Wednesday, February 4, 2015

Grades and Public Goods

I do little experiments in class. Today's topic was "public goods" and I did the following exercise: 
Each may voluntarily 'contribute' any number of points from 0 to 10.
I will increase the amount collected by 20 percent
The resulting total will be divided equally among all class members who are present.
You may interact before contributions are declared but you will make your contributions anonymously and in private.
All contributions will remain anonymous. 
It's basically a version of a game lifted from Games Economists Play. Anyway, there were 17 people in class, and there were 107 points contributed so everyone got back about 7.6 points. But, a few people put in 10 points and ended up with negative points. Needless to say, it's not the most popular game we do in class, but the grumbling subsides when I tell them that on average, students win between 15 and 30 points playing these games. 
Anyway. One kid who thought he was particularly clever asked, "let's just make the 107 everybody's score on the exams." 
I took the bait, and asked, "well, is that good for everybody?" 
Naturally, the first response was overwhelmingly positive, until I asked "why do we have grades?" Eventually the answer settled somewhere in the vicinity of the fact that they provide information about what we know or what we learned or how smart we are. Of course, the signal grades send is noisy, but that's a topic for another day (two classes from now, in fact!). 
Getting back to the grades, I asked what would happen if I announced (or if everyone knew from their friends for example) that everyone's going to get an "A" in the class. Someone said "I wouldn't do shit." AAAAND (wait for it) .... If everyone gets an A (or if all of the teachers give A's), then an A becomes a public good, and no one (students especially) has any incentive to work hard and make sure their grades and degrees mean something. AAAND.... ..... BOOM! we're back on public goods! If we make A's public goods (instead of private goods that have to be earned individually) then the whole value of education is degraded.

Thursday, September 25, 2014

Bill Simmons is Right

I'll say it. Roger Goodell is a liar. He knew what happened in the elevator between Ray and his now wife Janay Rice. He knew that Ray Rice assaulted his then-fiancee, he saw the video of Rice dragging her out of the elevator unconscious, and I fully believe that he saw the video of Rice brutally beating her in the elevator, although this last bit of information is completely immaterial.

So why is Bill Simmons being suspended by ESPN? (And, as a sidenote to ESPN, pulling a podcast from your website doesn't kill it from the internets.) Did he say something racist, explicit, or indecent? (OK, well he did use some grown-up language, but that was censored and is certainly not a first!) Is he the first journalist to claim this? NO. Here is Bill Plaschke of the LA Times, who incidentally is a regular on the ESPN fake gameshow "Around the Horn:"
It now appears that beyond being clueless, he may also have been lying. There now exists evidence his office actually received the tape five months ago. Goodell now looks like the sort of sleazy player he has long taken great pride in suspending, with a darkly ironic twist. The reckless bum who should be kicked out of the league for disgracing The Shield is him.
That is far more damning than Simmons. Or how about Christopher Gasper of the Boston Globe
The NFL bet that what happened between former Baltimore Ravens running back Ray Rice and his then-fiancĂ©e/now wife Janay Palmer in the elevator of an Atlantic City casino would never see the light of day. ... There is a willful suspension of disbelief that goes along with the business of the NFL, where the players are indistinguishable from the product. The players, portrayed, packaged and sold as superheroes are in reality flawed human beings, some with deeper flaws than others. The coaches, the general managers, the owners, the commissioner don’t really want to know what malice their players are capable of off the field, as long as they’re producing for them on it.
Or Patrick Rishe of Forbes:
The assertion by all parties (the league, the Ravens, Goodell and the NFL) is that they had not previously seen the first portion of the video which actually shows Rice striking his then-fiancé with a left hand to the head, causing her to hit her head on a railing within the elevator which rendered her unconscious before ultimately being dragged out of the elevator.
Unfortunately, it is very hard for me to believe that an organization with as much investigative juice/pull/power as the NFL was not able to get their hands on the entirety of the security video inside that elevator PRIOR to today...
A little subtler, but the gist is: Roger Goodell lied and only pretended not to know the truth. 

