Check Cashing Nonsense

We're always happy to have articles forwarded our way. TPS regular Rob Holub sent along the following piece on the regulation of check cashing businesses in the Cleveland area.

In short, the town of Parma is limiting the number of check cashing businesses within its city limits to 1 for every 10,000 residents; this means there will be no more than 9 at the current population level.

The mayor sums it up pretty well: "Some of these businesses charge high interest rates and fees for a short-term loan," said Parma Mayor Dean DePiero. "We want to make sure our residents are not taken advantage of."

This is bad economics rooted in political popularity. There are no residents being taken advantage of in this scenario; no one is being coerced into engaging in business with these check cashing groups. To the contrary, these businesses allow for a degree of time preference that is unattainable to workers sans check cashing places. Some people want to be able to spend their income sooner; these businesses allow for this to happen. They can't charge too high of an interest rate, or they would price many of their customers out of the market. I would be very willing to bet that their rates reflect very closely the time preferences of their customers. It would be interesting to see how these rates change over time and in response to certain economic ebbs and flows.

A good response question to the mayor would be, "What would an acceptable rate of interest be?" Better yet, ask a group against check cashing places the same question in private, then have them defend their position to each other.

It's popular for the mayor to take a stance like this because, sadly, legislating morality is almost an American political pastime. Many people don't use check cashing locations, feel that they charge too much, also feel that this is fundamentally wrong given their moral code, and therefore desire to change the world to fit their personal preferences. Here is West Virginia, we see the legislation of morality in the arguments over table games and slot machines. Drug prohibition is much the same argument as well.

Also-- check cashing places tend to be in lower income areas, and eliminating check cashing businesses gives the perception of "fighting poverty." It's not unlike swatting all of the flies from the air and claiming you've gotten rid of the refuse heap.

Happy Capitalism Day

My favorite blogger, Don Boudreaux of Cafe Hayek, today celebrates Capitalism Day instead of Earth Day. Here is his explanation:

On this Earth Day, I celebrate capitalism -- the institution that, far more than any other, has made human lives clean, safe, dignified, and culturally rich. Capitalism is also responsible for giving people the wealth and leisure to permit them to mis-perceive nature as loving and bountiful, and to enjoy nature in a way that few of our pre-industrial ancestors could ever have enjoyed it.

Jeopardy!

I'm a big fan of strategy, and economics satiates a good deal of my desire for it. Poker does too. Nonetheless, I've yet to encounter a diminishing marginal return to more competition in my life, so I enjoy as much of it as I can get.

Betting in final Jeopardy fascinates me. Some ideas I've been tossing around (and I'm sure this has been written about somewhere else many times; feel free to link it up):

- If you're in the lead, do you worry at all about the person in third place? I'm leaning now towards no, but I could be convinced otherwise. I think it may involve all three people being pretty close.

- If you're in third, obviously you want to two people ahead of you to be close, as presumably they both bet large amounts trying to beat each other and, if they both miss, the first person can slide in for the win (which happened tonight...on a final Jeopardy question category of "Military men" and having an enlisted serviceman in third place. Rigged? You decide.). But couldn't the top two people recognize this and mutually lower the stakes to effectively eliminate the lower player regardless of outcome? I know, there's no communication, it's a one time game, and even if both of those weren't true, it's not a stable equilibrium...nonetheless, I'm surprised this hasn't caught on in small bits here and there.

- I would think that if you're confident in your ability to answer one question-- and given the selection bias in people that can actually get on this show, I'd sense this is probably more true than not-- you'd find the top person always betting such that if they get it right and the second person bets it all and gets it right, they win by a dollar. Of course, knowing this, the second place person has an optimal betting strategy themselves, and then the third person too. We don't witness these respective strategies every single night, so where does this break down?

- I could be wrong, but in the past, if contestants tied, they brought them both back the next night. Why wouldn't people go for this? It's a chance to build trust with another contestant and make Jeopardy a repeated game. I suppose there's the fear of having someone approximately your equal back in the next game with you, but if you build the trust, they're not trying to get rid of you-- they could also go for the tie. Shirking is always a possibility...I'm surprised people haven't at least attempted the tie and move on in attempt to make friendly with another contestant. All you lose is one dollar for the chance to be playing the game with someone else. Maybe they don't let ties move on together anymore...in which case, strike all of this.

- Has the pattern of betting in final Jeopardy evolved over the years? There's totally a paper there. I'd suspect people learn and refine betting strategies; we may not be at the optimal betting solution, but given the path we took, I'd bet we're pretty near a locally optimal solution. Along the same lines, did Ken Jennings change his betting strategy throughout his run?

Divorce in the SWF: Part II

Shortly after my previous post on Divorce in the Social Welfare Function, a relevant NBER working paper has appeared. That earlier post was a result of a publicized study on behalf of a number of groups concerned about the tax effects of single parent families on children. Just in time for this study is the following NBER working paper by Kieth Findlay and David Neumark titled "Is Marriage Always Good for Children? Evidence from Families Affected by Incarceration." From the abstract:

Given that changes in the availability of men in the marriage market should affect marriage decisions, we use incarceration rates for men as an instrumental variable for family structure in estimating the effect of never-married motherhood on the likelihood that children drop out of high school, focusing on blacks and Hispanics. Instrumental variables estimates suggest that unobserved factors rather than a causal effect drive the negative relationship between never-married motherhood and child outcomes for blacks and Hispanics, at least for the children of women whose marriage decisions are most affected by variation in incarceration rates for men. For Hispanics, in particular, we find evidence that these children may actually be better off living with a never-married mother. [Emphasis provided by J. Ross]

I expect for this paper to carry no influence on the sponsoring child advocacy groups. As much as I like the result, I'll take it with a grain of salt.

Questions I've been mulling for the past couple of days

Which one company, today, will do the most good for the American public? The world as a whole? (I don't mean to emphasize the current day, April 21.)

Which company, to date, has done the most good for the American public? The world as a whole? (The question was originally asked to mean company still in business, but could be extended to include those that no longer operate.)

What scenario would you prefer: Good leaders in bad institutional structures, or bad leaders in good institutional structures? Who could do better? Who could do more harm? Who is prevented from acting like they want to the most? (Define "good" and "bad" as you wish, though as an exercise in reality, don't assume too violently either way.)

My choices in the comments...

Inequality and Growth

Mankiw writes on the subject drawing mostly on the supply and demand of skilled v. unskilled labor. Why does it seem that economic growth and income inequality be so closely related? What is the correct way to think about this relationship? I’m open to comments, but here are my thoughts as well (beyond Tournament pay, marginal income tax rates widening pre-tax incomes, and the fact that we are not measuring the same people over time):

1) We do not really know what income inequality actually means. The most common measure is the Gini Coefficient, which would be comical were it not taken so seriously. Perfect Gini equality exists when everyone has the same level of income, while perfect Gini inequality exists when one person has all of the income. To restate perfect Gini “inequality” then is to say everyone has the same income except one person. Sure everyone with the same income has $0, but we already chose to ignore the absolute levels of income when we began discussing inequality.

2) We measure growth and inequality according to arbitrary geopolitical borders over arbitrary intervals of time, which give us arbitrary results. Growth has very important implications for cost-of-living via land prices which artificially inflate income inequality measures.

3) The poor are drawn to areas of high income growth where they improve their standard of living, but drive up inequality measures. Suppose there are two open check-out lines at Wal-Mart. One line has a highly motivated and efficient cashier where customers are moving very quickly through, the second line has a very very old cashier who is also partially blind so customers move through very slowly. Which line is the longest? The first line with the fast cashier, as people at the end of the line in the second move to the first.

