One powerful argument in favor of free markets that I like to incorporate early in the Micro Principles semester is that market forces help mitigate discrimination. If you choose to indulge personal preferences based on race, sexual orientation, disability status, age, whatever-- you bear the cost of your decision. Peter Leeson's The Invisible Hook has a nice chapter on the issue as it pertained to pirates. I think I've now got a new example.
Michael Vick signed a sizable contract yesterday with the Philadelphia Eagles; 6 years with approximately $40 million guaranteed. The overall deal could be worth upwards of $100 million. Michael Vick is still considered by some to be un-signable-- fan bases would rise up in discontent and protest the move. As such, some teams choose to discriminate-- rightly or wrongly, whatever your moral compass, it's still holding a bias-- against Michael Vick on the basis of his past troubles.
What's this get the Eagles? In theory, a better-than-replacement player because they choose not to indulge their preferences against certain individuals. I'm a 49ers fan-- and a particularly poor season this year that would reunite Andrew Luck with Jim Harbaugh wouldn't be the worst thing in the world-- but I wouldn't have any qualms with the Eagles winning the Super Bowl this year, as this example becomes that much better.
Tuesday, August 30, 2011
Monday, August 29, 2011
The Game Theory of Usain Bolt's False Start
Usain Bolt was recently disqualified for his now infamous false start at the World Championships, and it has generated controversy for the recent rule change which eliminated the allowance of one false start. What you might not be familiar with is the game theory behind the rule change, and how the ancient Greeks created an incentive compatible rule to solve the same problem.
The essence of the problem is the ability of racers to collude against the heavy favorite, favorites like Usain Bolt. If every runner is given one permissible false start, then in an 8-man race, then a group of 7 colluders can create 7 false starts without resulting in a disqualification. This allows the colluding runners to essentially create a "snap count" in which they cycle through false starts, knowing that some certain number will be the "true start." Of course, the front-runner knows this, which makes them hesitant and more conservative coming out of the starting blocks, shifting the advantage to his slower rivals. This also makes for slow television drama, which reduces the popularity of the sport among those more interested in world record times.
So the IAAF's solution was to ban false starts altogether, which still subsequently damaged Bolt's opportunity (and seems to have backfired on making the sport more popular). Now, the Ancient Greeks devised a different rule altogether to circumvent this problem: they beat anyone who committed a false start.
Sure, it sounds (and arguably is) barbaric to physically abuse an athlete for jumping the start. However, this undermined the incentive to cartel against front-runners. The current cartel system works because there are not particularly strong incentives against being the first false-starter, and it shifts the advantage away from the front-runner. Under the Greek rules, however, being the first false starter meant that you would be beaten and would be in a physically worse condition to compete than your co-conspirators, who have an incentive to free-ride on the first mover. Only a sucker to cheap talk volunteers to be the first false starter in that conspiracy.
So the Ancient Greeks devised what, on the surface, appeared primitive, but was also an incentive compatible rule, and one that the modern sophisticated members of the IAAF presently would like to emulate without the violence.
The essence of the problem is the ability of racers to collude against the heavy favorite, favorites like Usain Bolt. If every runner is given one permissible false start, then in an 8-man race, then a group of 7 colluders can create 7 false starts without resulting in a disqualification. This allows the colluding runners to essentially create a "snap count" in which they cycle through false starts, knowing that some certain number will be the "true start." Of course, the front-runner knows this, which makes them hesitant and more conservative coming out of the starting blocks, shifting the advantage to his slower rivals. This also makes for slow television drama, which reduces the popularity of the sport among those more interested in world record times.
So the IAAF's solution was to ban false starts altogether, which still subsequently damaged Bolt's opportunity (and seems to have backfired on making the sport more popular). Now, the Ancient Greeks devised a different rule altogether to circumvent this problem: they beat anyone who committed a false start.
Sure, it sounds (and arguably is) barbaric to physically abuse an athlete for jumping the start. However, this undermined the incentive to cartel against front-runners. The current cartel system works because there are not particularly strong incentives against being the first false-starter, and it shifts the advantage away from the front-runner. Under the Greek rules, however, being the first false starter meant that you would be beaten and would be in a physically worse condition to compete than your co-conspirators, who have an incentive to free-ride on the first mover. Only a sucker to cheap talk volunteers to be the first false starter in that conspiracy.
So the Ancient Greeks devised what, on the surface, appeared primitive, but was also an incentive compatible rule, and one that the modern sophisticated members of the IAAF presently would like to emulate without the violence.
