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Faculty Pay Cut at the University of Illinois

January 6th, 2010 No comments

This is an interesting way to cut 2010 salaries:

Faculty and academic professional staff will take four furlough days – a temporary leave of absence without pay – between the four pay dates of Feb. 16 and May 16. Monthly pay will be reduced by one day for each of the four payroll periods.

Maybe nominal wages are not so rigid after all, at least for people not paid by hour.

Categories: Economics, research Tags:

The Precautionary Principle

December 9th, 2009 No comments

Sensibly applied, the idea behind the Precautionary Principle could be useful for global warming. The idea is that we should worry a lot about catastrophic low-probability events. The standard warmist scenario is not at all catastrophic. Adjusting to even a rise of 10 degrees Farenheit over 100 years is just not that bad. It’s the difference between Philadelphia and San Diego, and people do find the heat bearable when they move to San Diego. (Or use Boston and Atlanta if you like. But one thing I wonder about is how much of global warming will just be to make winters milder. The Highs in the Tropics are not higher than in the Midwest— they just last longer.)

But there is a possible catastrophe. It would be because of runaway effects caused by, for example, methane being released from Siberian swamps.

Correct use of the precautionary principle would say that we should forget about little things like cap-and-trade and instead (a) study possible catastrophes very hard,and (b) work on geoengineering, since mere cutbacks don’t address the problem (we could well be heading to catastrophe just with our present warming, and maybe it’s too late to go back unless we can get rid of carbon dioxide already in the atmosphere).

Thus, the precautionary principle really has the opposite implication of its standard use, which is to call for expensive CO2 cuts that won’t help with the small-probability, really-bad outcomes.

In fact, we could go a step further. Suppose we are limited to spending at most one trillion dollars dealing with climate change. Suppose, too, we think that(a) there is a 99% chance that if we do nothing, the temperature will rise and cause 3 trillion dollars in harm to the global economy , (b) there is a 0% chance that the temperature won’t rise, and (c) there is a 1% chance that the temperature will rise dramatically, killing off 90% of the world’s population. The standard global warming line is that we should spend the trillion dollars on substituting other inputs for energy, to reduce CO2 output and prevent the loss of the 3 trillion dollars. The precautionary principle says that we shouldn’t waste the trillion dollars on that— we should spend it on geoengineering research and technology to deal with the 1% probability of disaster, instead.

You may be tempted to reply that both the CO2 reduction and the geoengineering projects should be undertaken. Well, suppose we have 5 trillion dollars to spend. Why shouldn’t we spend all 5 trillion on dealing with the 1% probability of disaster? The more we spend, the higher probability we avoid the disaster, so why divert any of the funds to non-disaster scenarios?

Snowballs, Not Lines

December 9th, 2009 No comments

A good thought of Prof. Ribstein: (my boldface, as usual)

The best legal scholars, like the best lawyers, are those who bring a variety of tools together in responding to a legal problem. They are creative, insightful, and broad, making connections among different fields and with their other work. Their careers end up looking like snowballs rather than lines. They can use these skills to teach both lawyers and policymakers how to solve new problems.

Categories: academia, research, thinking Tags:

Simple Ideas and Complicated Models

December 2nd, 2009 No comments

My comment on a VC post.

Thank you for linking to the Hakes article. It rings true.

The problem it concerns is not exactly poor writing, though. Rather, it is the problem of the brilliant but simple new idea. If you explain it simply, people say, “That’s obvious”, even if they would never have thought of it in a million years. Thus, you have to math it up, or disguise it in a convoluted hypothetical, or quote in foreign languages to get it published.

When I visited Chicago back in 1989 I was amazed at what George Stigler and Gary Becker could do in seminars. They’d ask a simple one-sentence question (“Have you thought about X?”) and entirely demolish (or expand) somebody’s paper. Unfortunately, many of us refuse to recognize that kind of Feynmannian brilliance, which, indeed, is distinct from IQ.

I was just thinking of this topic today because I have what might be a novel idea on why deposit insurance is useful. It’s so simple that I could write the paper in words, with no equations. But I wonder whether a top journal in economics would publish it then, even if the editor believed that the idea was worthy of a Nobel Prize.

What’s the solution? One is to wrap up the idea in unnecessary math modelling. Another, which is often used, is to have two parts to the paper. The first part is to explain the idea in words or with a numerical example. Everybody reads that part, and referees decide whether to accept the paper based on it. The second part is the general model, all mathed up. Referees require that part, but they don’t really read it.

I should add that I am a conventional modern economist, constantly building math models and believing that they are utterly necessary for most economic research. But not every idea needs a math model.

