Some links on rationality, choice, and institutions

Economics in the next ten years? (Economic Principals) Some highlights that I found interesting:
Sometimes more choice makes people freak out and thus less choice is sometimes better. What is the Right Amount of Choice? (Gruber)
Understanding institutions and culture will be increasingly important. (Acemoglu and Alesina; more here by Barro and McCleary)
Sometimes people and institutions make bad choices even when they're fully informed and are trying to make good choices. Why? (Cutler)
An interesting book on conflict, I'm thinking of adding to my wish list. (Garfinkel and Skaperdas)
Relatedly, an interesting piece on conflict and class. (Economix)

Some links

There is no great stagnation. (Free Exchange)
Rule #1: Buy low sell high. Rule #2: You can't make up a per-unit loss with quantity. Don't forget rule #1.
Optimal punishment for bribery: giving a bribe is legal, soliciting is illegal. (Economist)
Optimal bribery for kids. (Boston Globe)
Rent vs. Buy (Economix)
Selling Government Land (MR)

Some Links, Including the Benefits of Holding "it" In

We make better long-run decisions on a full bladder. I can't wait to share this with my 75-minute classes. (APS)
Wage gaps and education. Some of this seems contrary to the recent evidence of stagnating education wage premia. (Krugman and Cowen - separately, of course!)
Given these structural changes, structural change is not welfare-neutral, even in the long run. (Rodrik)
Even (especially?) informed voters just really don't have beliefs about politics and policy that are consistent with reality. (Caplan)
Is controlled immigration better for welfare programs? This seems to assume a lot about the effectiveness of the controls.  (VOX)

The Deficit We Want

Via Economix:

Herein lies the political problem. We want to cut spending. We just don’t want to cut the benefits that the spending pays for.

We want to cut the vague notion of spending ahead of raising taxes, but when given the choice between cutting specific spending (on the "big three" - Medicare, Social Security, and Defense - for example) versus funding it with higher taxes, people choose higher taxes in each case.
Cognitive dissonance?

Links on taxes and incentives, arbitrage, and political momentum.

Looks like there are cases where high taxes actually spur innovation and investment. (Reuters)
Why is there room for arbitrage on used books? Many professors get desk copies of textbooks, and many professors sell these copies to book buyers. Usually the arbitrageur offers about 20-30 bucks for a book they can turn over for 90-100. It makes some sense that there will be enough individual small fish for whom the spread is not big enough to justify the costs of finding the market price and finding a buyer (which, is in fact not too hard with an Amazon Marketplace seller's account). But it amazes me that a used book store isn't researching it's market better. It seems like the bookstore's proprieter would be interested in picking up those extra bills off the sidewalk. (Marginal Revolution)
Finally, an interesting nerdy statistical criticism of seemingly contrarian findings about political momentum. (Freakonomics)

Some links: Who's lobbying against pot; how cops are catching those who are for it

Turns out, beermakers and police (two people who benefit most economically from prohibition) lobby most (Huffington Post).
Do I see an unholy freedom alliance between Teapartiers and NORML in America's future (420 Tribune)?
Is more vote-buying a good thing or a bad thing (Marginal Revolution)?
If you pay someone to help you cheat, do you deserve a refund when you discover that they cheated (Dan Ariely)?
How to eat a muffin (Incidental Economist). The second I read this, I realized that I already eat muffins this way, even when I'm not walking.
Imperialistic (or, mercantilistic?) Economists (Justin Wolfers).

Some Links: The Census, Online Gambling, and College Consumerism

The census: Not just enabling taxation anymore (Economist)
Online gambling: End prohibition, begin regulating it... and taxing it (Economist)
Trade: (1) Freight costs on the decline (Economist); (2) should we fear offshoring? (Economist) A couple of good sentences (in response to a claim that the US will have "little left in the comparative advantage department"):

The idea underlying comparative advantage is that a country always has one. The brilliance of the theory is that even when one nation is better at every last type of economic activity than another, it will still be advantageous for both nations to produce and trade. China isn't going to do everything.

Supersize me, Wal-Mart (Working paper)
Taxing "capital" - the devil is in the details (Economix)
Climate Change Reform (Economist)
The old joke is true: Colleges are becoming bars with a $100,000 cover charge - the country-clubification of colleges. (NY Times)

Mo' Money, Mo' Problems

Some Links, Featuring Conservatives for Higher Taxes, and Evil Cul-de-Sacs

Conservatives for Higher Taxes (Economix)
Cul-de-Sacs may not be evil but they are inefficient (Infrastruturist)
Facebook's progression of suckiness over the years (AllFacebook)
Awesome Dinosaur shirt for kids
Which type of cognitive bias are you? (via Freakonomics)
No Reservations (more here)
Gas tax or hybrid subsidies? Free Exchange makes economic sense of why a gas tax is better for the environment.

Some Links, Including a couple of cool graphs

Gas price vs. miles driven over time (NY Times).














Explanations of grade inflation that can be ruled out: Hard work (Babcock & Marks, 2008).












China bubble watch (MR).