Andolfatto on Fiat Money and Somalia
David Andolfatto, from the Research Division of the Federal Reserve Bank of St. Louis, summarizes the interesting work of Ostroy, Kocherlakota, Wallace and others, who highlight the role of money as a record keeping device. He then links this literature to my paper with L.H. White on Somalia. Since we here at TPS relish in shameless self-promotion, I thought I'd send this along.
Thanks to Andolfatto for linking to our paper!
Thanks to Andolfatto for linking to our paper!
Shocking finding of the day
Wait-- let me get this straight: If you lower taxes, then you see strong growth?
Go figure.
(Though I love the "problems" discussed in this bit-- the local economy is so strong that it's hard to find qualified people for expanding businesses and residential vacancy is remarkably low.)
Go figure.
(Though I love the "problems" discussed in this bit-- the local economy is so strong that it's hard to find qualified people for expanding businesses and residential vacancy is remarkably low.)
Saturday, August 27, 2011
Menu Costs
I'm trying out a new meme, wherein I'll post examples of menu costs captured as I wander about (or, as in the case below, attempts to avoid or defer higher menu costs). Enjoy!
Wednesday, August 24, 2011
Insuring $12 billion in gold
MR pointed to a fantastically intriguing article yesterday on Venezuela's intentions to transport $12 billion in gold-- 211 tons of it-- back to Venezuela, presumably Caracas. Before we get into it, this is a great phrase:
Not sure if that became the case when Chavez got involved or if he just reinforced that characteristic. Anyway, experts estimate that this could take 40 trips. (Sorry, one more diversion-- but who is an expert in transporting 211 tons of gold?) Naturally, insuring this transfer is something that needs to be considered. The article claims that no company would be willing to take that contingency onto its books (though I think that's more a function of dealing with Venezuela than the sheer value of gold, though both certainly do matter).
As a side note: If Venezuela considers itself socialist-- either in practice or doing what they can to get there-- doesn't the government play the role of providing insurance? Why hasn't anyone brought this point up? Insuring your own transfer makes about as much sense as anything Chavez does anyway.
Anyhow, I think people are thinking of this as a financial issue and not quite enough as a practical issue. Does there exist a risk premium by which, say, Lloyd's would be willing to take this on? I'm sure there is-- in the only previous instance of even beginning to approach this level of gold transfer, the rate came to 3.3%. Chavez' rate would undoubtedly be higher since there's a decidedly non-zero chance that he'd be involved in any nonsense that arises in transporting all that gold. Then again, it's presumably an international deal-- between Venezuela and an insurance company-- so the insurance company can decide not to pay and there's really no legal recourse towards claiming a settlement.
But it would seem that a superior risk/reward tradeoff could be achieved by simply arranging a very large number of transfers-- like in the thousands? I didn't see anything in the article saying that Chavez needed all of the gold quickly, so time's not a large problem. Let's say the going risk premium is 10% for Chavez to keep the numbers easy. That means he's paying $1.2 billion in premiums. What if you didn't pay any premiums and made any of the following arrangements:
- 1 million transfers of $12,000 in gold. Plus: That's a small amount of gold and could be transported in just about any way possible-- civilian aircraft, boats, anything. At current prices, that's what, about 6 or 7 ounces. Minus: That's a whole lot of transfers; coordination costs would be high.
- 100,000 transfers of $120,000 in gold. It's still a fairly small amount of gold-- 60 or 70 ounces, maybe 4 or 5 pounds-- so much of the benefits remain from above while the number of transfers is reduced by an order of magnitude.
- 10,000 transfers of $1.2 million in gold. At this point, that's a considerable sum of money and a lot of transfers to arrange-- the coordination costs here probably outweigh the benefits from spreading the money around.
I think the middle one provides the best characteristics-- yes, it's a lot of transfers, but you'd need more than 10,000 of those transfers to encounter trouble in order to outpace the risk premium (I know I came up with 10% to keep things easy, and that's where 10,000 comes from, but even at 3.3% you'd need 3,300 thefts.) So why not break it up and take your chances with not being robbed thousands of times? You're effectively insuring yourself this way (not in the facetious way I alluded to above). Plus, incentives are high to make certain nothing bad happens to the gold since it's coming right out of your pocket every time the gold never makes it.