File This Under Children's Books for Economists

While wandering the children's section of Barnes & Noble, I was shocked to see an dreary looking book titled The Wall: Growing Up Behind the Iron Curtain. I bought it and it is terrific. Here is the product description from Amazon:

“I was born at the beginning of it all, on the Red side—the Communist side—of the Iron Curtain.” Through annotated illustrations, journals, maps, and dreamscapes, Peter Sís shows what life was like for a child who loved to draw, proudly wore the red scarf of a Young Pioneer, stood guard at the giant statue of Stalin, and believed whatever he was told to believe. But adolescence brought questions. Cracks began to appear in the Iron Curtain, and news from the West slowly filtered into the country. Sís learned about beat poetry, rock ’n’ roll, blue jeans, and Coca-Cola. He let his hair grow long, secretly read banned books, and joined a rock band. Then came the Prague Spring of 1968, and for a teenager who wanted to see the world and meet the Beatles, this was a magical time. It was short-lived, however, brought to a sudden and brutal end by the Soviet-led invasion. But this brief flowering had provided a glimpse of new possibilities—creativity could be discouraged but not easily killed.

By joining memory and history, Sís takes us on his extraordinary journey: from infant with paintbrush in hand to young man borne aloft by the wings of his art.

Even if there are no folk songs, at least there is a children's book that gives collectivist action an accurate depiction.

Government Bumps Prices to Reduce Bumped Fliers

I don’t care for the trade-off. New regulations double the compensation to fliers who get bumped from overbooking. The obvious consequence is an increase in the price of airline fares and lower profit (thus consequences from lower profit as well). What are the other hidden unintended consequences? How would doctors, dentists, or restaurants respond if we imposed a similar regulation on them? Smaller planes? More red-eye flights? Larger first-class sections intentionally undersold to move the overbooked passengers so they won't complain to the Feds? As you can probably tell, I know very little about how the logistics and economics of this industry.

Caplan’s Myth of the Rational Voter

Bryan Caplan’s book, The Myth of the Rational Voter, is the most important book written in public choice this decade. It is a well-rounded argument that nicely blends elements of the Chicago and Virginia schools of public choice. The logic rests on a set of human biases that play against free markets in the policy arena (anti-foreign bias, make-work bias, anti-market bias, and pessimistic bias). In addition to further empirical testing for the presence of these biases, I believe the idea still needs a source or a reason for existence. For the anti-foreign bias, Caplan has an explanation already, that it may be a leftover evolutionary survival gene that was important in the cave-man days of hunter-gather groups.

Unless I missed it someplace else in the book, the other biases need a starting point as well. The existence of anti-market and make-work bias are the most perplexing to me, but I can think of a few possible explanations:

1. As economists, we pay attention only to the systematic bias when it is against the correct outcome and not when it is in favor. I’ve never seen a politician who made his way raging against the division of labor. Thus in survey’s we don’t think to ask questions about whether the economy is suffering from people developing skills in too few tasks.

2. The "informed" are endogenously determined by their bias. Beliefs are initially not systematically biased, but the mechanisms that cause those on the “wrong side” to avoid displeasing information also drives those who happen to be “in the right” to seek information pleasing to their bias and seek it out more often, making them also “in the know.”

3. People rationally ignore effects beyond the initial phase because of the lack of incentive, and much of economic intuition is appealing because the full chain of effects reverses the initial outcome. Minimum wage goes up is the initial effect and looks good so far, but with further cognitive effort we realize lower employment will also result. The lack of reward to thinking this far yields the systematically bad choices.

The Short Run of Long Baseball Games

Last night, the Colorado Rockies defeated the San Diego Padres 2-1 in a 22-inning game. Extra inning games in baseball are a somewhat frequent occurrence, though any game lasting longer than 13 or 14 innings is pretty rare. I went to an 18-inning game once that ended 1-0-- I think that's the longest 1-0 game in MLB history, or at least it was at the time.

Anyway, extra inning games are an interesting dilemma for the teams involved since pitching is scarce. Teams, naturally, want to win games. The game must go at least nine innings, sans weather irregularities, to determine a victor. If the game is tied after nine innings, your desire to win still remains-- winning in an inning or two is the best case scenario since you use up the least amount of your scarce resource. The problem is, should the game remain tied for the next few innings, you still want to win the game in the short term-- always the next inning or so-- but the supply of pitchers you have dwindles, as does the supply or pitchers you have for the next game as well. At some point, teams usually realize the increasing costs of playing in and trying to win a single game and resort to a "we're leaving this pitcher in until it's decided one way or the other" mentality, but by this point, the team has already hamstrung itself for the next day's contest...which is especially costly if you're playing a different team the next day. It's an issue of perpetual short run. These issues get a little more interesting in the playoffs, when the value of one win is a lot higher, as opposed to one game in 162.

Thus, you end up with a 22 inning game last night that neither side is particularly pleased about-- not the loser, since they expended so many resources for a loss, nor the victor, who is confronted with a Pyrrhic victory of sorts.

I'd be very willing to bet that if you presented to the managers after a tied nine inning game that the game would end up going 22 innings before being resolved, both would immediately agree to a coin flip to settle the outcome of the game.

Innovations in Season Tickets

It's not often you see entrepreneurship with professional sports franchises in how they offer tickets to fans, but this is certainly an idea that should turn some heads. Thanks to TPS regular Rob Holub for the heads up.

The Minnesota Timberwolves, an NBA franchise, have 43 home games next year. They were one of the worst teams in the league this season, somewhat to mostly attributable to the fact that they traded their best player, Kevin Garnett, before the season started. When you don't make the playoffs in the NBA, you enter a draft lottery, a process due which the first three picks in the draft are determined by chance. The worst teams get more ping pong balls than the teams that barely missed the playoffs, but nonetheless, any team that fails to make the playoffs has a chance at the first three picks. Minnesota's record is sufficiently bad such that they should not end up with any pick worse that #6 in the next draft.

So what did the team do? They decided to offer season tickets next season for $43 multiplied by the draft pick they end up with. So if they win the lottery and end up with the first pick: $43 season tickets. #2 pick? $86 season tickets. And so on.

I'd jump at this in a second if I lived in Minneapolis. Let's assume they end up in the worst possible scenario-- #6 in the draft-- then season tickets are $258. And that's your bill if you go to every single game and sell none of them. What are the odds that no games throughout the year will be must-see games that will demand a high resale value? If nothing else, this is a tremendous investment opportunity. And what if the Timberwolves are actually good next year?

The curious thing is that the tickets cost less for a better draft pick. Assuming you'd want to watch better players, and those players go earlier, you'd think they could get away with inverting the pay structure and getting even more people to sign up. You're paying $43 to see the #1 pick, yet $258 to see the #6.

You do have to sign up for the deal before the draft itself, so I guess there is a moderate risk involved. A $43 deposit is the only requirement.

Very intriguing.

(And Justin persuaded me...I'm going to try to label posts henceforth.)

What is the optimal level of Gold-Digging?

I have a friend who is well-educated and good looking with two conflicting complaints regarding women he’d like to date. His first complaint is regarding women who date men with no discernible purpose or future and lack all manner of worthy objectives in life (he calls them "trailer trash"). His second complaint is with women who want him because of his professional success. So women should avoid men with no potential for professional success but not want men with professional success? Questions that need answering:

1. What is the optimal level of professional success a woman should seek?
2. How can she send the appropriate and costly-to-fake signal that she is both interested and not interested?

