Results for “law literature” 167 found
Public choice: what to read
Jonathan G asks:
What concepts in public choice economics do you think liberals are under-exposed to? Can you recommend some books or articles?
I am not sure what he means by "liberals" so I will answer the question straight up about public choice. I recommend:
1. Dennis Mueller, Public Choice III. The best survey of the field, though this is an academic rather than a popular book. On voting theory — an overrated area in my view – try Peter Ordeshook.
2. Mancur Olson, The Rise and Decline of Nations. The best applied explanation of the logic of concentrated benefits, diffuse costs.
3. Bryan Caplan, The Myth of the Rational Voter. On the democratic side of the equation. Anthony Downs is still worth reading as well, though it needs a cheaper edition than $75. Also read Daniel Klein on The People's Romance.
4. For "pro-government public choice," see Amihai Glazer and Lawrence Rothenberg, Why Government Succeeds and Why it Fails. Also see my piece, with Glazer (an underrated public choice economist), "Rent-Seeking Promotes the Provision of Public Goods" (gated).
5. Buchanan and Tullock are among the most important public choice economists, but they don't come in canonical, easy to digest form. Any recommendations here? Liberty Fund has done the complete works.
6. Read Robin Hanson's blog posts on "politics isn't about policy."
7. An underrated topic is the application of behavioral economics to politicians and also voters and even special interest groups.
8. For understanding the U.S. system, I very much like David Stockman's The Triumph of Politics; oddly the paperback is priced at four times the hardcover.
9. Overall I recommend comparative approaches with other countries (start with Arend Ljiphart, plus Matt Yglesias has had good blog posts on this topic) and acquiring an anthropological and sociological understanding of political legitimacy and perception of interest. The rational choice literature often neglects those topics.
10. Here is my short review on the public choice of finance and big government.
11. For frontier research, see the papers of Andrei Shleifer and Daron Acemoglu. There is plenty of good applied research in political science, although this is less of a foundational place to start.
From the classics, there is Plato's Republic (a critique of tyranny in my view), Robert Michels Political Parties, Tocqueville's Democracy in America (politics as culture), and various Vilfredo Pareto essays, I am no longer sure which volume they are collected in (edited by Finer?). The Federalist Papers are impressive, but are they impressive to read?
What am I neglecting?
Paul Krugman’s predictions from 1998
David Henderson directs us to these. David is skeptical, and so is this source (and Megan), but I think Krugman was more right than wrong, at least if you allow him some slight rewordings. Here were his picks, noting that he offers more discussion and context at the first link:
* Productivity will drop sharply this year. Nineteen ninety-seven, which was a very good year for worker productivity, has led many pundits to conclude that the great technology-led boom has begun. They are wrong. Last year will prove to have been a blip, just like 1992.
* Inflation will be back. Wages are rising at almost 5 percent annually, and the underlying growth of productivity is probably only 1.5 percent or less. Sooner or later, companies will have to start raising prices. In 1999 inflation will probably be more than 3 percent; with only moderate bad luck–say, a drop in the dollar–it could easily top 4 percent. Sell bonds!
* Within two or three years, the current mood of American triumphalism–our belief that we have pulled economically and technologically ahead of the rest of the world–will evaporate. All it will take is a few technological setbacks or a mild recession here while Europe or Japan recovers a bit.
* The growth of the Internet will slow drastically, as the flaw in "Metcalfe's law"–which states that the number of potential connections in a network is proportional to the square of the number of participants–becomes apparent: most people have nothing to say to each other! By 2005 or so, it will become clear that the Internet's impact on the economy has been no greater than the fax machine's.
* As the rate of technological change in computing slows, the number of jobs for IT specialists will decelerate, then actually turn down; ten years from now, the phrase information economy will sound silly.
* Sometime in the next 20 years, maybe sooner, there will be another '70s-style raw-material crunch: a disruption of oil supplies, a sharp run-up in agricultural prices, or both. And suddenly people will remember that we are still living in the material world and that natural resources matter.
I'll number them 1-6. On #1, Krugman should not have committed to the time frame of one year, but overall, in my view, productivity hasn't done well since he wrote. A lot of the measured per worker gains come from firing unproductive people, or overvaluing the contributions of the finance, health care, government consumption, and education sectors, not from much expanding the actual production possibilities frontier. I'll be writing more on this, and while it involves some complex issues, overall I side with Krugman.
