active. “Over the 10-year period, bots on English Wikipedia reverted another bot on average 105 times,” say Yasseri and co.
And this:
Bots and humans differ significantly in their revert habits. The most likely time for a human to make a revert is either within two minutes after a change has been made, after 24 hours, or after a year. That’s clearly related to the rhythms of human lifestyles.
Robots, of course, do not follow these rhythms: rather, they have a characteristic average response time of one month. “This difference is likely because, first, bots systematically crawl articles and, second, bots are restricted as to how often they can make edits,” say Yasseri and co.
Nevertheless, bots can end up in significant disputes with each other, and behave just as unpredictably and inefficiently as humans.
Many of the bots seem to be designed to make varyin- language versions of the same Wikipedia pages consistent with each other, yet the bots do not always agree. Solve for the equilibrium, as they say…
Here is the article, via Michelle Dawson.
Cherokee Gothic channels Tyrone on Brexit
Discombobulated by my anti-Brexit post, apparently Kevin has been receiving secret messages for some time now, he writes:
People, I just received the following Linkedin message from Tyrone which I reproduce here verbatim (apparently Tyler’s been really cracking down on poor Tyrone):
It’s a good thing Tyler wasn’t an influential blogger back in the 1770s. We’d all still be British subjects.
In 2016 he’s blogging Brexit and unsurprisingly, he’s again come out against change.
The end result he concedes would be good but the path rocky and “the path is everything”.
This from a man who believes the social rate of discount should be zero!
(and, just to hammer on this, if the discount rate is zero, the path is the opposite of everything)
Tyler’s against Scottish Independence, Catalan Independence, Brexit. I somehow feel like he’s even against Grexit (the path! the path!).
Apparently, change is bad.
People, I’m here to tell you Brexit is a no-brainer. The EU is a utility killing machine exponentially ratcheting up dumb regulations while ignoring or actively worsening the real problems that the group suffers. When I solve for the equilibrium I see a place where everything is either mandatory or banned.
Consider refugees as an example of idiotic EU policy. Now that Kenya and Niger have seen that the EU is paying for poor countries to house refugees, they have quite rationally closed their existing camps and put out a call for bids. Niger has opened by asking for a cool billion or so to keep refugees off Europe’s beaches.
The UK’s per capita income is currently about 2/3 that of the US. They and most EU countries have been falling further and further behind the wealth frontier in the last decades. The EU hasn’t exactly been a huge success story for them. In the long run, they will do much better on their own (better policies, closer relation to their former settler colonies, less regulatory crushing) and since the social discount rate really should be zero, the path, while perhaps rocky, is temporary while the new equilibrium is rosy and permanent.
Tyrone out.
This is Tyler again…Tyrone sent me his own message on LinkedIn, and he reminded me of this old Tyler post from 2006, “Would I have supported the American Revolution?“:
These modal questions are tricky. Which “Tyler” is doing the choosing? (If I were an elephant, would pink be my favorite color? Living in 1773, have I at least still read Jonathan Swift? Would a modern teenage Thomas Jefferson have a crush on Veronica Mars?)
But think about it, wasn’t it more than a wee bit whacky? “Let’s cut free of the British Empire, the most successful society the world had seen to date, and go it alone against the French, the Spanish, and the Indians.” [TC: they all seemed more formidable at the time than subsequently]
Taxes weren’t that high, especially by modern standards. The British got rid of slavery before we did. Might I have concluded the revolution was a bunch of rent-seekers trying to capture the governmental surplus for themselves?
Tyrone, of course, wishes we had sold off the entire North American British empire to the Spanish crown…
Kenya fact of the day
There are about 300,000 Quakers in the world, and over one-third of them live in Kenya…
While you’re at it, solve for the equilibrium:
While the amount of constituents there is growing by the day, numbers in the West (the United Kingdom and United States, in particular) have nosedived in recent years, some 25 percent from 1972 to 2002, according to the Friends World Committee for Consultation.
More broadly:
The Pew Research Center estimates that there will be two and a half times more Christians in Africa than Europe by 2050. Currently, the numbers are about equal.
Here is the article, via Rachel Strohm.