File this under...things that work: Profit Incentives

Obviously, this is a step in the right direction for Cuba...and one step closer to having Cuban cigars back in the United States?

Do Prostitutes Get Tips?

Why or why not? I believe not based on the following limited evidence: 1) I see no mention of tipping in a skim-reading of the recent prostitution working paper by Levitt and Venkatesh; 2) In my first college course I sat next to a woman I later learned to be a prostitute, and she never mentioned it, although she apparently was a highly specialized sort.

So, assuming the norm is to not tip a prostitute following a trick, why is that the norm? Why would it be the case that a prostitute in the spirit of competition not offer potential Johns the opportunity to “pay” on merit after the transaction? I offer three explanations:

1. The prostitution market suffers from adverse-selection, and Johns are more likely to stiff (pardon the pun) the ladies, making the dominant business model to offer an up-front fee.
2. Consumers would prefer to pay up-front for psychological reasons. When I go to the restaurant and I am considering what the appropriate tip should be, I go through sort of a mental checklist: How was the service? How difficult was I? Did my kids spill drinks on the ground? Did my wife make a complicated order that required lots of amendments? I imagine that Johns would prefer not to reflect on what they just did with a similar checklist just like they may avoid a mirror for some time.
3. Prostitutes can capitalize on a systematic male-ego bias by making them pay first. The male ego says “$xxx sounds reasonable for the hours I am about to have with her” only to then spend a considerably shorter time. If they tipped after the fact they would be tipping on a shorter duration than they would have paid for up-front.

I’m sure others have great ideas and I look forward to reading any of them in the comments.

Divorce in the Social Welfare Function

A study conducted at the request of a collection of marriage advocate associations found that divorced and out-of-wedlock parents cost $112 billion (about $373 per person) of federal spending. Their intention is for the government to spend more money so that fewer marriages end or that more people who decided they should not marry choose to do so instead. I’m curious about the logic of how divorce affects the social welfare function though, particularly through transactions costs and externalities.

The true motivation of these groups though is the effect of family disbandment on the children. The crux of their argument is that there exists externalities on children if the parents do not take their kin’s suffering into consideration. Divorce is a binary outcome (0/1), thus increasing transactions costs can be welfare improving if the externalities are greater than the transaction costs. The externality component is important, as typically economists think of reducing transactions costs as a means to increasing efficiency and thus social welfare. Thinking carefully about the existence of externalities in this circumstance raises a different point though, as they exist to the extent that parents do not consider their children’s feelings. Thus, if significant negative externalities do exist, wouldn’t those be exactly the types of parents we would want to have less time with their children and be prime candidates for seperation? What if only one of the two parents creates externalities?

Strength of Schedule Bias

Since the NFL is scheduling up right now, it's worth mentioning that strength of schedule measures are inherently biased. This is nothing groundbreaking-- good teams beat their opponents more than bad teams, so if the 49ers played the exact same schedule as the Patriots last season, the strength of schedule would seem less for the Patriots, simply because they're winning against them more often.

I'd assume you simply look at the games that don't involve your participation in them-- so 16 wins would be taken from the composite won-loss total for the opponents of the Patriots from last year to compute their year-end strength of schedule. I suppose calculating this year's before-season strength of schedule upon last year's win-loss results would be unbiased. I can't think of a large reason why they would be...unless considering a) you don't play entirely new schedules from year to year due to divisional games and b) there is some mild persistence of team ability across seasons. Take together, the bias would be presumably small. Previous season strength of schedule doesn't seem to predict much in the NFL anyway.

Of course, this issue carries a bit more weight in college football, where strength of schedules matter to determine which teams play for the national championship. I'm sure they adjust for this...right? How do they do that? (Holub, that means you.)

My preliminary guess as to the determination of SOS for college is this:

1) Spots 1-12 are reserved for SEC teams.
2) The next spots are reserved for teams that play against SEC teams.
3) The rest.

Campus Shootings and Corner Solutions

Here is a piece on the growing movement for allowing guns on campus.

On campus shooters, along with other extreme decision makers in society, are often referred to as corner solutions. The idea comes from a typical utility curve/budget constraint maximization procedure. Here's the general case for the uninitiated:

The straight line is the budget constraint, the curve is the individual's utility function, and they are tangent to each other at the point of utility maximization, which also happens to be the price ratio between the two goods. Small changes in prices-- changes to the slope of the straight line budget constraint-- lead to shifts in the utility curve. Basically, small changes in prices lead to small changes in behavior.

But consider that the utility curve is drawn such that it hits at one of the axes-- at the corner of the budget constraint. At this point, the curve need not be tangent to the budget constraint. This situation is known as a corner solution since...well, you're in the corner. More importantly, due to the lack of tangency, small changes in prices need not lead to small changes in behavior.

This makes all the difference. If terrorists and on-campus shooters are corner solutions, then making marginal changes to increase the cost of their activities isn't going to change their behavior. Only large-scale shocks to the system will generate a change in behavior. Marginal changes, such as longer searches at airports, won't do anything.

Which brings us to allowing guns on campus. If school shooters are resigned to dying in the process-- and, sadly, I think this is largely the case-- then I'm not sure this will be the cure-all that some of the supporters think it may be. It would likely lessen the impact of each shooting, and this shouldn't be undervalued. I suppose a shootout between an aggressor and an armed student could result in the case of fellow classmates taking more stray bullets than if only one person had a gun, but I find this awfully unlikely. I don't see the number of incidents going down. Of course, this can't be directly tested; no one knows what would have happened if the law had/hadn't changed, though if there is enough variance between states in on campus gun laws then this may lead to a testable scenario (though the time frame would have to be pretty long-- these shootings, thankfully, do not happen with great frequency).

I'm certainly in favor of allowing guns on campus; liberty is good, and limiting the scope of those attacks is good as well. But I don't think it's going to make them once-every-twenty-years occurrences.

My Next David Skarbek-esque Post: The Federalist Papers and Legislative Tenure

I always feel like fellow blogger David Skarbek when I post something that might contain academic value. (Emphasis on 'might.')

Anyhow, when I'm interested in a topic, I find it useful to break out the Federalist Papers and seeing what those three had to say on the topic. Currently, I'm interested in all things legislative tenure. Onwards!

- Federalist 39 (Madison):

"If we resort for a criterion to the different principles on which different formsof government are established, we may define a republic to be, or at least may bestow that name on, a government which derives all its powers directly or indirectly from the great body of the people, and is administered by persons holding their offices during pleasure for a limited period, or during good behavior."

"It is sufficient for such a government (MER: a republic) that the persons administering it be appointed, either directly or indirectly, by the people; and that they hold their appointments by either of the tenures just specified; otherwise every government in the United States, as well as every other popular government that has been or can well be organized or well executed, would be degraded from the republican character." (emphasis in original)

"According to all the constitutions, also, the tenure of the highest offices is extended to a definite period, and in many instances, both within the legislative and executive departments, to a period of years. According to the provisions of most of the constitutions, again, as well as according to the most respectable and received opinions on the subject, the members of the judiciary department are to retain their offices by the firm tenure of good behavior."

Nothing too surprising here. Remember, limited office is a big topic at the time-- monarchy and its indefinite rule wasn't the most popular idea at the time. It is interesting that judges pretty much get a free pass.

- Federalist 53 (Madison):

"The period of service ought, therefore, in all such cases, to bear some proportion to the extent of practical knowledge requisite to the due performance of the service."