On #2, Krugman was wrong about inflation returning, in part because he was overly optimistic about wage growth. #3 is debatable, and while one of the modal claims is wrong about Europe and Japan, he was not obviously wrong about the United States.
On #4, we may soon be reaching "peak internet." Parts of #4 and #5 may sound ridiculous, and Krugman did underestimate how much people have to say to each other, and the future of the information economy. Nonetheless, keep in mind the information technology sector has not contributed net job growth over the last decade. Smart, curious people consistently overestimate the economic impact of information technology, in part because it improves their own lives so much. #6 turned out to be true.
That's a mixed record, as anyone would have, but more insightful I think than the critics are granting.
Many of Krugman's current false (modal) predictions stem from his claims that if left-wing politicians would "get tough" and take their case directly to the public, good progressive results will follow. I view that claim as a move into a non-scientific mode of thought. While it is sometimes true, usually it is not, and there is plenty of political science literature on how hard it is to form a winning political strategy through rhetoric.
Without such a view, however, Krugman would have to entertain the possibility that moderate outcomes, or sometimes observed outcomes, are more likely second-, third-, or fourth-best efficient than he would like to admit. If you took away this one rather weak prop of his worldview, he could quite readily turn into a conservative, of course in the literal rather than the right-wing partisan sense.
More on Arrow’s theorem
Dirk writes:
I vote that this post deserves a follow up post with more clarification. If anyone is against this please express your vote with inaction. Us laymen would like to understand this a little better. For the record, the reason I got on a tangent about the law of large numbers was that I watched Boudreaux's lecture and understood it in terms of 3 parties but kept thinking if there were 3000 parties it was unlikely that exactly 1000 would have preference A, 1000 preference B, and 1000 preference C. I guess I'm used to thinking in terms of run-off elections and not the sort in the example. That is why I couldn't grasp why things should "collapse" back to an island situation where n = 2 or 3.
Arnold Kling comments as well and not everyone is happy.
Return to the oft-neglected difference between intra-profile and inter-profile versions of the theorem. Most commentators and expositors have in mind an intra-profile version of the theorem. They set up an example of people and preferences and show how cycling or some other paradox of choice or voting is possible. Observers then wonder whether this cycling is likely as the number of people increases, or as preferences change, and indeed sometimes it is not, as Gordon Tullock pointed out long ago and as Dirk above wonders.
That's interesting stuff, but those fun and practical-sounding expositions are not Arrow's theorem as Arrow wrote it up. Think of Arrow's theorem as modal in nature: "Maybe there is no paradox with current preferences, but there exist possible preferences where everything goes screwy, under any decision rule satisfying a few criteria." Arrow showed that claim is related to something like: "if we apply a specified decision-making procedure across all possible preference configurations, consistent application means the same person gets her way each time."
That's called Arrovian dicatorship, but it does not have to be either harmful or unjust or not even necessarily undemocratic. It just means that one person — the same person — is always getting her first choice, across these modal worlds with differing preference configurations.
This more metaphysical and more originally Arrovian version of the theorem is perhaps why Arnold Kling finds it difficult to apply the theorem to practical problems. It is not about the likelihood or relevance of cycling (though it is a jumping-off point for those analyses). It is instead a deep result about the implications of consistency, combined with limited information about the value of ordinally ranked outcomes.
The intra-profile versions are still important. For intra-profile versions of Arrow, start with Kemp and Ng (1976). Here is a good summary article on that literature. Samuelson, by the way, remained somewhat recalcitrant when it came to the theorem.
Allowing in even limited amounts of interpersonal comparability defuses the paradox, as shown by Kevin Roberts (ReStud, 1980) and Amartya Sen (see the essays in Choice, Measurement, and Welfare). That said, interpersonability can lead to other paradoxes, as shown by Derek Parfit and his Repugnant Conclusion. Paradoxes everywhere, and you must choose which ones to live with.
I take the practical upshot of Arrow's interprofile theorem to be this: when you make a judgment, it is our assessment of the interpersonal comparisons (or intersport importance comparisons, for scoring a decathlon) which is doing all the work. Be very careful with those.
Neither Tullock nor Samuelson was happy with Arrow's theorem, especially when it came to practical implications, so it is fine if you wish to add your name to that list. But I also think they each missed Arrow's point a bit and that of the major economists of his time he was probably the deepest thinker, albeit not the best practical thinker.
Economic Misconceptions
Students typically come to an economics class with many misconceptions, not just random errors but systematic biases (see especially Caplan 2002).