Subsidies Increase Tuition, Part XIV
In a new NBER paper, Accounting for the Rise in College Tuition, Grey Gordon and Aaron Hedlund create a sophisticated model of the college market and find that a large fraction of the increase in tuition can be explained by increases in subsidies.
With all factors present, net tuition increases from $6,100 to $12,559. As column 4 demonstrates, the demand shocks— which consist mostly of changes in financial aid—account for the lion’s share of the higher tuition. Specifically, with demand shocks alone, equilibrium tuition rises by 102%, almost fully matching the 106% from the benchmark. By contrast, with all factors present except the demand shocks (column 7), net tuition only rises by 16%.
These results accord strongly with the Bennett hypothesis, which asserts that colleges respond to expansions of financial aid by increasing tuition.
Remarkably, so much of the subsidy is translated into higher tuition that enrollment doesn’t increase! What does happen is that students take on more debt, which many of them can’t pay.
In fact, the tuition response completely crowds out any additional enrollment that the financial aid expansion would otherwise induce, resulting instead in an enrollment decline from 33% to 27% in the new equilibrium with only demand shocks. Furthermore, the students who do enroll take out $6,876 in loans compared to $4,663 in the initial steady state….Lastly, the model predicts that demand shocks in isolation generate a surge in the default rate from 17% to 32%. Essentially, demand shocks lead to higher college costs and more debt, and in the absence of higher labor market returns, more loan default inevitably occurs.
Sound familiar? Some of these results appear too large to me and the authors caution that they need to assume a lot of monopoly power to solve their model so the results should be taken as an upper bound. Nevertheless, the Econ 101 insight that subsidies increase prices (even net for those who are not fully subsidized) holds true.
I wonder where else (& here) we could apply this insight?
My macroeconomic framework, circa 2015
A while ago Scott Sumner laid out at least part of his framework, I thought I should lay out some key parts of mine. Here goes:
1. In world history, 99% of all business cycles are real business cycles. No criticism of RBC can change this fact. Furthermore the propagation mechanism for a “Keynesian business cycle” (arguably a misleading phrase) also relies on RBC theory.
2. In the more recent segment of world history, a lot of cycles have been caused by negative nominal shocks. I consider the Christina and David Romer “shock identification” paper (pdf, and note the name order) to be one of the very best pieces of research in all of macroeconomics. Sometimes central banks tighten when they shouldn’t, and this leads to a recession, due mainly to nominal wage stickiness.
3. Workers are laid off because employers are often (not always) afraid to cut their nominal wages, for fear of busting workplace morale, or in Europe often for legal and union-related reasons.
4. Overall I favor a nominal gdp rule for monetary policy. But most of its gains would come in a few key historical episodes, such as 1929-1932, or 2008-2009. In most periods I don’t think we know what the correct monetary policy should be, nor do we know that it matters. Still, that uncertainty does not militate against an ngdp rule.
5. Once workers are unemployed, nominal wage stickiness is no longer the main reason why they stay unemployed. In fact nominal wage stickiness is largely taken out of the equation because there is no preexisting nominal wage contract for these workers. There may, however, be some residual stickiness due to irrational reservation wages, also known as voluntary unemployment due to stupidity. (You will find a different perspective in Scott’s musical chairs model, which I may cover more soon.)
5b. Monetary stimulus to be effective needs to be applied very early in the job destruction process of a recession. It is much harder to put the pieces back together again, so urgency is of the essence.
6. The successful reemployment of workers depends upon a matching problem, a’la Pissarides, Mortensen, and others. Yet this matching problem is poorly understood, and it can involve a mix of nominal and real imperfections. Sometimes it is solved more quickly than expected, such as in the recent UK experience, and other times more slowly than expected, as in current Spain. Most of the claims you will read about this reemployment of workers are wrong, enslaved to ideology or dogmatism, or at the very least unjustified. Hardly anyone wants to admit this.
7. Really bad recessions involve deficient aggregate demand, negative shocks to intermediation, some chronic supply-side problems, negative wealth effects, and increases in the risk premium, all together. It is hard to find a quick fix. Furthermore models where AS and AD curves are independent and separable are often misleading, despite their analytic convenience.