"In a single State, the requisite knowledge relates to the existing laws which are uniform throughout the State and with which all the citizens are more or less conversant... The great theater of the United States presents a very different scene. The laws are so far from being uniform that they vary in every State...public affairs of the Union are spread throughout a very extensive region and are extremely diversified by the local affairs connected with them, and can with difficulty be correctly learned in any other place than in the central councils, to which a knowledge of them will be brought by the representatives of every part of the empire."

"...the business of federal legislation must continue so far to exceed, both in novelty and difficulty, the legislative business of a single State, as to justify the longer period of service assigned to those who are to transact it."

"A few of the members, as it happens in all such assemblies, will possess superior talents; will, by frequent re-elections, become members of long standing; will be thoroughly masters of the public business, and perhaps not unwilling to avail themselves of those advantages. The greater the proportion of new members and the less information of the bulk of the members, the more apt they will be to fall into the snares that may be laid for them."

The final quote has public choice written all over it. Should a gap develop between tenured, in-the-know legislators and the new, still-learning-the ropes legislators, then self-interested action will likely increase.

The earlier quotes in Federalist 53 concern the fact that most State constitutions at the time had tenure of representatives at one year, yet the Constitution was proposing tenures of two years.

What Should Be of Adam Smith’s Home?

Story here.

I say auction it to the highest bidder.

Which Economic Theory is the Most Underappreciated?

Which theory in economics deserves more attention and thought? One of the reasons I am such an avid EconTalk listener is that I get to spend time listening on topics like the division of labor or opportunity cost that seem to have a deeper level than I had previously realized. So I’d like to invite the readers to comment on which economic concept or theory they feel is underappreciated by the science.

My answer, by the way, is the Homevoter Hypothesis by William Fischel. To boil it down to the idea that homeowners vote based on the potential impact on their housing price sterilizes the real power of this idea. Empirical evidence by researchers not named Fischel is limited but very supportive. Classical liberals should use it as support for sharpening the focus of the EPA to non-local pollutants and push for greater replacement of Federal powers with local government control.

Milk Test 2008

This weekend, I had a taste test between organic 1% milk and "normal" 1% milk. I really didn't think I'd be able to to tell the difference-- nor would the person to which I directed the challenge in the first place. To my surprise, there is a mildly perceptible difference in taste, but they actually smell distinctly different. I'm still not sure I can support organic foods due to the fair-trade foolishness that usually comes with it, but organic milk does tend to last longer in your fridge. So they've got that going for them. Which is nice.

But it got me to thinking: My opponent drinks only organic milk. I drink only "normal milk." Obviously, we're both not immediately familiar with the milk foreign to us-- but does that mean we're in the same positional (dis)advantage for participating in the taste test? Presumably, my opponent switched to organic milk at some point-- does the memory of "normal" milk help in discerning the difference? Could "normal" milk in all its capitalist, mass-production evil have diminished my taste buds so as to render me useless in a challenge like this? Is the problem really symmetrical?

Netflix and Price Discrimination

Third Degree Price Discrimination occurs when consumers are separated into different groups and charged different prices. I have discovered a clever ruse by emusic.com that applies this concept by targeting Netflix customers (which I am). Now this will only work on your computer ONCE, so follow these instructions carefully.

1. Open a new web browser, go to www.emusic.com where they will offer you 50 free downloads to subscribe. Keep this open.
2. Open another new web browser, go to www.emusic.com/netflix11. This is the web address that I received on a flier with my Netflix DVD arrival. What is different?

With the /netflix11 extension, you will be offered 35 free downloads instead of 50 (i.e. a higher price). Emusic has apparently discovered (or they believe) that customers of netflix are willing to pay a higher price than the general internet music consuming public. We have been segmented, and are believed to have a higher willingness to pay. I should note that if emusic would not have been able to price discriminate and instead offer one single price, then they probably would have charged some middle price between 35 and 50.

The Perfect Substitute Welcomes Justin Ross!

I'm not sure if you've noticed, but at times the posting here on The Perfect Substitute has been a bit sporadic. Alright, of course you've noticed...but towards that end, we've picked up another blogger! We'd like to introduce Justin Ross as a new contributor. He knows more about spatial econometrics than you do. He's finished his dissertation at West Virginia University and will be heading off to the School of Public and Environmental Affairs at Indiana University in the Fall. He's done a lot of work in Urban/Regional, though is increasingly merging into the Public field.

Anyhow, the last two posts were his, and we're looking forward to more great stuff from him! Welcome aboard, Justin.

In completely unrelated news, I'm currently reading the biography of Charles Schulz and A Splendid Exchange, both of which I recommend. I won't mention the Charles Schulz book again, but considering how widely known Peanuts is, I think the general public knows little to nothing about the creator. It's an interesting read. I will be posting concerning the latter once I get through it-- I'm a slow reader, but will try to finish it soon. A Splendid Exchange is nicely written and gives a great account of the historical roots of trade and early long-range commerce (for the first quarter of the book, anyway).

Why Experimental Methods in Education Are So Important

Full story here:

Vaughn learned that the regional pass rate for girls was low because it was rooted in the economic need of young girls to work at home. They begin missing classes, then failing exams, often ultimately failing or dropping out of school.

"I found every one a girl younger than she and said, 'You're responsible to make sure she learns.' I taught them how to teach each other."

It worked. In two years, the group of girls had grown to 80 -- and they were succeeding in school. With a grant, Vaughn was able to hire teachers, and the program continued to expand despite her attempt to set a limit of 100 girls.

"The girls wanted to take it to 10,000," says Vaughn.

To keep their "10,000 Girls" education program going, the girls asked Vaughn to teach them to bake. They began selling cookies and juice and were able to buy books and supplies.

Soon after, they got their older sisters, aunts and cousins -- who had already failed out of the school system -- involved in baking and selling goods. The entrepreneurial element of the program was born.

"We have girls who were told they'd never get through high school who are at university now," beams Vaughn. "We hope that if we get 10,000 girls out there, 1,000 girls will come back to Kaolack and work. It would revolutionize the whole region.

Fortunately Vaughn was in Senegal, not California, where home-schooling is a crime.

Limited Only by the Extent of the Market

The Perfect Substitute recently hit the 10,000 visitors mark. Such high demand and expanding market prompted Matt and David to divide and specialize a bit further by inviting me to join in production. So a brief introduction….I have defended my dissertation on Taxation and Space, and will soon take the post of Assistant Professor of Public Finance in SPEA at Indiana University in Bloomington. My fields are public, urban, and regional economics with my econometric interests in spatial, quantile, and Bayesian methods. I think of myself as a classical liberal, but I limit my political activism to small one-time donations to the campaigns of candidates I especially despise (a suggestion I picked up from Tyler Cowen’s Discover Your Inner Economist). I look forward to posting on the Perfect Substitute, where the experts go first.

Draws and Chess

I'm not completely ignorant of chess, but to say I've got any more than a passing knowledge of it would be a bit misleading. (I know for a fact that one reader of this blog knows a good deal about chess, so I'm curious as to their take on this post. We'll call him T. Johnson...no, Tom J.) I enjoyed playing it sporadically when I was younger, and would still enjoy playing it now, but there seem to be matching problems and, of course, a limit on the hours in the day. Oddly enough, if I were to play ten games of chess right now, I think I'd perform better in the first game than the tenth...though that's another discussion for another time.