Categories: research, writing. mathematics Tags:

Should Victims Be Able to Sue Corrupt Judges

November 28th, 2009 No comments

From VC:

Now comes news that the judges are immune from suit arising from any and all of their “judicial acts” in connection with the sentencing of these juveniles. [Stories are here and here; the opinion in the case conferring absolute immunity on the defendant judges (Middle District of PA, Judge Caputo) is here). Judge Caputo’s opinion conferring the immunity is thoughtful and well-reasoned…

My comment:

Very interesting problem, and you’re right that it’s not an easy one. We definitely want the judge to have criminal liability, I think (some people might want to limit it to impeachment) and we want the corrupt cases to be subject to review, so the only question is whether the victim— the losing side— should be able to sue the judge or the government for money damages besides.

What is the case with corrupt policemen? (Section 1983?) Can they be sued personally?

We also have a second-best situation. As the Court says, we’d have a huge amount of meritless litigation harassing judges. I say that is “second-best” because it is the fault of bad policy created by the judiciary itself, which for the past 50 years has encouraged nuisance suits generally. If judges would use their powers to punish lawyers who bring meritless suits, the problem would dwindle. Maybe making judges personally vulnerable to legal harassment and wacko juries would change the judiciary’s mind about whether trial lawyers should be given every freedom to sue corporations.

Categories: administrative law, judges, law, research Tags:

Phelps on Capitalism and Innovation

September 25th, 2009 No comments

Nobel laureate Edmund Phelps has an interesting essay, “Economic Justice and the Spirit of Innovation,” in the October 2009 First Things.

The issue of morality in economics is neither the fairness of income distribution nor the stability of financial systems. It is how human institutions can be shaped to correspond to human nature—to man’s nature as an innovator….

Prosperity and the development of the human spirit are linked in the dynamism of the economy. The dynamism of the American economy over the past two hundred years was strong, and that helps to explain why prosperity was high both in the sense of high employment and the sense of a high degree of personal satisfaction compared to that in other countries….

That is the positive moral content of economics—to realize an anthropology that starts with innovative human nature: homo innovaticus, not homo economicus. Existing economics has a negative moral content in that it treats economic factors as though they were pieces on a game board rather than human beings who learn, discover, and innovate. Politicians play the same game, channeling resources from one activity or social group to another without considering the effect on the creativity and judgment exercised within the economy and thus the deep rewards the economy imparts or fails to impart….

Even now, in the midst of an economic downturn, there are signs of vitality that weren’t present in the 1950s. There is exuberance, however irrational, in the banking system, and some originality here and there in hedge funds and private equity, and still some inventiveness in Silicon Valley. Although they may have caused more problems than they were worth, the exotic, new financial instruments showed that America is still the world’s leader in invention. They reflect America’s capacity to create. Unfortunately, the markets were unsophisticated and set mistaken asset prices.

Categories: Economics, research Tags:

Constructing a Risky Density Function

September 25th, 2009 No comments

My colleague Haizhen Lin found a neat trick from someone in the math department. Suppose you have a density f(x) and you want to construct a pointwise less risky function, as in my paper cited below. You can use this:

f(a, x) = (1/a) f( .5 – .5/a +x/a)

If a=1, f(a,x) = f(x).

If a is small, f(a,x) tends to get big because of the 1/a portion, and it gets very big for x=0, but for x far from 0, the f becomes small because the argument becomes very big, distant from 0.

“When Does Extra Risk Strictly Increase the Value of Options?” The Review of Financial Studies, 20(5): 1647-1667 (September 2007). It is well known that risk increases the value of options. This paper makes that precise in a new way. The conventional theorem says that the value of an option does not fall if the underlying option becomes riskier in the conventional sense of the mean-preserving spread. This paper uses two new definitions of “riskier” to show that the value of an option strictly increases (a) if the underlying asset becomes “pointwise riskier,” and (b) only if the underlying asset becomes “extremum riskier.” Paper in tex or pdf ( http://www.rasmusen.org/published/Rasmusen07-RFS-options.pdf).

Categories: math, research Tags:

Flag Burning and the Founding Fathers

July 3rd, 2009 No comments

Prof. E. Volokh’s Flag Burning and Free Speech in the WSJ:

The Framers were working within a late 18th century common-law legal system that generally treated symbolic expression and verbal expression the same. Speech restrictions — such as libel, slander, sedition, obscenity and blasphemy — covered symbolic expression on the same terms as verbal expression.