So why is it such a big deal that Simmons said similar things? It's not like the notion that Goodell is lying is a wild, fringe accusation with no basis in fact. ESPN is very unlikely to be sued for libel given the fact that the Associated Press has reported that law enforcement and the DA office made the tape available to the NFL in April

I fully agree that ESPN has the right to enforce restraint by its "journalists" by whatever means it thinks will most benefit its share holders. I also fully support any news organization willing to discipline its reporters when they fail to live up to journalistic standards for truthfulness, and am correspondingly suspicious of organizations that do not (I searched for an alternate story with the audio of Simmons' rant even though Huffpo was the first link containing the audio). In the end, I hope there will be more backlash against ESPN than Bill Simmons. While news organizations have an obligation to their audience to report truth, they have a reciprocal obligation to their reporters and columnists to give them full liberty in the manner in which they report those facts as well as in the opinions they express.

Wednesday, June 25, 2014

Conflict and Growth

There is more out there on the subject of war. Economics blogger and libertarian Tyler Cowen seems to think that war (or at least the threat of it) is good for growth. There are two problems with this. First of all, across the post-WWII era, much of the evidence seems to support the opposite hypothesis: countries that are less prone to conflict grow faster. Second, growth is likely not the only variable worth exploring.
On the first issue, one might argue that countries that have been prone to conflict over the last 70 years have mostly been those countries that are also prone to slow growth, for institutional reasons, and that would be fair. So, let's not call in the jury yet on that, although the likes of Dani Rodrik would likely share my skepticism.
On the second issue, even if we found there to be spurts of growth following conflict, we would be hard pressed to show that those spurts would really leave us better off than the alternative scenario in which countries like those in the OECD had done everything else the same, except that they had fought more. Many countries are bound to have growth spurts after conflict simply because of the destruction of capital wrought by conflict. In other words, sometimes growth speeds up precisely because things have exogenously been made worse. This is merely an application of neoclassical growth theory.
Digging deeper into Dr. Cowen's argument, there is a hint that the threat of war might, historically, provided an incentive for investment in public goods, including infrastructure and technology. The mechanism through which this operates in Cowen's model, it seems, is by increasing competition between the incumbent regime and external and internal contestants. To his credit, this is indeed a hypothesis of that is well-established in the literature on institutions, for example by Mancur Olson (1993), but also North, Wallis, and Weingast (2006).
The problem is that in these institutional models, the threat of war as a constraint on power is mostly used in primitive nation-states that rely on fairly closed and autocratic forms of government that are more apt to be extractive. Also, in these models, the main priority of the dictator is to provide security so he can remain in power. This is done in three ways: (1) by buying off former warlords and elites; (2) by eliminating elites those who can't or won't be bought; and (3) by providing public goods.
More open, inclusive, and democratic forms of government can usually achieve the constraints on power necessary to provide public goods effectively through the electoral process, to the extent that the process is not too tainted by asymmetric information and special interest politics. Note that this does not mean that taxes will be lower in a democracy, nor that redistribution will be less. It just means that policies will better reflect the preferences of society at large, and in particular those of the average (median) voter. In fact, a democratic government may have a greater capacity to tax precisely because it uses public funds to provide public goods like infrastructure and technology.
So, it seems myopic at best to think that conflict (or the threat of conflict) should be considered a "good thing." At worst, it is dead wrong and a destructive way of thinking.

Monday, June 23, 2014

Conflict and Capitalism

This week, Pope Francis was quoted by the Economist to have said this in an interview with the Spanish newspaper La Vanguardia (translation in the National Catholic Register):
We are discarding an entire generation to maintain an economic system that can't hold up any more, a system that to survive, must make war, as all great empires have done. But as a third world war can't be waged, they make regional wars...they produce and sell weapons, and with this, the balance sheets of the idolatrous economies, the great world economies that sacrifice man at the feet of the idol of money, are resolved...
The Economist takes an philosophical approach in expressing its doubt towards the Pope's assertion of a link between capitalism and conflict, citing Shumpeter and Popper as having argued that capitalism can "consolidate peace, by offering non-violent ways to satisfy human needs."

On the one hand, there is a theoretical basis for the Pope's argument. Early studies of conflict posited that the rapid transition from traditional economic and social institutions to more modern (capitalistic) ones would alienate those who could not assimilate quickly, and thus foment conflict. These reasons include the unequal distribution of benefits, both between elites and non-elites of the same ethnic group, and among different ethnic groups.