Anyway-- there seems to be a widespread problem with the chess world of too many draws in high level chess. Of course, this isn't a structural problem with chess per se, just people's preferences for the outcomes they'd like to see. Nonetheless, part of sport is spectator, so that aspect does need to be taken into consideration.

Hockey had this same problem a few years ago; people thought overtime was boring and resulted in too many ties. Back then, teams would play, and the winner got 2 points, if the two teams tied they each got 1 point, and the loser got zero points. At the end of regulation time, if the game were tied, teams became extremely risk averse. Settling for one point in most scenarios was better than risking for two and possibly coming up with none. Thus, overtime play became extremely defensive and fans were none too pleased.

How did the NHL deal with this? Modify the payoffs. (They also changed the number of players on the ice to enhance the openness, but I believe the rule changes to have had a far larger impact.) Instead of coming up with zero points for an overtime loss, teams instead retained their one point. Winners in overtime still get their two points. Basically, you've now got nothing to lose by going for a win in overtime. To think-- incentives matter! Ties went down, offensive play went up in overtime, and fans on the whole were pleased with the result. Changing the structure of the payoffs changes the outcome.

Why can't something similar to be done with chess? If people want to see more wins, why not make wins more valuable? At some point, I presume you could make wins so valuable such that no one would want to offer a draw. If it's really that big of a problem-- and maybe it isn't-- this seems like an obvious solution that maintains the integrity of the game. Though perhaps there would be a large resistance to a change even on this margin...

Could it also be that since a number of these draws occur when there are a lot of pieces on the board-- the only time I'd draw with my brother is when we each had a king and a king only left-- well established players are saving their mental acuity for a time when it is most valuable to expend a lot of it? Athletes oftentimes speak about giving 110% on every play, but that's pretty clearly not the case. Running backs could fight for every inch on every play, but sometimes it is best to accept the play for what it is (or isn't) and retain your energy for another opportunity. Pitchers don't put everything they have into each pitch-- starting pitchers, especially. Ultimate fighters aren't going all out at every second of the match either-- they wait for the right time to make the large expenditure of energy. Why should chess be any different?

Economics and Matt E. Ryan

I read a blog post a while ago-- it may have been on Marginal Revolution, but I could be wrong-- to the effect of how economics helps you through your everyday life. I thought I'd offer my own list:

1) The rules of the game are the biggest factor out there. By a lot. Messed up situations are usually a function of messed up rules.

2) Given that it is the rules of the game that are so important, people spend too much time worrying about the selfishness of others. Could a little less selfishness in the right places leads to good outcomes? Probably. But on net, selfishness-- at least in this country-- is a big positive.

3) Given that people are self-interested, it is typically not especially hard to figure out what people are going to do if put into a pre-determined situation. This gives me a lot of comfort.

4) Consumer surplus and producer surplus are really important ideas, right out of Econ 101. I've been debating with myself over the past week or so whether total consumer surplus would be greater than total producer surplus, world-wide, if such a calculation were feasible. I continually come to the conclusion that consumer surplus is bigger-- a lot bigger. This also gives me a lot of comfort. Maybe this is because I'm not on the producer side too often, though I do supply my labor. I have a general inkling-- misguided as it may be-- that people who demand things get a bigger share of the surplus than those who supply them.

5) On the whole, people generally don't take advantage of other people. In our system, for the most part, you end up better off by cooperating, not coercing. Cooperation and selfishness are often painted as mutually exclusive by the non-economist; this is not accurate.

6) Just about everything in my life (absolutely everything?) is voluntary. This, too, gives me a lot of comfort.

7) It's OK to like big companies. They provide a lot of good things for a lot of people. That's why they're big. Big companies allows us to spend money at small companies. I'm glad I realize this.

Organ Markets

In poking around online for my column, I came across a nice brief piece from lewrockwell.com about organ markets, Eight Ethical Objections to an Organ Market...And Why They're Wrong. I haven't heard an objection to organ markets that isn't on this list.

Cato Article

I have a piece in the upcoming issue of The Cato Journal on "Occupational Licensing and Asymmetric Information: Post-Hurricane Evidence from Florida." Here's the abstract:

Licensing is typically justified on the grounds that market mechanisms will not mitigate the problems associated with asymmetric information. In the wake of Hurricanes Frances and Katrina, Florida reduced restrictions on construction contractors, yet in times of crises informational asymmetries are more likely to be problematic. I find that volume of construction work completed increased during this period, indicating that asymmetric information didn't stifle the market. Given the relative success of reducing restrictions and the government's explicit recognition of licensing's limiting effect on the availability of roofers, reform of licensing, at least to the extent done in crisis, should be adopted permanently.

Communism and Malthus

Courtesy of my brother, I thought this was an interesting piece of history. What's better-- Mao's offer, or Kissinger's response?

eBay's new fees

A couple of comments on eBay changing their fee structure and the ensuing user outrage:

- The network effects of the online buying and selling market are huge; if all firms offered the same fee structure, only one firm would survive. Once a site got a few more people, it would be more profitable to sell there since there would be more bidders, which would attract more sellers, which would attract more bidders, etc. That's why all of the fledgling auction sites from the late 90s went by the wayside-- it's not about offering a lower price, it's about attracting the most people...and only one place can attract the most. A move like this would have meant death in 1999, so I'd say eBay's decision reflects its knowledge and comfort with its place in the market.

- That being said, a large enough shock to the fee structure could make it impossible for someone to sell at a profit at eBay but for profit somewhere else. In order for that to happen, though, you're going to need a lot of buyers to jump ship along with the sellers; otherwise, they're going to lose even more money at the new place because even though the fees are lower, the final prices aren't as high. Traffic is the name of the game in auctioning-- the more, the better. I just don't see that happening-- that's a massive coordination problem. I know the talk of a one week strike is an attempt to move down that path, but it's not focused on the buyers, it's focused on the sellers. They could try to act as a group and all move, and let it be known to the buyers where they are headed...first mover problem, anyone? Collective action problem, anyone?

- I am surprised at the modest success of the fringe/specialty auction sites that I've been reading about in the eBay stories. Then again, I nor many others hadn't heard of them prior to the story...that might be a problem in the long run. Maybe they can operate on a smaller scale and serve a dedicated niche.

- Was I the only one that found the threat of not selling for a week mildly humorous? Let me get this straight-- you're not going to sell for a while, but you're not going to leave, and while you're not selling you're hoarding your goods to sell when you decide to jump back on? A commitment to sell goods on another site for a week would have been more effective, but the funny thing about profit motives...

- Based on that, why didn't an emerging site offer to list every good from an eBay seller for free during that week? It might not work out, but the traffic would go up, and if you could get enough buyers to head over there (and the sellers, I'm sure, would be very active in letting previous buyers know about this) you might get the ball rolling. Maybe someone has; I'm out of the loop on this.

My two cents on the Clemens ordeal

I'm a baseball fan, and like most fans, I'm frustrated with this Clemens nonsense not because he did or did not take performance enhancing drugs but because it takes the focus away from the art of the game. I could honestly care less if every player or no player takes steroids; if home runs are 800 feet and pitchers throw 150 mph, so be it-- just as long as they are playing the game.

Nonetheless, I get asked frequently about this Clemens ordeal. I really don't think anything has changed with today's proceedings. (Though McNamee did include the fact that he injected Clemens with Winstrol, an anabolic steroid, in today's proceedings. I hadn't heard anything other than HGH up until today, though I'm not following it exceedingly close.) If we look at the biases of each person's testimony, McNamee would be biased towards withholding the bad things he did-- if anything, he isn't telling us enough. It's the same for Clemens; he's biased towards witholding any bad things that could have happened. The reason we've got a problem is while Clemens is squarely where his bias would predict him to be, McNamee is entirely on the other side. I think that speaks more than any confirmation of who was at so-and-so's house for lunch or when certain conversations occurred, if at all.

