Results for “model this” 3181 found
The Peltzman Model of Regulation and the Facebook Hearings
If you want understand the Facebook hearings it’s useful to think not about privacy or technology but about what politicians want. In the Peltzman model of regulation, politicians use regulation to tradeoff profits (wanted by firms) and lower prices (wanted by constituents) to maximize what politicians want, reelection. The key is that there are diminishing returns to politicians in both profits and lower prices. Consider a competitive industry. A competitive industry doesn’t do much for politicians so they might want to regulate the industry to raise prices and increase firm profits. The now-profitable firms will reward the hand that feeds them with campaign funds and by diverting some of the industry’s profits to subsidize a politician’s most important constituents. Consumers will be upset by the higher price but if the price isn’t raised too much above competitive levels the net gain to the politician will be positive.
Now consider an unregulated monopoly. A profit-maximized monopolist doesn’t do much for politicians. Politicians will regulate the monopolist to lower prices and to encourage the monopolist to divert some of its profits to subsidize a politician’s most important constituents. Monopolists will be upset by the lower price but if the price isn’t lowered too much below monopoly levels the net gain to the politician will be positive. (Moreover, a monopolist won’t object too much to reducing prices a little since they can do that without a big loss–the top of the profit hill is flat).
With that as background, the Facebook hearings are easily understood. Facebook is a very profitable monopoly that doesn’t benefit politicians very much. Although consumers aren’t upset by high prices (since Facebook is free), they can be made to be upset about loss of privacy or other such scandal. That’s enough to threaten regulation. The regulatory outcome will be that Facebook diverts some of its profits to campaign funds and to subsidize important political constituents.
Who will be subsidized? Be sure to watch the key players as there is plenty to go around and the money has only begun to flow but aside from campaign funds look for rules, especially in the political sphere, that will raise the costs of advertising to challengers relative to incumbents. Incumbents love incumbency advantage. Also watch out for a deal where the government limits profit regulation in return for greater government access to Facebook data including by the NSA, ICE, local and even foreign police. Keep in mind that politicians don’t really want privacy–remember that in 2016 Congress also held hearings on privacy and technology. Only those hearings were about how technology companies kept their user data too private.
The basic model for Puerto Rico isn’t working any more
That is the topic of my latest Bloomberg column, here is one bit:
Worse yet, the island has about $123 billion in debt and pension obligations, compared with a gross domestic product of slightly more than $100 billion, a number that is sure to fall. In the last decade, the island has lost about 9 percent of its population, including many ambitious and talented individuals. In the past 20 years, Puerto Rico’s labor force shrank by about 20 percent, with the health-care sector being especially hard hit. The population of children under 5 has fallen 37 percent since 2000, and Puerto Rico has more of its population over 60 than any U.S. state.
And then came Hurricane Maria. According to a recent NYT piece, almost half of American’s don’t know that Puerto Ricans are American citizens.
In my considered opinion, using government money to help Puerto Rico has a much higher humanitarian return than devoting it to the further subsidization of health care.
Further reasons why the Mundell-Fleming model is simply, flat-out wrong
Most trade is invoiced in very few currencies. Despite this, the Mundell-Fleming benchmark and its variants focus on pricing in the producer’s currency or in local currency. We model instead a ‘dominant currency paradigm’ for small open economies characterized by three features: pricing in a dominant currency; pricing complementarities, and imported input use in production. Under this paradigm: (a) terms of trade are stable; (b) dominant currency exchange rate pass-through into export and import prices is high regardless of destination or origin of goods; (c) exchange rate pass-through of non-dominant currencies is small; (d) expenditure switching occurs mostly via imports and export expansions following depreciations are weak. Using merged firm level and customs data from Colombia we document strong support for the dominant currency paradigm and reject the alternatives of producer currency and local currency pricing.
That is from a new NBER working paper by Casas, Díez, Gopinath, and Gourinchas. Here are my previous posts on Mundell-Fleming.