8. Given that weak AD is only one of the problems in a bad downturn, and that confidence, risk, and supply side problems matter too, the best question to ask about fiscal policy is how well the money is being spent. The “jack up AD no matter” approach is, in the final political equilibrium, not doing good fiscal policy any favors.
9. You should neither rule out nor overstate the relevance of Hayek and Minsky. Their views have much in common, despite the difference in ideological mood affiliation and who — government or the market — gets blamed for the downturn. For really bad recessions, usually both institutions are complicit to say the least.
10. All propositions about real interest rates are wrong.
There is more, but I’ll stop there for now.
Saturday assorted links
1. Questions that are rarely asked: “How many who think we shouldn’t judge schools by how well students do also think we should judge companies by wages?”
2. An economist gets dessert, sort of (apologies for the video when you click on the link).
3. University of Maryland to spin off its data analytics division into a new company. Solve for the equilibrium.
4. The grey market foods of New York City. And Arnold Kling on Fiorina and Trump.
5. Data on Uber’s surge pricing, it keeps the expected wait time within a remarkably consistent range.
6. UK scientists apply for license to edit genes in human embryo.
7. The smart basketball. Nein, danke, I prefer self-deception to keep me on the exercise track.
Utah fact (estimate) of the day
One of my web searches turned up a study from Trinity College’s American Religious Identification Survey (ARIS) on the demographics of Mormons. According to the ARIS study, there are now 150 Mormon women for every 100 Mormon men in the state of Utah—a 50 percent oversupply of women.
The article considers data on Orthodox Jews as well, via Jodi Ettenberg.
Solve for the equilibrium, as they say, and please consider as many different variables as possible…
What Is “Price Theory”? (A Guest Post by Glen Weyl)
When I was last living in Chicago, in the spring 2014, a regular visitor to the department of the University of Chicago and the editor of the Journal of Economic Literature, Steven Durlauf, asked me if I would be interested in writing something for the journal. For many years I had promised Gary Becker that I would write something to help clarify the meaning and role of price theory to my generation of economists, especially those with limited exposure to the Chicago environment, which did so much to shape my approach to economics. With Gary’s passing later that spring, I decided to use this opportunity to follow through on that promise. More than a year later I have posted on SSRN the result.
I have an unusual relationship to “price theory”. As far as I know I am the only economist under 40, with the possible exception of my students, who openly identifies myself as focusing my research on price theory. As a result I am constantly asked what the phrase means. Usually colleagues will follow up with their own proposed definitions. My wife even remembers finding me at our wedding reception in a heated debate not about the meaning of marriage, but of price theory.
The most common definition, which emphasizes the connection to Chicago and to models of price-taking in partial equilibrium, doesn’t describe the work of the many prominent economists today who are closely identified with price theory but who are not at Chicago and study a range of different models. It also falls short of describing work by those like Paul Samuelson who were thought of as working on price theory in their time even by rivals like Milton Friedman. Worst of all it consigns price theory to a particular historical period in economic thought and place, making it less relevant to the future of economics.
I therefore have spent many years searching for a definition that I believe works and in the process have drawn on many sources, especially many conversations with Gary Becker and Kevin Murphy on the topic as well as the philosophy of physics and the methodological ideas of Raj Chetty, Peter Diamond and Jim Heckman among others. This process eventually brought me to my own definition of price theory as analysis that reduces rich (e.g. high-dimensional heterogeneity, many individuals) and often incompletely specified models into ‘prices’ sufficient to characterize approximate solutions to simple (e.g. one-dimensional policy) allocative problems. This approach contrasts both with work that tries to completely solve simple models (e.g. game theory) and empirical work that takes measurement of facts as prior to theory. Unlike other definitions, I argue that mine does a good job connecting the use of price theory across a range of fields of microeconomics from international trade to market design, being consistent across history and suggesting productive directions for future research on the topic.