Related to the issue at this juncture is also the simple fact that, if something bad happened, the marginal cost to admitting it is basically zero for McNamee (or possibly a net benefit if coming clean and leading to other users minimizes his legal penalty) and massive for Clemens.

It doesn't look good for Clemens at this point, nor has it since this began to blow up. Wolfers et al wrote a piece in the New York Times about the statistical analysis Clemens' team did and makes very good points; here (I think) is the most recent post at Freakonomics which links the first post which, in turn, links to the NYT article. I'm going to go ahead and say that you're generally not in a good position when Justin Wolfers is arguing against what you're saying.

Though I will say that one positive that could come from today is that it prevents the members of Congress from...oh, I don't know, printing out checks and sending them to people.

Can you spot the difference, NBA version

I got into a debate with a friend of mine this weekend about the Hall of Fame prospects of Dennis Rodman; I know a bit about the NBA, but he knows more. I've always felt that Rodman was a very underrated player and should definitely be in the Hall of Fame, and my buddy felt he was a borderline case, so we hit the online NBA encyclopedia.

Dennis Rodman's page is here.

As a comparable case, Ben Wallace's page is here.

And after having noticing the difference in those two pages, we spent the next fifteen minutes seeing exactly how different the pages can be. Poke around yourself-- I'll keep the secret, but offer Michael Jordan and Bryce Drew.

In Rainbows

Amid quite a hubbub, Radiohead released their most recent album In Rainbows online about three months prior to it arriving in record stores. But there was a catch-- you could name the price you wanted to pay for it. (Here's a brief rundown; if you search the topic, there has been plenty written about it.) If you wanted to pay nothing, that was fine. If you wanted to pay 10 pounds, that was fine too-- both parties got the same disc. It turned into a great assignment for my Public Economics class last fall-- public goods, rational economic actors on all sides...plenty of angles to take.

As it turned out, the most you could pay for the album was 99.99 pounds. And in a recent interview, about halfway down, lead singer Thom Yorke revealed that 15 people ended up paying the full 99.99 pounds-- "...and I swear the band members are not among that 15." I have to admit, I thought it would be a bit higher, though if I remember correctly, it was not immediately clear when moving through the site that 99.99 pounds was the maximum. I believe it took some trial and error by the user to come to that amount (or hearing about that level online prior to downloading your copy).

The band is acting very protective of the specifics of how many were downloaded and at what prices...now that would be interesting data to look at.

Bluefields: Heaven on Earth?

TPS stalwart Thomas Johnson sent forward a fantastic piece about Bluefields, a coastal community in Nicaragua that benefits from bales of cocaine washing ashore due to Colombian smugglers dumping them when pursued by US Drug Enforcement officials. Even better: The Nicaraguan government considers the area an autonomous region, so they pretty much leave them be to fend for themselves. There are, quite honestly, a dissertation's worth of angles to take with this story if everything in the piece is accurate. This has to be the most interesting article I've read in a while. There's actually four pages to that article, so click ahead...it is well worth the read.

My favorite lines:

The police and Navy have few resources and less trust from the local public. Bluefields is effectively an anarchist nation - no Government, no organised institutions and the rules are made by community groups. Given the massive amount of cocaine in town, violence is surprisingly rare.

(Insert your "looking for $20 bills on the beach" joke here.)

Update: Minor league investing

It looks like we're going to have to wait a little longer to invest in our favorite minor league prospects. Though I get my $20 back, my retirement portfolio has been irreparably harmed-- if I can't diversify my risk into professional sports development, can I really sleep soundly at night?

Good point in the article: MLB's concerns with isolation from gambling. Not to imply the investing in prospects is akin to shady 1919 Black Sox-esque scandals, but given the steroid problems baseball is in the thralls of, the last thing they would want to encourage is that players are doing anything other than good ol' American try-your-best-and-win-because-you-love-playing-the-game-cleanly.

On the flip side, could investment contracts be designed to reverse the incentive to take performance enhancing drugs? I bet yes. Though to force every player to enter into such a deal isn't a good solution to the problem.

Bad point in the article: Assuming that players sell 5% for $50,000. There's no reason to believe both of these margins couldn't change; I'd be shocked if the market developed and it stayed at those levels sans regulation. More risk averse players could up the percentage. More talented or major-league-likely players could up the value, though given the reality of larger signing bonuses for those players there might be a natural ceiling that develops. Or perhaps the evolution of the player investment market will displace signing bonuses completely?

Edited: Here's the text of the email that Real Sports Investors sent out:

Dear Valued RSI Shareholders,

Since we launched our site in early December 2007, the response has been absolutely tremendous. Fans and Athletes alike love this concept and we cannot thank you enough for your support. Athletes are signing up with us because we can provide them with security in exchange for a piece of their potential. Fans like you have purchased shares for a number of different reasons and the excitement is tangible.

Thanks to your overwhelming response we know that our company’s mission and ideas have a place in the future of sports. With your help, we will be able to create the first market where future earnings of professional athletes can be traded.

In order to create a system that will allow players and fans the best experience possible we believe it is in everybody’s best interest to work with Major League Baseball. We have been in contact with them and in the coming months we will be working with Major League Baseball to make sure that RSI addresses all the needs of the larger baseball community especially fans and players.

We are committed to working quickly to achieve these goals, however we do not feel that it is fair to hold your money when we cannot set a definitive time table. In the next few days, we will be returning your money and you will no longer own any shares of Randy Newsom. We will be working with Pay Pal to remove ALL of the charges to your credit cards.

Our company has two goals. The first is to improve the lives of professional athletes. The second is to provide you with an enhanced spectating experience. We are confident that by working with Major League Baseball, we can come up with an optimal system that will achieve both of these goals and provide you exactly what you have told us that you want.

When we re-launch our website, and re-offer shares of Randy Newsom we will allow you to re-purchase your shares of Randy before anyone else. You will have priority and we thank you for your loyalty.

Please continue to check our website for updates in the coming months. In this transition you will notice significant changes. Our website will have much more functionality from message boards to shareholder certificates and we will be able to provide you with a greater selection of athletes from which to choose.

If you have any questions or comments, please direct them through the contact us page on our site, www.realsportsinvestments.com and we will be sure to answer them. We promise that we will contact you as soon as the next player’s shares become available.

We truly appreciate all the comments and support that we have received. Your enthusiasm has energized us even more to bring this market to fruition. I hope you are as excited about this as we are.

Sincerely,

Real Sports Investments, LLC

Gamblers' paradise

Want to bet on Super Bowl XLII? Yes you do. (That's a moderately sized .pdf, so be patient.) Courtesy of Rob Holub, who wants to emphasize that all wagers are for recreational purposes only. Naturally.

And if I had to pick 5-- for recreational purposes only, of course-- I'd go with:

Total Touchdowns scored in game: 6.5, under
Total Sacks by both teams: 4, over
Jersey number of player to score 1st touchdown: 43.5, over
Giants total rushing yards: 105.5, over
Eli Manning, what will he throw first (TD vs. INT): Interception, 115

Bill Gates and 'Creative Capitalism'

Bill Gates has put forth a new type of economic system that would battle world poverty and growing inequality in the world. Here is the CNN story, here is the actual text of what he said.