Bill Goffe recently (2009) surveyed one of his macro principles classes and found, for example, that the median student believes that 35% of workers earn the minimum wage and a substantial fraction think that a majority of workers earn the minimum wage (Actual rate in 2007: 2.3% of hourly-paid workers and a smaller share of all workers earn the minimum wage, rates are probably somewhat higher today since the min. wage has risen and wages have not).
When asked about profits as a percentage of sales the median student guessed 30% (actual rate, closer to 4%).
When asked about the inflation rate over the last year (survey was in 2009) the median student guessed 11%. Actual rate: much closer to 0%. Note, how important such misconceptions could be to policy.
When asked by how much has income per person in the United States changed since 1950 (after adjusting for inflation) the median student said an increase of 25%. Actual rate an increase of about 248%, thus the median student was off by a factor of 10.
I would add that there are also theoretical misconceptions that are probably even more important than factual misconceptions. For example, I think it would be useful to ask questions such as:
1. A number of new furniture manufacturers open in North Carolina, since the new competition forced existing manufacturers to reduce prices the effect of this additional competition was to reduce wages for workers in the furniture industry.
Rate this argument on a 1 to 10 scale from least to most plausible or likely.
2. Competition from Korean automobile manufacturers caused US manufacturers to cut quality in order to reduce their costs. Rate this argument on a 1 to 10 scale from least to most plausible or likely.
3. A law that prevents supermarkets from advertising the prices of their products will reduce the supermarket costs and in turn this will reduce prices to consumers. Rate this argument on a 1 to 10 scale from least to most plausible or likely.
Note that the point here is not to say that an answer is wrong but to understand the implicit models that students are using. It can help a teacher to know what these conceptions and misconceptions are in advance so that they can be addressed.
To further this research, Bill Goffe is putting together a colloborative database on economic misconceptions that teachers are welcome to contribute towards. See also Bill's page on the large literature on teaching in physics much of which is also relevant to economics.
*Sakhalin Island*
That is a book by Anton Chekhov, part memoir, part ethnographic study of a penal colony and the surrounding economic institutions on Sakhalin Island. I hardly ever hear of this work, but it is both a literary and social science masterpiece; I will teach it next spring in my Law and Literature class. Here is one review of the book. This excerpt reminded me of some recent events:
On the fifth line I marked their age. The women who were already over forty remembered theirs only with difficulty, and had to think for a bit before answering. Armenians from the Yerevan Region had no idea of their age at all. One of them answered me: "Might be thirty, but it could be fifty by now." In cases such as these, the age had to be determined approximately from their appearance and then verified from the relevant prison documents. Youths of fifteen and slightly older would usually reduce their ages. Some women would already by married, or have been engaged for ages in prostitution, yet still said they were thirteen or fourteen. The point about this is that children and juveniles in the poorest families receive a food ration from the state; which is issued only up to the age of fifteen, and here a simple calculation induces young people and their parents to tell lies.
These days, lying about age, and continued existence, seems to a standard practice in Japan. Here is more on Japan's "missing elderly". Apparently 884 people are listed as over 150 years of age; it is believed that many of these pensions still are being collected.
The permanent jam?
K. writes and tells me that she imagines someone writing a novel based on this incident and that I will assign it in my Law and Literature class. Here is the excerpt:
A number of people have written in, or tweeted (and don’t forget to find me in the tweetosphere), to tell me about a traffic jam in China, currently in its ninth day, that seems to be on the verge of evolving, as per Cortazar’s story “The Southern Thruway” (an inspiration for Godard’s Weekend), into some kind of makeshift settlement.
This has struck an enterprising verve in some locals, notes the BBC:
The drivers have complained that locals are over-charging them for food and drink while they are stuck.
Then again, what is the “market price” for selling food and drink to 100 km traffic jams?
Instant noodles have risen to four times their market price in this new Chinese city. This account, sent to me by Joshua Hedlund, notes that the jam is 62 miles long and offers good photos.
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.
What I’ve been reading
I've been trying not to read too much during my stay in Berlin, as an experiment in information processing and to see how it changes my thoughts. Still, I've been reading a bit and here are a few of the books:
1. Weimar Germany: Promise and Tragedy, by Eric D. Weitz. A bit stolid, but a good general overview of an era I very much would like to be able to visit. That said, deflation and fascist political movements make for an obviously nasty combination.