To illustrate my definition I highlight four distinctive characteristics of price theory that follow from this basic philosophy. First, diagrams in price theory are usually used to illustrate simple solutions to rich models, such as the supply and demand diagram, rather than primitives such as indifference curves or statistical relationships. Second, problem sets in price theory tend to ask students to address some allocative or policy question in a loosely-defined model (does the minimum wage always raise employment under monopsony?), rather than solving out completely a simple model or investigating data. Third, measurement in price theory focuses on simple statistics sufficient to answer allocative questions of interest rather than estimating a complete structural model or building inductively from data. Raj Chetty has described these metrics, often prices or elasticities of some sort, as “sufficient statistics”. Finally, price theory tends to have close connections to thermodynamics and sociology, fields that seek simple summaries of complex systems, rather than more deductive (mathematics), individual-focused (psychology) or inductive (clinical epidemiology and history) fields.
I trace the history of price theory from the early nineteenth to the late twentieth when price theory became segregated at Chicago and against the dominant currents in the rest of the profession. For a quarter century following 1980, most of the profession either focused on more complete and fully-solved models (game theory, general equilibrium theory, mechanism design, etc.) or on causal identification. Price theory therefore survived almost exclusively at Chicago, which prided itself on its distinctive approach, even as the rest of the profession migrated away from it.
This situation could not last, however, because price theory is powerfully complementary with the other traditions. One example is work on optimal redistributive taxation. During the 1980’s and 1990’s large empirical literatures developed on the efficiency losses created by income taxation (the elasticity of labor supply) and on wage inequality. At the same time a rich theory literature developed on very simple models of optimal redistributive income taxation. Yet these two literatures were largely disconnected until the work of Emmanuel Saez and other price theorists showed how measurements by empiricists were closely related to the sufficient statistics that characterize some basic properties of optimal income taxation, such as the best linear income tax or the optimal tax rate on top earners.
Yet this was not the end of the story; these price theoretic stimulated empiricists to measure quantities (such as top income inequality and the elasticity of taxable income) more closely connected to the theory and theorists to propose new mechanisms through which taxes impact efficiency which are not summarized correctly by these formulas. This has created a rich and highly productive dialog between price theoretic summaries, empirical measurement of these summaries and more simplistic models that suggest new mechanisms left out of these summaries.
A similar process has occurred in many other fields of microeconomics in the last decade, through the work of, among others, five of the last seven winners of the John Bates Clark medal. Liran Einav and Amy Finkelstein have led this process for the economics of asymmetric information and insurance markets; Raj Chetty for behavioral economics and optimal social insurance; Matt Gentzkow for strategic communication; Costas Arkolakis, Arnaud Costinot and Andrés Rodriguez-Clare in international trade; and Jeremy Bulow and Jon Levin for auction and market design. This important work has shown what a central and complementary tool price theory is in tying together work throughout microeconomics.
Yet the formal tools underlying these price theoretic approximations and summaries have been much less fully developed than have been analytic tools in other areas of economics. When does adding up “consumer surplus” across individuals lead to accurate measurements of social welfare? How much error is created by assumptions of price-taking in the new contexts, like college admissions or voting, to which they are being applied? I highlight some exciting areas for further development of such approximation tools complementary to the burgeoning price theory literature.
Given the broad sweep of this piece, it will likely touch on the interests of many readers of this blog, especially those with a Chicago connection. Your comments are therefore very welcome. If you have any, please email me at [email protected].
Benign liquidity traps
Stefan Homburg has a new paper on this topic. I don’t quite get how the model hands together, but still the effort alone strikes me as very real progress in this area:
Japan has been in a benign liquidity trap since 1990. In a benign liquidity trap, interest rates approach zero, prices decline, and monetary policy is ineffective but output and employment perform decently. Such a pattern contradicts traditional macro theories. This paper introduces a monetary general equilibrium model that is compatible with Japan´s performance and resolves puzzles associated with liquidity traps. Possible conclusions for Anglo-Saxon countries and eurozone members are also discussed.
What does Robin Hanson think is the most likely “Great Filter”?
Here is a long and excellent post, whereby Robin outs himself as a strange kind of environmentalist. Do need the whole thing, but here is one summary excerpt:
So, bottom line, the future great filter scenario that most concerns me is one where our solar-system-bound descendants have killed most of nature, can’t yet colonize other stars, are general predators and prey of each other, and have fallen into a short-term-predatory-focus equilibrium where predators can easily see and travel to most all prey. Yes there are about a hundred billion comets way out there circling the sun, but even that seems a small enough number for predators to careful map and track all of them.