The way Gates sees it, everything should be based in incentives. For people who can pay for goods, we don't have an incentive problem-- trade occurs, and though voluntary exchange everyone is better off. For people who can't pay, businesses don't have the incentive to provide goods, as the profits are not there. We need to introduce a new incentive-- recognition. If companies "doing the right thing" can get recognition for being good, caring entities, then they'll attract better people to the organization and get more customers. For companies "doing the right thing" and making money...well, they get the benefit of both effects.

I'm happy Gates is thinking about changing the structure of the system. (I think the funniest part of the CNN article is when Bono "pushed the debate towards issues such as...poverty alleviation...") Forcing people to recognize "good" companies won't make them do so any more than they do now, and insofar as "good" companies profit in the manner that Gates described, the market will already have that covered. But kudos for thinking outside of the Bono-aid box.

Still, the big question is: Why are those in poor countries not able to compete in markets in the first place? Trade barriers? Low standards of living due to poor institutional environments? The answers are down these paths.

Thank you West Virginia Legislature for the high gas prices!

Many people like to complain that gas prices are too high and that they would like to see the price go down. I usually respond by asking for them to name a few goods which they wouldn't like to see the price go down. There seems to be a general feel that particular necessities (read: inelastic goods) shouldn't change in price by too much. Mind you, I speak (mostly) with West Virginia folk, and while gas prices across the country have certainly risen, there still remains a moderate amount of variance between states in average gas prices. I heard a radio spot recently that pinned West Virginia up near the top of average gas prices nationwide, so the question becomes: Why does West Virginia have relatively high gas prices? Greedy oil companies?

Nope-- greedy legislators. (More details.) West Virginia hovers around the top quartile when it comes to state gas taxes, and that translates directly into higher prices than our neighbors (none of which have higher gas taxes than West Virginia). So instead of bemoaning the capitalist system, fuel-guzzling SUV drivers or profit-driven oil companies, turn to your local representatives in Charleston and give them a big thumbs-up on your next trip to fill up.

Or you could try this.

January 21 - Depression Day

So if you were to try to answer the question of "What is the most depressing day of the year?", how would you go about it? Personally, I think they answer the question of "What is the day in which people are the most depressed?"-- I think the day that would cause people to feel the most below what they otherwise would be feeling would be the most depressing day of the year. They are different questions.

Nonetheless, how would you tackle this problem? The initial investigator cites "weather, consumer debt from holiday spending and failed New Year's resolutions" in his formula towards finding the answer, and then the author of the linked article looks at search engine behavior. Google searches of "depression," websites of developers of anti-depressants...those are the only two he mentions, but you could generate an exhaustive list that's just as viable with little effort.

Why not alcohol sales? Dips in restaurant attendance? Cell phone usage? Airline travel? All different from cyclical predictions, of course...

I think I'm going to file this under "interesting to look at but impossible to make significant headway."

Disappearing Hitchhikers

Where have all the hitchhikers gone? I rarely see anyone thumbing for a ride. Yet, according to my gray-haired father, everyone hitchhiked in the 60's. The most frequent answer seems to be that it is "too dangerous." The problem with this hypothesis is that violent crime is on the decline, and it has been for many years. This absence could just be explained by a change in prices. Transportation may have become less expensive or perhaps the internet has made arranging rides with strangers easier

My tentative explanation, though, is as follows: Its true that crime has fallen, but people who hitchhike today are more likely to be violent than people who hitchhiked in the 60's. The 60's and 70's saw relatively large numbers of young people due to the baby boomers. Normal young people were more likely to hitchhike. They don't have as much money, are less likely to be on strict schedules, and are possibly more risk taking. Drivers, consequently, are then more likely to pick up young hitchhikers. The more normal people hitchhiking encourages more people of all ages to participate. There is positive feedback.

As the number of young people has declined, the characteristics of people who hitchhike have made drivers less willing to give strangers a ride. At some tipping point, the equilibrium switched from "everyone participates" to "just the weirdos still do that." Now (perhaps for Akerlof-ish reasons) average quality is low and difficult to detect, and as a result, mutually beneficial exchanges do not take place.

File this under: Twins, low probability occurrences

It would seem pretty unlikely, but if the N is large enough...I suppose you could marry your long lost twin who was adopted by a different family. Seriously, though-- this can't possibly have happened more than this time, could it?

Under the law, I don't think this is construed as illegal-- legally, they're not brother and sister. They might want to think twice about having kids with this new piece of information though...

In related news, Columbus brought syphilis back to Europe.

Thanks to Rachel Mathers (no relation to Eminem) for the picture idea.

Value Rankings of College Sports Teams

Forbes has ranked the top 20 most valuable college basketball and college football programs in the country (neither article has a concise 1-20 list, so you have to click through the in-pictures link to get your teams, though ESPN has the basketball rankings here), based on:

We base our valuations on what the basketball [football] programs contribute to four important beneficiaries: their university (money generated by basketball that goes to the institution for academic purposes, including scholarship payments for basketball players); athletic department (the net profit generated by the basketball program retained by the department); conference (the distribution of tournament revenue); and local communities (incremental spending by visitors to the county during the regular season that's attributable to the program).

An intriguing concept. The most valuable basketball team belongs to UNC-Chapel Hill ($26 million), based largely on an agreement with Nike, and football's most valuable to Notre Dame ($101 million), based largely on a TV contract with NBC. Football has a sizable advantage over basketball, and Notre Dame, while having a unique contract, is by no means an outlier-- #2 Texas ($92 million) and #3 Georgia ($90 million) are right behind. (Georgia surprised me.) In fact, #20 on the football list, Wisconsin, is still a good deal ahead of the top basketball school at $43 million.

More successful college teams make more money, both from being on TV more and getting richer payouts from better bowls (though conference tie-ins on both margins tend to create some grouping), but the correlation isn't perfect. Heritage, i.e. success in the past, plays a large role as well.

Why not sell these and let them be run for profit? Is there any illusion left that these are university funded programs provided for the benefit of the student-athelete?

Unintended arson

I have to admit-- I hadn't thought of this, but there's no reason to believe that this won't happen.

I also like the line about fraud increasing when the economy is bad. Would increased government regulation come as a result of more fraud, furthering the economy's woes, and the cycle continues?

Fun vs. profits in predicting college football results

Tonight's BCS title game between LSU and Ohio State culminated the 2007 bowl season, a 19-day, 32-game college football bonanza that, though unsatisfying to the playoff-wanting populus, is nonetheless enjoyable. It's also a fun testing ground.

Yahoo! Sports offers a bowl pick-em contest that lets users choose the winners of each bowl game, and also lets you assign a confidence level to each game. Different bowl games are worth different amounts of your choosing, from 1 to 32 points. The idea is that the games in which you are most (least) confident you then assign the most (least) points. You must have a selection at every point level, so the final rundown of bowl selections is an ordinal listing of how confident you are in your picks for each and every bowl game.

This let me test the following: Does information with money behind it predict better than information without money behind it?

It worked as follows. Yahoo! provided information about the percentage of the country that selected each participant in each bowl game, so this could be construed as a decent measure of the aggregated non-money information (the game is free to play). The team receiving greater than 50% of the participant vote was selected as the winner (there were no 50%/50% ties), and confidence levels were attained by how much of favorite they were. For example, the highest confidence level was for the Hawaii Bowl-- 95% of those playing liked Boise State to defeat East Carolina. (They didn't.) The lowest confidence game was the Poinsettia Bowl-- 51% of the country liked Navy to defeat Utah. (Nor did they.)