And yes, I realize that hiring shady people may be a problem-- but if that's the concern, you can't automatically assume that away at any point in the process. So that impacts all plans. In fact, if you assume that shady people are more likely to get involved when there's more money to be had, then it would be MORE of an issue in large-scale transfers like the ones described in the article.
"...the market in physical gold is tiny, and largely comprised of nutcases."
Not sure if that became the case when Chavez got involved or if he just reinforced that characteristic. Anyway, experts estimate that this could take 40 trips. (Sorry, one more diversion-- but who is an expert in transporting 211 tons of gold?) Naturally, insuring this transfer is something that needs to be considered. The article claims that no company would be willing to take that contingency onto its books (though I think that's more a function of dealing with Venezuela than the sheer value of gold, though both certainly do matter).
As a side note: If Venezuela considers itself socialist-- either in practice or doing what they can to get there-- doesn't the government play the role of providing insurance? Why hasn't anyone brought this point up? Insuring your own transfer makes about as much sense as anything Chavez does anyway.
Anyhow, I think people are thinking of this as a financial issue and not quite enough as a practical issue. Does there exist a risk premium by which, say, Lloyd's would be willing to take this on? I'm sure there is-- in the only previous instance of even beginning to approach this level of gold transfer, the rate came to 3.3%. Chavez' rate would undoubtedly be higher since there's a decidedly non-zero chance that he'd be involved in any nonsense that arises in transporting all that gold. Then again, it's presumably an international deal-- between Venezuela and an insurance company-- so the insurance company can decide not to pay and there's really no legal recourse towards claiming a settlement.
But it would seem that a superior risk/reward tradeoff could be achieved by simply arranging a very large number of transfers-- like in the thousands? I didn't see anything in the article saying that Chavez needed all of the gold quickly, so time's not a large problem. Let's say the going risk premium is 10% for Chavez to keep the numbers easy. That means he's paying $1.2 billion in premiums. What if you didn't pay any premiums and made any of the following arrangements:
- 1 million transfers of $12,000 in gold. Plus: That's a small amount of gold and could be transported in just about any way possible-- civilian aircraft, boats, anything. At current prices, that's what, about 6 or 7 ounces. Minus: That's a whole lot of transfers; coordination costs would be high.
- 100,000 transfers of $120,000 in gold. It's still a fairly small amount of gold-- 60 or 70 ounces, maybe 4 or 5 pounds-- so much of the benefits remain from above while the number of transfers is reduced by an order of magnitude.
- 10,000 transfers of $1.2 million in gold. At this point, that's a considerable sum of money and a lot of transfers to arrange-- the coordination costs here probably outweigh the benefits from spreading the money around.
I think the middle one provides the best characteristics-- yes, it's a lot of transfers, but you'd need more than 10,000 of those transfers to encounter trouble in order to outpace the risk premium (I know I came up with 10% to keep things easy, and that's where 10,000 comes from, but even at 3.3% you'd need 3,300 thefts.) So why not break it up and take your chances with not being robbed thousands of times? You're effectively insuring yourself this way (not in the facetious way I alluded to above). Plus, incentives are high to make certain nothing bad happens to the gold since it's coming right out of your pocket every time the gold never makes it.
And yes, I realize that hiring shady people may be a problem-- but if that's the concern, you can't automatically assume that away at any point in the process. So that impacts all plans. In fact, if you assume that shady people are more likely to get involved when there's more money to be had, then it would be MORE of an issue in large-scale transfers like the ones described in the article.
Tuesday, August 23, 2011
Thiel, Friedman and Seasteading
I apologize for my lack of presence over the last few months-- with the start of school and the start of college football season (and thus the third incarnation of the Gus Rankings!), I should be a more frequent commentator.
In the meantime, here's a fun article about Peter Thiel, Patri Friedman and seasteading. I think this was my favorite line:
Indeed.
In the meantime, here's a fun article about Peter Thiel, Patri Friedman and seasteading. I think this was my favorite line:
Margaret Crawford, an expert on urban planning and a professor of architecture at Berkeley, calls it "a silly idea without any urban-planning implications whatsoever."
Indeed.
Tuesday, August 16, 2011
Paul Krugman: Sci-Fi Fan Boy
At the Beacon Blog, Mary Theroux posts an amusing video wherein Paul Krugman states that the US could get out of the slump by faking an alien attack.
