Thursday, July 29, 2010

One good sentence

It seems feasible that a strategy of ignoring debt and focusing on growth could be as effective as ignoring growth and focusing on debt in breaking the debt-growth relationship.
From Free Exchange.



Tuesday, July 27, 2010

Participation Constraints, Incentive Constraints, and Weaning

As with most Monday nights, last night I was home with the kid while Jane had an evening group meeting. This meant I was in charge of dinner (no big deal), but this week was different because we are trying to wean our son off the bottle, so, instead of a bottle after dinner, he had to drink milk out of a cup. Things went fine to start - cheering him on seemed to work just fine (as it had the couple of previous nights we had done this). But then, things changed, and the crying began.
OK, so most of you know where things are going here, but indulge me; there's some interesting economics behind the strategy. If any more milk was to be drunk, I needed an incentive scheme. What I came up with had two parts:
(1) About a half a handful of Cheerios (kids like the Cheerios!) to start with to get him back on-board; and
(2) A few Cheerios after every 2-3 drinks of milk.
In Mechanism Design (a branch of economic game theory) (1) is intended to overcome the Participation Constraint (get the kid to stop crying and play ball); (2) is intended to overcome the Incentive-Compatibility Constraint (keep the kid drinking the milk after the first offering is eaten). I'm surprised how well it worked, and I'm thinking that I may have overpaid on the participation constraint. By the time we got into it, all I really had to do to get a second or third drink was open my hand and show him the reward (as long as I remained credible with my payouts!).