The money information generated a set of picks and confidences from moneyline posts in Vegas. The selection came from the moneyline favorite, the confidence from the size of the line. It is the role of the bookie to place lines such that equal money falls on both sides-- that way, any bowl outcome yields a profit for the house. All votes are equal for non-money information; the same is not true for the money information.

The results?

Non-money: 21 of 32 correct, for 382 points

Money: 24 of 32 correct, for 381 points

(Both were around the 90th percentile of all picks submitted.)

I read this as saying the money information-- derived from moneylines-- did best in determining the higher percentage of winners, but the non-money information did a bit better in isolating with confidence those teams that would win. A thin line, nonetheless.

Perhaps more interestingly, there were some pretty sizable differences between the two sets of picks; Utah/Navy, for example, was given the least confidence on the non-money picks, the money picks put that game at 26 confidence points (out of 32)-- and picked the game correctly as well. Tennessee/Wisconsin was at 16 confidence points for the non-money and 4 for the money, though both correctly picked Tennessee as winner. The disparities go on and on. As the numbers bear out above, many of the picks with regards to team are similar, but confidence levels vary widely.

Some shortcomings: Picks were locked after the first bowl game was played, so for the championship game, there was 19 days worth of late information unincorporated into the rankings/choices. This probably would have a larger impact on the money information, if the "late-money-is-smart-money" adage is true, and moneylines could be adjusted (and therefore confidence levels) by small information changes (i.e., player X is now doubtful for bowl Y) whereas picking a different team to win might take a larger information shock (which is how the non-money information confidence levels would be affected).

Also, can the non-money information be trusted as a true reflection of public sentiment, i.e., are people playing the game seriously and not making ad hoc selections? I'm not certain this is a large concern. While it is impossible to believe that everyone who played the game played it seriously, there isn't a reason to believe this caused a bias in any direction. After all, people make bets on a whim as well.

Ah, the sheer bulk of gambling and sports data.

Tigers and Transaction Costs

On Christmas Day, a tiger escaped from its cage at the San Francisco Zoo. It killed one man and mauled two others. It turns out that these three people had been taunting the tiger; shooting rocks at it with a slingshot, dangling their feet into the cage, etc. Obviously, there has been quite an uproar about both the foolishness of these guys and of the animal security at the zoo. It turns out that the tiger's cage wall was several feet lower than recommended by some official zoo organization (not the law).

The two surviving hooligans have hired infamous law dog, Mark Geragos, who has represented the famous of all ilk, from Michael Jackson to Scott Peterson. Some social commentators have called for the zoo to fork over millions while others say those rowdy kids got what they deserved.

It seems to me that the zoo should pay big time for this fatal fiasco. My reason: transaction costs. The zoo can avoid this at a much lower cost than the random tourist. The zoo has expert information about the animals and the zoo facility, whereas the tourists usually don't know anything at all. It would be prohibitively expensive for a tourist to ensure his safety when entering a zoo. He would have to call/question countless people, inspect the cages, etc. In fact, a tourist would have to put himself into danger (in addition to bearing high costs) in order to ensure his safety. In short, those guys were probably being idiots, but the zoo should have realized this is a world full of knaves.

Bartering

A recent trip to Mexico got me thinking: If bartering for goods became a cultural norm in the U.S., would society be better off? You wouldn't make any less sales-- you'd just be scooting yourself down the demand curve. (Though I suppose prices in a barter scenario could be listed as higher in anticipation of a bargaining process, thus driving off potentially interested buyers, but then again prices oftentimes aren't listed at all.) None of the new sales would be involuntary, so there's surplus to be had on both sides. Granted, there would be transactions costs on both sides, probably more of a burden on the buyer. Information costs would be greater for the seller acting as an agent, and I suppose principal-agent problems would then come into play as well.

It seems that bartering isn't that common in the most highly developed countries...which is probably the most telling fact anyway.

(Edit: Sorry-- by bartering, I mean price negotiation, not "my four chickens for your three goats.")

And here I've been going to class all these years!

Did you know that if you recite the Koran in Iran, you automatically get a university degree? It's true. I wonder if there is a specific emphasis with the diploma...but in order for it to have the effect implied in the piece, wouldn't it have to be indistinguishable from a schooling-earned degree? (Unless you wanted it to imply religious superiority, of course...but then you could always just recite the Koran in your interview.)

It won't work by itself...I "promise"

Here in West Virginia, high schoolers have a chance at a free college education though the PROMISE scholarship program. (It turns out that PROMISE is an acronym for Providing Real Opportunities for Maximizing In-state Student Excellence. We have a tough time getting the policies right...but if you need a seven-word acronym, West Virginia is your place.)

For some reason, the program seems to be getting quite a bit of attention as of late. Maybe it's the high school seniors deciding what to do next year or the fact that the first class to receive scholarships under this program are just getting their post-college feet wet. With all the to-do about program, it's worth giving a few bullet points as to why the PROMISE scholarship won't be the savior to the West Virginia economy that many believe it will be...at least not on its own, anyway.

- We could give every person in the state a doctorate, but unless businesses decide to locate here that utilize those types of special skills, West Virginia as a state will be no better off. The status of the West Virginia policy climate is no mystery; it is widely hailed as the worst in the Union, and is a topic we've dealt with at length.

- So what do the students do with their degrees and no West Virginia jobs to go after? They find jobs elsewhere. No surprise there. In this light, West Virginia is not only not helping itself, but also subsidizing the human capital of its neighbors. I've taught a number of students with PROMISE scholarships and this is exactly their choice set. Many of them would prefer to stay in West Virginia ceteris paribus but they just don't have employment options commensurate to their education level.

- It's not like West Virginia conjured this idea out of our thin mountain air. The World Bank thought this was the path to prosperity in Africa, only instead of growth the individuals either a) moved out of the area, just like in the case of West Virginia, or b) became more knowledgable of how to rent-seek and fleece the ever-worsening systems in their homelands. There's a good amount of that going on here in West Virginia as well.

- It's really debatable as to whether the PROMISE scholarship is having a significant impact in sending more kids to college. It may keep more kids in state attending college who otherwise may have gone to college outside of West Virginia-- of course, the taxpayers foot the bill, and when they head off for greener employment pastures you wonder what the upside for West Virginia is. The program, I have gathered, was to give opportunities to low income individuals to get a chance at college. It should be noted that oppotunities (read: scholarships) did/do exist for low income individuals, especially low-income, high-performing students. Further, since empirics bear out that higher income children tend to do better in school than lower income children, a wide swath of these scholarships are ending up in the hands of families that would otherwise have paid for their children to attend college in West Virginia. All of this aside, capital markets function well, and borrowing for education is nowhere near uncommon.

- This argument I'd never heard before but was relayed to me this morning from a professor at Penn State (they are considering a similar program in Pennsylvania). The PROMISE scholarship, as compared to similar programs around the country, has more stringent academic requirements to qualify. Thus, they are even more selective of the academic upper crust than other states. Well, it's been shown that those who do best in high school-- the very best-- tend to segue into courses of study (such as engineering and medicine) that lead them to a more regional, if not national, job search upon commencement from college.

It's with good intentions that these programs are thought up-- but as Ben Harper says, "There's good deeds, and there is good intention; they're as far apart as heaven and hell."

(I could have sworn that I wrote something about this before, but I can't find it in the archives, so if I'm an idiot and all of this is just rehashed from a previous, unfindable-to-me post, my apologies.)