If we, If we discovered that space aliens were planning to attack and we needed a massive build up to counter the space alien threat and, really, inflation and budget deficits took secondary place to that, this slump would be over in 18 months. [...] There was a Twilight Zone episode like this in which scientists fake an alien threat in order to achieve world peace. Well, this time we don't need it, we need it in order to get some fiscal stimulus.Seriously. It was on CNN. Of course, this isn't the first time Krugman has shown is Sci-Fi side. Here's the abstract from his paper titled "The Theory of Interstellar Trade":
This article extends interplanetary trade theory to an interstellar setting. It is chiefly concerned with the following question: how should interest charges on goods in transit be computed when the goods travel at close to the speed of light? This is a problem because the time taken in transit will appear less to an observer traveling with the goods than to a stationary observer. A solution is derived from economic theory, and two useless but true theorems are proved.
Wednesday, August 03, 2011
Debate @ LSE
The much anticipated debate between George Selgin, Jamie Whyte and Lord Skidelsky, Duncan Weldon will air today at 3PM EST. You can listen online.
Tuesday, July 26, 2011
The Fed's Balance Sheet: Size and Composition
Here's an illustration of the Fed's balance sheet from the Cleveland Fed.
A lot of talk has focused on the expansion of the Fed's balance sheet since Sept 2008. The big question: why no inflation? Bob Higgs writes:
Good question. The standard view is that the Fed can simply sell its assets to keep the money supply from expanding when the money multiplyer picks up. But the Fed's balance sheet ain't what it used to be. It is not only larger, but also differs in terms of composition. Note that traditional security holdings have actually fallen since Dec 2007. The net increase stems from loans to financial institutions in 2008 and 2009 (much of which has already been repaid) and then large scale asset purchase programs associated w/ Freddie and Fannie starting around Jan 2009. The Fed can certainly sell these assets. But at what price? Will they be able to suck up enough money when the time comes? We will soon find out.
Addendum: Check out this Barron's article by Walker Todd and Bill Ford.
A lot of talk has focused on the expansion of the Fed's balance sheet since Sept 2008. The big question: why no inflation? Bob Higgs writes:
Ordinarily, one would have expected this development to produce hyperinflation of the general price level. However, the price level has increased quite moderately, and for a while many analysts warned that deflation was the greater risk. [...] Not only has hyperinflation failed to appear; even garden-variety inflation of prices in general has been extremely low by the standard of recent decades.So we haven't seen much inflation yet. But if (when?) banks start lending out reserves, we should see it pick up. Right?
[...]
The most obvious answer, of course, is that the banks are simply sitting on the reserves, rather than lending them to customers. And why are they doing so? The usual answer is that since late 2008, the Fed has paid the banks a rate of interest on their reserves at the Fed. This interest rate has recently been in the range 0-0.25 percent. Although this is not nothing, it verges very closely on nothing. And if one notes that the purchasing power of money has fallen at least a bit, it is clear that the banks are realizing a negative real rate of return on their holdings of excess reserves at the Fed.
[...]
Moreover, they are doing so notwithstanding that they appear to have the option of lending at 3.25 percent to their best corporate customers and at higher rates to their less creditworthy customers.
Good question. The standard view is that the Fed can simply sell its assets to keep the money supply from expanding when the money multiplyer picks up. But the Fed's balance sheet ain't what it used to be. It is not only larger, but also differs in terms of composition. Note that traditional security holdings have actually fallen since Dec 2007. The net increase stems from loans to financial institutions in 2008 and 2009 (much of which has already been repaid) and then large scale asset purchase programs associated w/ Freddie and Fannie starting around Jan 2009. The Fed can certainly sell these assets. But at what price? Will they be able to suck up enough money when the time comes? We will soon find out.
Addendum: Check out this Barron's article by Walker Todd and Bill Ford.
The SPEA Research Paper Series
The series is now available online through SSRN. Here is the announcement, but I think they should have led with something about Lin Ostrom's papers being available through the series:
INDIANA UNIVERSITY-BLOOMINGTON: SCHOOL OF PUBLIC & ENVIRONMENTAL AFFAIRS RESEARCH PAPER SERIES
View Abstracts: http://www.ssrn.com/link/Indiana-U-Bloomington-Public-Enviro-PUB.html
Subscribe: http://hq.ssrn.com/jourInvite.cfm?link=Indiana-U-Bloomington-Public-Enviro-PUB
The Indiana University School of Public and Environmental Affairs (SPEA) is a world leader in public affairs and the environmental sciences and is the largest school of public affairs in the United States. In the most recent "Best Graduate Schools" rankings by U.S. News & World Report, SPEA ranked second and was the nation's highest-ranked graduate program in public affairs at a public institution. The School's curriculum and research are distinguished by a vigorous interdisciplinary approach to education and problem-solving. SPEA will celebrate its 40th anniversary in 2012. The SPEA working papers series eJournal contains works in progress from our faculty.