Modeling Donald Trump as a deal-maker
Imagine a politician who had trading in his utility function, and furthermore used some intertemporal price discrimination analogies from real estate — what might that look like? That is the topic of my latest Bloomberg column, here is an excerpt from the latter part of the piece:
If those trades take up much of the legislative calendar over the next year or two (while the Republican majority remains secure), what might Trump then do next? He hardly seems like a caretaker president or someone who would enjoy presiding over gridlock.
Like a good real estate magnate, the next step then would be to turn to the lower valuation buyers – namely the Democrats in Congress – and offer them some lesser deals at lower prices. The Democrats are the buyers who will value dealing less because many (but not all) of their voters are less enthused about working with Trump, and also they value less what Trump might plausibly offer. Still, there will be room for further exchange.
If Trump, perhaps working with his daughter Ivanka, crafted a reasonable federal child-care or preschool policy, many Democrats would jump on board. They wouldn’t become Trump supporters in return, but they would moderate their criticism, as they would have a victory to take home to their voters.
In short, the second half of the Trump administration might consist of Trump offering a series of smaller but still significant trades to Democrats, taking care to bring along some Republican votes as well.
And what might the final fire sale consist of? Imagine Trump in his fourth year, essentially running for re-election as an independent, feeling he has nothing to lose and intent on showing that he has broken gridlock. Imagine a Trump whose ideology remains fluid and who loves to make deals more than to adhere to an ideological line. Could he also “sell” climate change legislation and a higher federal minimum wage to Democrats and a smattering of swing-district Republicans?
That is just one scenario, not an absolute prediction, but it would mean lots and lots of policy change under Trump.
Josh Marshall on the Coasian model of politics
Here is one bit, there is more analytical political science at the link:
5. Trump’s foreign policy advisor on Russia and Europe is Carter Page, a man whose entire professional career has revolved around investments in Russia and who has deep and continuing financial and employment ties to Gazprom. If you’re not familiar with Gazprom, imagine if most or all of the US energy industry were rolled up into a single company and it were personally controlled by the President who used it as a source of revenue and patronage. That is Gazprom’s role in the Russia political and economic system. It is no exaggeration to say that you cannot be involved with Gazprom at the very high level which Page has been without being wholly in alignment with Putin’s policies. Those ties also allow Putin to put Page out of business at any time.
Recommended reading for your final exams in public choice. Do read it all.
A simple and plausible model of some of the major stock market anomalies
The paper is entitled Sticky Expectations and Stock Market Anomalies, and it is by Jean-Philippe Bouchaud, Philipp Krueger, Augustin Landier, and David Thesmar, here is the abstract:
We propose a simple model in which investors price a stock using a persistent signal and sticky belief dynamics à la Coibion and Gorodnichenko (2012). In this model, returns can be forecasted using (1) past profits, (2) past change in profits, and (3) past returns. The model thus provides a joint theory of two of the most economically significant anomalies, i.e. quality and momentum. According to the model, these anomalies should be correlated, and be stronger when signal persistence is higher, or when earnings expectations are stickier. Using I/B/E/S data, we measure expectation stickiness at the analyst level. We find that analysts are on average sticky and, consistent with a limited attention hypothesis, more so when they cover more industries. We then find strong support for the model’s prediction in the data: both the momentum and the quality anomaly are stronger for stocks with more persistent profits, and for stocks which are followed by stickier analysts. Consistently with the model, both strategies also comove significantly.
For the pointer I thank the excellent Samir Varma.
The Solow Model and Ideas
The fifth video in the Solow series from our Principles of Macroeconomics course is really the capstone. It explains how ideas drive growth on the cutting edge. A key insight of the model, however–one which many people still don’t really get–is that ideas increase output and by doing so they also drive capital accumulation so both forces are always at play.
The Solow Model Animated!
Modern Principles of Economics was the first principles textbook to make the Solow model of economic growth easily accessible to undergraduates. By focusing on simple mathematics that the students already know, like the square root function, we made the Solow model easy to understand without losing the power of the model to explain the world.