2. My Name is Charles Saatchi and I am an Artoholic, an interview with Charles Saatchi. Entertaining throughout, plus you can read it in a few minutes time. This is the sort of book Felix Salmon would blog. Saatchi claims that Pollock, Warhol, Judd, and Hirst are the four artists from recent times who will pass into history as the immortals. The others will be swept away.
3. The Most Powerful Idea in the World: A Story of Steam, Industry, and Invention, by William Rosen. This is a popular treatment of some of the themes in Jack Goldstone's excellent work on engineering culture in England. I don't think this book has anything fundamentally new, but about half of it I found to be worthwhile reading. The other half is OK summaries of various economic theories.
4. William Voegeli, Never Enough: America's Limitless Welfare State. Voegeli has a good basic point, namely that a) the welfare state is here to stay, and b) we need to set limits to it. At some point the book runs into diminishing returns. Arnold Kling wrote a good review of the book, plus he had lunch with the author.
5. Herta Müller, assorted. When she won the Nobel Prize last year, I was skeptical. In Berlin I've been reading her work, much of which is set in Berlin, and I like it. It helps if you have a connection to those who have left formerly communist countries. In English, I suggest The Land of Green Plums as a starting point.
6. Salman Rushdie, The Satanic Verses. This one is a re-read, as I will teach it next spring in Law and Literature and I am studying it well in advance. This is Rushdie's most significant achievement and one of the truly excellent novels of the last thirty years. It's not an easy read, but worth the commitment if you haven't already done so. Sadly, this book seems to have fallen into a commercial black hole; you can't even get it on Kindle.
Optimizing Kidney Allocation: LYFT for LIFE
Under the current system, kidneys are allocated to patients primarily based on the time that the patient has been on the waiting list and the quality of the match. If we evaluate these criteria "locally" there's nothing obviously wrong but if we step back and think globally, that is think about what the ultimate goal of the transplant system should be, then the current system is deeply misguided. Suppose that we want the transplant system to maximize total life expectancy or, as it is known in the literature, to maximize the life-years from transplant (LYFT).
The current system does not maximize life expectancy. In the current system, a 60 year old patient can be given a 20 year old kidney–that's a waste because the life expectancy of the kidney is longer than that of the patient; it's like putting a new clutch in a car that is rusting away. If we had 20 year-old kidneys to spare, this wouldn't be a big problem. But we don't have 20-year old kidneys to spare, so we also give 20-year old patients 60-year old kidneys which means the kidney is likely to die early taking the patient along with it. If we want to maximize total life expectancy, younger people should get younger kidneys.
Here is a simple example to illustrate the principle. Suppose that the life expectancy of both patients and kidneys is 75 years of age so everyone dies when they are 75 or when their kidney is 75, whichever comes first. Thus, if we allocate the 20 year old kidney to the 60 year old patient and vice-versa we gain a total of 30 years of life expectancy.
| Kidney Age |
Patient Age | Life Years | |
| 20 | 60 | 15 | |
| 60 | 20 | 15 | |
| 30 years | Total |
But if we allocate the 60 year old kidney to the 60 year old patient and the 20 year old kidney to the 20 year old patient we more than double life expectancy to 70 years in total.
| Kidney Age |
Patient Age | Life Years | |
| 60 | 60 | 15 | |
| 20 | 20 | 55 | |
| 70 years | Total |
It's not just age that matters, it turns out that the longer a patient has been on dialysis the less is their life expectancy after transplant (dialysis stresses the body so the sooner we get someone a transplant the better). Although it may seem unfair, if we want to maximize total life expectancy we are doing the wrong thing by giving more points to patients who have been on the list longer.
An optimized allocation system that took into account these considerations would increase total life
expectancy (modestly but significantly, about 11,500 extra life years) but it wouldn't benefit every individual. Maximizing life expectancy would shift organs away from older people and people who have been on the waiting list a long time towards younger people. As a result, some patients have argued that LYFT is unfair. The Office of Civil Rights is even asking whether LYFT might violate age discrimination laws.
But consider, would the older patients have objected to LYFT when they were younger? If not, shouldn't their objections be discounted? More formally, consider how people would vote behind a veil of ignorance. By definition a LYFT approach maximizes total life expectancy, so without knowing the specifics of who you are or when you might need a transplant it's likely that behind a veil of ignorance just about everyone would favor LYFT. Thus, in my view LYFT is a fair and ethical system.
Here are previous MR posts on kidney transplant policy.