Tuesday, July 19, 2011
Lucas on the Recovery
Robert Lucas gave a talk recently at University of Washington on Macroeconomic recovery in the US. His slides are available.
Lucas argues that, by imitating European policies on labor markets, welfare, and taxes, the U.S. has chosen a new, lower GDP trend. If this is correct, the weak recovery we have had so far may be all the recovery we will get. He uses these two slides to support his argument. The first shows the spread in growth rates which Lucas describes as the cost of the welfare state--note the lower trend for most of Europe. The second shows the US recovery in the recent recession.
What do you think?
[HT: PJB]
Lucas argues that, by imitating European policies on labor markets, welfare, and taxes, the U.S. has chosen a new, lower GDP trend. If this is correct, the weak recovery we have had so far may be all the recovery we will get. He uses these two slides to support his argument. The first shows the spread in growth rates which Lucas describes as the cost of the welfare state--note the lower trend for most of Europe. The second shows the US recovery in the recent recession.
What do you think?
[HT: PJB]
Friday, July 15, 2011
Thursday, July 14, 2011
Blockquoting X
X = Ben Bernanke.
The reason the Federal Reserve was founded a century ago was to try to address the problems arising from financial panics, which did, by the way, occur in an unregulated environment in the 19th century.Discuss.
Wednesday, July 13, 2011
The Political Economy of Coin Images
This story is old news-- a combination of free shipping on U.S. Mint coins and credits cards giving frequent flyer miles for spending yields free flights-- but this bit was new to me:
Native American coins bear the likeness of Lewis and Clark guide Sacagewea. By law, Sacagewea must appear on one in every five dollar coins manufactured, the legacy of political dealings on Capitol Hill.
Thursday, June 30, 2011
Tuesday, June 28, 2011
Line of the Day: China
China has no fewer than 428 think tanks involved in policy formulation—a number second only to the United States.
That's from a bit on China's foreign policy in the Boston Globe.
Math in Sports
Here's a bit from Bill Simmons' new writing project (the piece is not by him). It feels familiar. Some thoughts:
1. I've never understood sabermetrics to be about "solving" sports. It's a tool to gain an edge on some margin by which you generate for yourself an information advantage. Sports and management decisions are not solvable; find an edge, exploit it.
2. Sabermetrics developed with baseball; it's evolution into basketball and football seems to overlook the nature of separability in the baseball production function (and the lack thereof in the production functions for basketball and football). I'm not sure that this is completely intractable but it's a hurdle, and not an insignificant one. "Finding the right metrics" in basketball and football doesn't get at the root issue.
3. Since we're here-- here's the trailer for Moneyball. Jonah Hill playing Paul DePodesta (I understand he's a composite of individuals, but nonetheless) has to be one of the most surprising movie castings in recent memory, though the more I consider it, I think it may work out well. And is it mandatory that Kevin Costner be cast in any and all movies concerning baseball?
1. I've never understood sabermetrics to be about "solving" sports. It's a tool to gain an edge on some margin by which you generate for yourself an information advantage. Sports and management decisions are not solvable; find an edge, exploit it.
2. Sabermetrics developed with baseball; it's evolution into basketball and football seems to overlook the nature of separability in the baseball production function (and the lack thereof in the production functions for basketball and football). I'm not sure that this is completely intractable but it's a hurdle, and not an insignificant one. "Finding the right metrics" in basketball and football doesn't get at the root issue.
3. Since we're here-- here's the trailer for Moneyball. Jonah Hill playing Paul DePodesta (I understand he's a composite of individuals, but nonetheless) has to be one of the most surprising movie castings in recent memory, though the more I consider it, I think it may work out well. And is it mandatory that Kevin Costner be cast in any and all movies concerning baseball?
Thursday, June 23, 2011
Blockquoting Whom?
Can you guess which Nobel Laureate recently penned...errr typed...these words?
+/-
The trick, always, is not to take your equilibrium stories too seriously, to understand that they’re aids to insight, not Truths; given that, I don’t believe that there’s anything wrong with using equilibrium analysis.If the hint didn't give it away, follow the link or check below the fold.
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