On the other hand, empirical support for such an argument is weak. In particular, Collier and Hoeffler (2004) find little support for the hypothesis that either income or wealth inequality does in fact increase a society's propensity for conflict. These results are affirmed by Fearon and Laitin (2003). Moreover, a my own working paper with Atin Basu and William Shughart suggests that more open, more prosperous, and more capital-abundant societies are less likely to devolve into civil war. In fact, the positive impact of openness and wealth seem to be the greatest for countries with institutional arrangements that otherwise put them at risk of tipping into the abyss of state failure.

Yet, there is one last caveat in favor of the Pope's position: Greed does lead to conflict. The same studies cited above that discount the role of inequality and capital accumulation in stoking conflict almost unanimously find some role for competition over resources as a significant determinant of conflict. However, in most societies where greed and competition for resources significantly contribute to conflict it is the state that controls access to such resources, not the market. It is precisely this state control over resource rents that makes violence attractive (or necessary) for insurgent groups.

Friday, June 20, 2014

Maybe there is such a thing as a free appetizer

This week, Freakonomics Radio broadcast their take on so-called "free appetizers" - bread, chips, etc. that many restaurants supposedly give out for "free" with their meals.
Other supposed freebies include free soft drink refills, free unlimited salad bar with your meal, and even free french fries (and other sides!) at some casual restaurants. A listener contacted Dubner and asked, "Why do restaurants do this?" The program puts forth 6 hypotheses of varying plausibility:

  1. Increase turnover - people who fill up on bread eat their meal and leave, allowing the owner to clear the table and turn it over. People who stay for dessert linger too long. The experts in the podcast don't buy this one, and neither do I. Desserts may be low in menu price, but they typically have higher profit margins than entrees. People who stay longer are often also getting other high-margin items like coffee or alcohol. 
  2. Reduce complaints - Hungry people waiting for their order get cranky and may complain or leave. The broadcast also suggests that, for behavioral reasons, "free" is much more effective at this than just "cheap." This probably doesn't explain a lot of it, and I don't really buy the "behavioral" angle on this explanation, but it's a plausible contributor.
  3. Exploit complentarities with higher-margin items - A basket of salty chips or bread makes people buy other things that "go with" that item. The usual suspect here is drinks, which fits with the "loss leader" strategy. I would also point out that at many Mexican restaurants, about half of the available appetizers are direct complements to chips: cheese or bean dip, fundito, and guacamole. 
  4. Expectations and history - At some point a firm saw it in its strategic advantage to give stuff out for free, or to charge a fixed-price. Other firms followed suit, consumers developed expectations around receiving free stuff to snack on, and the rest is history. 

Finally, they propose that the "free" apps are not free at all, but rather that their cost is included in the price. This leads them to the question, "why not let consumers choose (or not choose) the appetizer they want, and price them separately?" This is really the key question, and the one that institutional analysis has a good answer for. Bottom line: Transactions costs matter.
To answer the first part of the question, then from the firm's perspective there is a value in knowing that all consumers that place an order will be ordering the same thing. If economies of scale matter, then making the same thing 400 times at predictable intervals each night will be cheaper than making 8 different things an average of 50 times each at unpredictable intervals. Consumers also then have to make their choice, which itself takes time, energy, and as Yoram Bauman comically points out, "choices are bad - really bad." In some contexts, and as Dan Ariely points out they can be dangerous.
But economies of scale alone don't quite answer the question, because we could always counter that by asking why "bread" or "chips" aren't listed on the menu for a nominal charge, even if they're unlimited. The broadcast hints at the answer by implying that people don't like to be "nickeled and dimed" which is part of it - but believe it or not, restaurants don't benefit from nickeling and diming either!
Market transactions create costs that aren't present when we leave them unpriced, kind of like friction. A common example (which is sometimes also applied to the related topic of property rights) is how to price fresh produce. In this case, it's quite possible that the restaurant and consumers both benefit from leaving bread or chips unpriced, since pricing them would involve greater mental cost, monitoring, and in the long run make the combined bill somewhat more expensive.
So, if the cost of producing a good is small relative to the transactions costs, then a price of zero is quite efficient. Further, if the side-benefits of supplying the good at a price of zero exceed the production costs, it will be in the firm's private self interest to supply that good at the efficient price of zero, and without such side-benefits (even if they do arise out of a "prisoner's dilemma"), the good may not be supplied at all! In fact, if the transactions costs of exchange exceed the production costs, it's possible that by economizing on transactions costs, free bread really is free.