Regulation vs. tort
Paul Krugman writes:
Well, here’s the thing: regulation demonstrably does work where tort law doesn’t. Consider the environmental issue: in reality, the perpetrators of oil spills never pay most of the cost; but in reality, environmental regulation has led to much cleaner air and water. (Look up the history of Los Angeles smog or the fate of Lake Erie if you don’t believe me.)
So why does regulation work? If polluters can buy off the system ex post, after a disaster, why don’t they manage to totally corrupt regulation ex ante? There’s a lot to say about that, and I’m sure there’s a literature I haven’t read. But one thing we tend to forget in this age of Reagan is the importance and virtues of a dedicated bureaucracy: when you have professional government agencies with a job to do, and treat them with respect, that job often gets done.
I'll offer a few points:
1. Here is Susan Rose-Ackerman on regulation vs tort (JSTOR). This is a standard piece in the area, and although she does not stress public choice arguments, the upshot is not extremely far from Krugman's conclusions. She thinks that tort can replace regulation to only a limited degree.
2. I agree with Krugman that the "tort only" position espoused by some libertarians does not work. Yet I do not think his remarks are pointing at the best possible understanding of the question. For instance…
3. There is in fact an agency regulating off-shore drilling and in the case under question it totally failed. How can Lake Erie, an orthogonally related success, be cited but this very directly relevant failure not be mentioned?
Furthermore standard accounts of this failure blame regulatory capture, and the Congressional desire for revenue for this failure, not the ideology of free market economics. You might also blame voter sentiment, since Obama seemed to pick up some advocacy of off-shore drilling from the Republicans and arguably this happened because that position proved to be one of the few effective Republican arguments in the last election.
4. There are plenty of problems where tort works better than regulation, most notably when behavior cannot be controlled or measured easily ex ante or where the correct decision relies on the producer's decentralized information. This encompasses numerous areas, from medical practices to accident law to injuries resulting from the handling of guns to, most of all, many micro-components of highly regulated sectors. Here is a legal and moral defense of tort law.
5. Off-shore drilling is closely related to these cases. For a number of obvious reasons, it is hard for the regulator to monitor how safe an off-shore platform really is. We thus rely a lot on ex post penalties in this area (regulatory as well as tort), not because of ideology but because the ex ante proscriptions don't have as much bite as we would like. This reliance on the ex post penalty also means that "regulation plus tort" (never mind "regulation alone" or "tort alone") may not work so well in this area, with or without free market ideology.
6. Krugman seems to argue that regulators are more protected from the ravages of bad ideology than are judges. Maybe yes, maybe no (see below), but such a comparative argument is unnecessary. The most salient point for Krugman's conclusion is simply that optimality requires a bit of regulation and a bit of tort law and that to do without regulation is, in some regards, to be too lax. He could justify his main conclusion much more simply than he does. (That said, I still believe in less regulation than Krugman does, though I accept the logic of this argument.)
7. If we need to make the said comparison – the corruptibility of regulation vs. the corruptibility of tort law – an independent judiciary need not do worse than a respected bureaucracy and indeed the former is arguably more protected from political interference. It's also the case that the judiciary is more likely to overturn very bad behavior from other parts of the government. This is an advantage for judicial approaches over reguatory approaches and it is a further sign of (partial) judicial independence.
8. I worry when numerous bloggers and writers — not just Krugman — hold a primary theory of regulatory failure based on regulators who do not agree with them ideologically. This is at odds with a big chunk of the relevant public choice literature, which stresses knowledge and incentives, yet without ruling out ideological bias as a factor. Political science approaches to regulation offer greater scope for ideological bias as a major cause of regulatory failure, but still it is hardly the dominant theory to the exclusion of others. In this matter we should follow the literature, and evidence, which are there for the taking.
FCPA as embargo
It turns out Andrew Spalding has a paper on the topic. Here is the abstract:
Although the purpose of international anti-bribery legislation, particularly the U.S. Foreign Corrupt Practices Act, is to deter bribery, empirical evidence demonstrates a more problematic effect: in countries where bribery is perceived to be relatively common, the present enforcement regime goes beyond deterring bribery and actually deters investment. Drawing on literature from political science and economics, this article argues that anti-bribery legislation, as presently enforced, functions as de facto economic sanctions. A detailed analysis of the history of FCPA enforcement shows that these sanctions have most often occurred in emerging markets, where historic opportunities for economic and social development otherwise exist and where public policy should encourage investment. This effect is contrary to the purpose of the FCPA which, as the legislative history shows, is to build economic and political alliances by promoting ethical overseas investment.