Modern Principles is the only textbook with the Super Simple Solow model! And now we’ve brought the model to life with a series of fun videos in our Principles of Macroeconomics class at MRUniversity. You’ve never seen the Solow model taught like this!
Introduction to the Solow Model introduces the questions and the “characters” that drive the story. Physical capital and diminishing returns explains the idea of a production function and diminishing returns. We then introduce capital depreciation and focus in on the most important idea for understanding the Solow model, the steady state:
I’ll cover some more videos in the Solow series later this week.
Working as a model for stock photography — what’s it like?
I very much liked this Jonathan Kay piece, which has so many good, interesting, and separate points, here is one of them:
“One of the most important elements of the Shutterstock quality-control process is to ensure there are no logos or other brand identifiers,” she told me. “Nor can the photos contain identifiable people or locations which haven’t released their legal rights.” The blackouts here can be extremely broad, and include some of the most famous landmarks on the planet. You can’t include the Eiffel Tower in most forms of stock photography, for instance. Nor can you include anyone wearing the iconic beige-and-blue Burberry pattern. Even a tiny patch of it in the background renders an image completely unusable.
And this:
Click through the Shutterstock database, and you find that professionally shot and curated stock photos invariably exhibit what might be called calculated soullessness. The subjects project human emotions—happy, sad, confused, angry—but in a simple, one-dimensional way. There should be nothing bespeaking a complex inner life. Real human interest always will distract the audience from the intended product or idea.
In closing:
How does a photographer achieve authenticity in an age where authentic culture increasingly is built around irony? More broadly: Is the project of organizing human experience into databases of generic happy faces and sad faces still relevant to us in 2016?
Alas, I can no longer remember to whom I owe the pointer, my apologies.
File under Those New Service Sector Jobs. And if that doesn’t suit you, here is “Calling all ‘bulky’ Alec Baldwin lookalikes”.
Modeling North Korean negotiators
Joel S. Wit, who has negotiated with North Koreans for over twenty years, has a very interesting NYT piece on that topic, here is one excerpt:
The North Koreans may know a lot about the outside world, but they don’t know everything, even about the United States, their main adversary. In one meeting, an official asked, “Why do the president and secretary of state keep saying that the United States will not allow North Korea to have nuclear weapons when in fact you are not doing much to stop us?” He deduced that there must be a hidden agenda. “It’s because you want us to have nuclear weapons as an excuse to tighten your grip on South Korea and Japan, your two allies.” We responded that there was no hidden agenda and that the United States really did not want the North to have those weapons. I’m not sure we convinced him.
The piece is interesting throughout, most of all Wit stresses their realism and sophistication as negotiators, and urges us not to think of them as lunatics.
The Tiebout model taken to an extreme
What if the entire town moves?:
When independent traders in a small Welsh town discovered the loopholes used by multinational giants to avoid paying UK tax, they didn’t just get mad.
Now local businesses in Crickhowell are turning the tables on the likes of Google and Starbucks by employing the same accountancy practices used by the world’s biggest companies, to move their entire town “offshore”.
Advised by experts and followed by a BBC crew, family-run shops in the Brecon Beacons town have submitted their own DIY tax plan to HMRC, copying the offshore arrangements used by global brands which pay little or no corporation tax.
The Powys tax rebellion, led by traders including the town’s salmon smokery, local coffee shop, book shop, optician and bakery, could spread nationwide.
The article is here, via John Chilton. Georgists of the world unite!
Another risk-based model of business cycles
I say if you don’t understand risk-based models, it is difficult to grasp why recovery has been so slow, or why the cycle was so tough to begin with. Here is Mete Kilic, Jessica A. Wachter:
What is the driving force behind the cyclical behavior of unemployment and vacancies? What is the relation between job creation incentives of firms and stock market valuations? This paper proposes an explanation of labor market volatility based on time-varying risk, modeled as a small and variable probability of an economic disaster. A high probability of a disaster implies greater risk and lower future growth, which lowers the incentives of firms to invest in hiring. During periods of high disaster risk, stock market valuations are low and unemployment rises. The risk of a disaster generates a realistic equity premium, while time- variation in the disaster probability generates the correct magnitude for volatility in vacancies and unemployment. The model can thus explain the comovement of unemployment and stock market valuations present in the data.