Does Terrorism Work

Short answer: Yes. Long answer read more here, and even more here.

Intrinsic Motivation vs. Extrinsic Motivation (a.k.a. "Incentives")

From Ted Talks.

Conspiracies and Economic Statistics

Menzie Chinn at EconBrowser writes,

In my view, the reason why so many hold onto these views is because it's so much easier to remain ignorant, and leap to the conspiracy view, than to do the hard work to understand why the statistics are imprecise measures of economic concepts, and why they are revised over time. After all, the former requires nothing more than taking somebody's word, the latter entails reading the supporting documentation, comprehending what the terms used mean, and applying some basic math and statistics skills...

In other words the reason conspiracy theories attract a nice crowd of supporters is because people are "rationally ignorant." Being informed takes a lot of effort, and it's easy to believe a plausible lie (along with a dose of paranoia that the other side is lying) than it is to be bothered with the facts.

"Look" signs

A few years ago there were a couple of pedestrian deaths caused by motorists near the University of Illinois. There were two legal responses to this: (1) reduced speed limits to 15 right around campus; and (2) signs at intersections saying you must yield to pedestrians (even in zones where speed limits weren't reduced). (1) was probably not a bad idea , but (2) never made much sense to me and predictably caused more confusion, not less (not to mention there were still a couple of pedestrians hit in the year or so following the posting of the signs).

First, the "yield to pedestrians" signs did was make less clear who had the right of way between a car on the street and a pedestrian who had not yet actually entered the crosswalk. Smart pedestrians will still pause when there is approaching traffic because her incentives are well-defined. But forgetting that relatively minor confusion, it created a Pelzman Effect and you would increasingly see dumb (sometimes intoxicated) undergrads wandering out into intersections without care, and sometimes talking on their cellphones.

U of I sent out surveys and I said then what I'll say now: They should have put up signs warning pedestrians to look both ways before entering the intersection. It's so simple we teach it to kindergartners. Anyway, they have such signs painted on the crosswalks in Vancouver (where I attended a conference last week) for pedestrians that say "LOOK ->." Maybe their health care system isn't what we want, but their attitude towards dummies who don't pay attention in traffic is admirable.

Industries Where the Customer May not Always be Right

Found this on Freakonomics. Consumers who bone up on their own health may actually interfere with their own health care. Interesting. Any other applications where the customer may not be "right" and "information may actually lead to worse service? Education? Investing?

Financial Crisis & Williamson's Behavioral Taxonomy

The whole crisis in the financial sector made me reflect today on Oliver Williamson's thoughts on transactions costs economics and behavioral assumptions built into various models economists employ. The basic taxononmy can be represented by looking at agents' behavior in two dimensions, rationality (maximizing, bounded rationality, and organic rationality or rationality as an evolutionary process) and self interest motivation (opportunistic, simple self-interest, or obedient).

Mostly, the relationship in the crisis comes down to a philosophical question of rationality - how well did folks figure out what kind of trap they were getting themselves into - and greed - how willing were agents to take advantage of others to get ahead.

Realistically, if agents are acting opportunistically, the type of economic organization that leads to the best outcomes is mechanism design (regulation). Unfortunately, under those circumstances, the mechanism has to be well designed. Copouts and loopholes will basically lead to another way for agents (homeowners and banks and realtors) to game the system. Furthermore, even if we're all trying to be rational the lack of information should give us more pause. Why hasn't anyone with some authority noticed this and put the brakes on this crazy rush to do "something?"

Voting and Economic Interests

There's some notion running around that folks aren't voting their economic interests or that they are being somehow irrational when they vote Republican. I don't know if I agree with this. I mean, it may be correct, on average, but not necessarily evidence that they are being in any way irrational. Maybe middle-class families are simply making a "high" guess at their chances of moving upward in the income distribution (becoming rich). If we think of the market economy as partly based purely on hard work, partly on ability, and partly on luck, then at least part of the outcome is based on a sort of lottery, and there's plenty of anecdotal evidence that suggests that many people overestimate their chances in a lottery. Perhaps middle class voters who support McCain's tax structure are (often wrongly) estimating that they will be one of the few who move upward into the $250,000+ income range, the top 5%.

Menu Costs and Information

Are the costs of changing menus really the main barrier that makes restaurants not want to print caloric and nutritional information?

Optional ARM

I've moaned about the "negative amortization option" on three part optional ARM mortgages here already. Basically an optional ARM an adjustable rate mortgage that lets you pay one of three payments (not by agreeing to it in advance but on a month to month basis):
1. normal payment that (if made each and every month) amortizes the loan after X months.
2. interest only payment that (if made each month) never amortizes the loan (the bank perpetually owns your house).
3. "negative amortization" payment that doesn't even pay off the interest, and adds the difference onto the principle (I'd rather call this the "default incentive" option - do this as long as the bank will let you, default, foreclose, and rent for the rest of your life).
Now the Economist is onto the stupidity (just so you know that I'm not making this stuff up).

Penn and Teller Bullshit - Mad Cow