These perverse and unanticipated consequences create two policy problems. First, the sanctions literature suggests that the resulting foreign direct investment void may be filled by capital-rich countries that are not committed to effectively enforcing anti-bribery measures. This dynamic can be observed, for example, in China's aggressive investment in Africa, Latin America, and Central Asia, and creates myriad ethical, economic, and foreign policy problems. Second, by enforcing these laws without regard to their sanctioning effects, developed nations are unwittingly sacrificing poverty reduction opportunities to combat bribery. The paper concludes with various proposed reforms to the text and enforcement of international anti-bribery legislation that would further the goal of deterring bribery without deterring investment.
Getting drunk as signaling behavior
Here is the abstract, I look forward to reading the paper:
It is argued that drug consumption, most commonly alcohol drinking, can be a technology to give up some control over one’s actions and words. It can be employed by trustworthy players to reveal their type. Similarly alcohol can function as a “social lubricant” and faciliate type revelation in conversations. It is shown that both separating and pooling equilibria can exist; as opposed to the classic results in the literature, a pooling equilibrium is still informative. Drugs which allow a gradual loss of control by appropriate doses and for which moderate consumption is not addictive are particularly suitable because the consumption can be easily observed and reciprocated and is unlikely to occur out of the social context. There is a trade-off between the efficiency gains due to the signaling effect and the loss of productivity associated with intoxication. Long run evolutionary equilibria of the type distribution are considered. If coordination on an exclusive technology is efficient, social norms or laws can raise efficiency by legalizing only one drug.
I thank Brian Dailey for the pointer.
Civil war exposure and violence
That's a new paper by Edward Miguel, Sebastian Saiegh, and Shanker Satyanath and here is the abstract:
In recent years scholars have begun to focus on the consequences of individuals’ exposure to civil war, including its severe health and psychological consequences. Our innovation is to move beyond the survey methodology that is widespread in this literature to analyze the actual behavior of individuals with varying degrees of exposure to civil war in a common institutional setting. We exploit the presence of thousands of international soccer (football) players with different exposures to civil conflict in the European professional leagues, and find a strong relationship between the extent of civil conflict in a player’s home country and his propensity to behave violently on the soccer field, as measured by yellow and red cards. This link is robust to region fixed effects, country characteristics (e.g., rule of law, per capita income), player characteristics (e.g., age, field position, quality), outliers, and team fixed effects. Reinforcing our claim that we isolate the effect of civil war exposure rather than simple rule-breaking or something else entirely, there is no meaningful correlation between our measure of exposure to civil war and soccer performance measures not closely related to violent conduct. The result is also robust to controlling for civil wars before a player’s birth, suggesting that it is not driven by factors from the distant historical past.
One question is whether such behavior occurs because the player's psyche has somehow been brutalized or whether it is a deliberate affect aimed at a violence-expecting audience back home. It's related to which variables might best predict the propensity of an NBA player to pick up technical fouls; would that be correlated with urban upbringing, the nature of the audience (home vs. away, TV vs. live crowd, etc.) or perhaps correlated with early brushes with the law?
If you wish to skim the results, start with p.25. The Colombian players pick up a lot of yellow cards.
Austin Frakt and Ian Crosby on the insurance antitrust exemption
Taxpayers will be best served by insurers with sufficient market
power to bargain down provider rates, but with not quite enough power
to keep the savings (“rents“)
for themselves. That is, we want low provider rates to translate into
low premiums. Though liberals may be skeptical that this balance is
achievable, it is not at odds with their objectives in principle. After
all, one of the arguments for the public option is that it would be a
large insurer with commensurately large negotiating power but would use
that power on the behalf of consumers.How to balance the power of insurers and providers is far from
simple. Many have pointed to the alleged dominant market position of
insurers as a substantial source of high health care costs. However,
the health economics literature
supports the notion that recent increased market power of insurers does
not lead toward monopolistic pricing, but rather it provides a
counter-balance to the power held by hospitals and provider groups.Moreover, insurance companies are partially exempt from federal
antitrust law for an important reason: so they can share rate-making
data. This function actually benefits small insurers who would not
otherwise have sufficient data to properly adjust premiums.
Paradoxically, removing the legal cover for data sharing would harm
small insurers more than large ones.
Read his whole post, which also has a good public choice analysis of the recent threat to repeal the exemption.
Oliver Williamson and the pin factory
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 (working version) published in the May 2005 AER 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.