That is a new NBER working paper.
A crack in the higher education model? (hi future…!)
One of the UK’s biggest graduate recruiters is to remove degree classification from the entry criteria for its hiring programmes, having found “no evidence” that success at university was correlated with achievement in professional qualifications.
Accountancy firm Ernst and Young, known as EY, will no longer require students to have a 2:1 degree and the equivalent of three B grades at A level to be considered for its graduate programmes.
Instead, the company will use numerical tests and online “strength” assessments to assess the potential of applicants.
There is more here, via the excellent Jake Seliger.
Daniel A. Bell on the China model and political meritocracy
Stein Ringen reviews The China Model, here is Gideon Rachmann. He writes:
Daniel Bell, a Canadian political philosopher who has taught at Tsinghua University in Beijing for many years, is deeply influenced by this Chinese tradition. In his new book, he has set himself the ambitious task of making the case that Chinese-style meritocracy is, in important respects, a better system of governance than western liberal democracy.
I’ve been seeing a lot of emotional reactions to this book, here are a few points:
1. The United States probably should have less democracy along some margins, if only fewer referenda in California and no state and local elections of judges, dog catchers, and the like. If a writer cites “democracy” as obviously and always good for all choices, that writer isn’t thinking clearly.
2. More generally, the Western nations are relying on democracy less, as evidenced by the growing roles for central banks and also the European Union. That may or may not be desirable, but it’s worth considering our own trends before putting the high hat on.
2. The key to long-term living standards is stability of growth, just look at Denmark. There was never a heralded “Danish economic miracle,” but the country still has finished close to the top in terms of human welfare. Whether ostensibly meritocratic non-democratic systems can deliver such outcomes remains very much up for grabs, and Bell’s book hasn’t convinced me any that they can.
3. Arguably a country’s best chance of achieving meritocracy is to have many smart individuals who are culturally central. No system of government is going to overcome the lack of that.
4. Most humans in history seem to have favored meritocratic rule over democracy, and before the 19th century democracy was rare, even in the limited form of male-dominated or property owner-dominated republics. It is possible that the current advantage of democracy is rooted in technology, or some other time-specific factor, which ultimately may prove temporary. That said, I still observe plenty of democracies producing relatively well-run countries, so I don’t see significant evidence that a turning point against democracy has been reached.
5. To consider comparisons which hold a greater number of factors constant, I haven’t seen many (any?) serious people argue that Taiwan or South Korea would have done better to resist their processes of democratization.
Here you can buy The China Model: Political Meritocracy and the Limits of Democracy.
An economic model of the mystery novel, and are sports suspense-optimal?
Those questions are considered by Jeffrey Ely, Alexander Frankel, and Emir Kamenica in their new JPE paper “Suspense and Surprise.” Here is one to the point excerpt:
In the context of a mystery novel, these dynamics imply the following familiar plot structure. At each point in the book, the readers thinks that the weight of evidence suggests that the protagonist accused of murder is either guilty or innocent. But in any given chapter, there is a chance of a plot twist that reverses the reader’s beliefs. As the book continues along, plot twists become less likely but more dramatic.
In the context of sports, our results imply that most existing rules cannot be suspense-optimal. In soccer, for example, the probability that the leading team will win depends not only on the period of the game but also on whether it is a tight game or a blowout…
Optimal dynamics could be induced by the following set of rules. We declare the winner to be the last team to score. Moreover, scoring becomes more difficult as the game progresses (e.g., the goal shrinks over time). The former ensures that uncertainty declines over time while the latter generates a decreasing arrival rate of plot twists. (In this context, plot twists are lead changes.)
There are ungated versions of the paper here. Note that at the very end of the paper…well, I’ll just let you read it for yourselves.