“At first they came for the rabbits…and then they came for me.” I find that intriguing, but I have a more marginalist approach, and perhaps one which encompasses Robin’s hypothesis as a special case. The death of human (and other) civilizations may be a bit like the death of the human body through old age, namely a whole bunch of things go wrong at once. If there were a single key problem, it would be easier to find a patch and prolong things for just a bit more. But if we have reason to believe that, eventually, many things will go wrong at once…such a concatenation of problems is more likely to defeat us. So my nomination for The Great Filter, in a nutshell, is “everything going wrong at once.” The simplest underlying model here is that a) problems accumulate, b) resources can be directed to help solve problems, and c) sometimes problems accumulate more rapidly than they can be solved.
This is also why, in many cases, there is no simple “fact of the matter” answer as to why various mighty empires fell in the past. Here is my earlier review of Apocalypto, a remarkable and still underrated movie.
Does the Egertsson and Mehrotra model of secular stagnation work?
Their new paper is here, ungated here (pdf), here is the key passage:
We have shown that in the model with capital, the presence of productive assets carrying a positive marginal product does not eliminate the possibility of a secular stagnation. The key assumption is that capital has a strictly positive rate of depreciation. In the absence of depreciation, capital can serve as a perfect storage technology which places a zero bound on the real interest rate. It is straightforward to introduce other type of assets, such as land used for production, and maintain a secular stagnation equilibrium. For these extensions, however, it is important to ensure that the asset cannot operate as a perfect storage technology as this may put a zero bound on the real interest rate.
Let me recapitulate the basic problem. Secular stagnation models are supposed to exhibit persistent negative real rates of return, but how is this compatible with economic growth and positive investment? Just hold onto stuff if need be and of course the goverment can help you do this with safe assets, if need be. The earlier models had no capital, which ruled out this possibility. The new model assumes storage costs for capital are fairly high, or alternatively the depreciation rate for capital is high. Since you can’t sit on your wealth, you might as well invest it at negative real rates of return.
But at the margin, storage costs for goods (and some capital) are not that high. My cupboard is full of beans and cumin seed, but I eat the stuff only slowly. In the meantime it is hardly a burden, nor is it risky since I know it will be tasty once I make the right brew. Art has negative storage costs (for the marginal buyer it is fun to look at), although its risk admittedly makes this a more complicated example. Advances in logistics, and the success of Amazon, show that storage costs are getting lower all the time.
Secular stagnation might be a good model for Liberia and Venezuela and Mad Max, but not for the United States today or other growing economies with forward momentum. But a credible stagnation model for America needs to recognize that rates of return will be lower than usual but not negative in real terms. And there won’t be a long-run shortfall of demand because eventually market prices will adjust so that demand meets the supply we have. That is a supply-side stagnation model of the sort promoted by myself, Robert Gordon, Peter Thiel, Michael Mandel, and others. In the secular stagnation model as it is now being discussed by Keynesian macroeconomists, you end up twisting yourself in knots to force that real rate of return into permanently negative territory. Of course if you allow the real rate of return to be positive albeit low, the economy is not stuck in a perpetual liquidity trap as people move out of cash into investment assets. The demand-side stagnation mechanisms fade away into irrelevance once prices have some time to adjust.
Izabella Kaminska comments here. Josh Hendrickson has a very good blog post on the model here. I’ve already cited Stephen Williamson here, he notes the model is really about a credit friction and would be remedied with a greater supply of safe assets for savings, an easy enough problem to solve, for instance try the Bush tax cuts. Here is Ryan Decker on the model, and here is Ryan arguing that investment is aggregate demand also and many of us seem to have forgotten that, a very good post.
This is an important and interesting paper, but only because it shows the model doesn’t really hold and requires such contortions. The discussion of policy results is premature and way off the mark. The authors should have included sentences like “storage costs aren’t very high, and the economy as a whole does not exhibit negative real rates of return, so these policy conclusions are not actual recommendations.”