Many cases and treatises, including Blackstone’s “Commentaries” published in 1765 and often cited by the Framers’ generation in America, said this about libel law. And early American court cases soon held the same about obscenity and blasphemy. Late 18th and early 19th century libel law cases and treatises gave many colorful examples: It could be libelous to burn a person in effigy, send him a wooden gun (implying cowardice), light a lantern outside his house (implying the house was a brothel), and engage in processions mocking him for his supposed misbehavior.

Defamation law is not about speech at all, is it? It is generally about conveying information. If an action conveyed defamatory information, it was illegal. Thus, the brothel light was illegal. If it conveyed non-defamatory information– I don’t see that it should have been, under common law principles. Burning a simple effigy to indicate “I don’t like you” should not have been illegal. If it was burning an effigy of someone in an enemy military uniform, it should have.

At any rate, libel law regulated content, and doesn’t care about method of expression. Much of traditional social regulation regulated method, and didn’t care about content. (Admittedly, some of it, such as blasphemy laws, combined regulation of method– “no swear words”— and regulation of content— “no atheistic books”. )

Conservatism and Libertarianism

May 10th, 2009 No comments

Whenever I grade my economics courses, I become fearful of how fragile capitalism is. Even my students, well above average in intelligence, and trained by my excellent self, don’t really understand why a free market is good and call for government interventions uncritically and at the slightest excuse. Yet Americans favor the free market, and Western nations by and large are free, if a little corrupt in legal ways. Why?

One possibility is the lobbying by business counteracts the voters’ natural desire to wreck the economy. Here’s another possibility though: It is conservatism that is now rescuing the economy. Americans, at least, have a strong suspicion of government and of innovative policies. That protects us when understanding of economics does not.

Categories: research Tags:

Discrimination in Major Law Firms?

May 6th, 2009 No comments

Interesting data is available showing the number of African, Asian, and Hispanic American lawyers and partners at 20+ major law firms. The common pattern is that the Partner/Lawyer ratio is much higher for African-Americans and Hispanic-Americans than for Asian-Americans. An interesting question is why. Three possibilities:

1. The firms discriminate in favor of blacks and make them partner more often.

2. The firms discriminate against blacks, and hire them as associates less often.

3. The past decade has had a surge in the number of Asian-American lawyers, who aren’t old enough to go up for partner yet.

This could use further study.

Later: See Steve Sailer. Apparently, if a group difference is more than 4/5, you can sue. That’s easy here. You’d get statistical significance even for individual law firms. An interesting legal question, though, is whether you could sue an entire industry on behalf of an industry class– sue 20 law firms on behalf of the denied Asian associates– if all of the law firms had the same discrimination pattern, but non individually statistically signfiicant, but jointly highly significant.

Something amusing about the lawsuit is that the likely best defense can’t be used. It is: “We make lots more blacks partner because we discriminate against them at the associate level and their average quality is a lot higher than for asians.”

Categories: law, research Tags:

Scientists and Philosophy of Religion

March 2nd, 2009 1 comment

Professor Smith’s God and Darwin at The Right Coast, is good, tho not entirely right. I’m just working on a paper I’ll send him:

“The Concealment Argument: Why Christians Should Be Agnostics.” Logic and Biblical evidence suggest that God wishes that some but not all humans become convinced of His existence and desires. If so, this suggests that attempts to either prove or disprove such things as God’s existence, past miracles, or present supernatural intervention are doomed to failure, because God could and would take care to evade any such efforts.

My Co-Authors

February 24th, 2009 No comments

After going to Ian Ayres’s excellent 50th Birthday
Co-Authors Conference
I
decided to count up my own co-authors. Stars indicate that what we’ve
written is not yet published (and maybe never will be). I don’t
include co-editors.

  1. Michael Alexeev
  2. *Maria Arbatskaya
  3. Ian Ayres
  4. F. H. Buckley
  5. *Luis Fernandez
  6. *Barick Chung
  7. *Christopher Connell
  8. Kenneth Dau-Schmidt
  9. *Richmond Harbaugh
  10. David Hirshleifer
  11. Jack Hirshleifer
  12. Maarten Janssen
  13. Thomas P. Lyon
  14. Richard McAdams
  15. * Kaushik Mukhopadhaya
  16. Robert Heidt
  17. Emmanuel Petrakis
  18. Ivan Png
  19. Richard Posner
  20. Manu Raghav
  21. J. Mark Ramseyer
  22. Timothy Perri
  23. Minoru Nakazato
  24. Santanu Roy
  25. Jeffrey Stake
  26. John Wiley
  27. *David Myatt
  28. *Young-Ro Yoon
  29. Todd Zenger
  30. Mark Zupan

Ian is up to 51, I think, with about 30 at the conference and 15 presenting papers there.

Murder and Medicine

February 23rd, 2009 No comments

Comparing murder rates across 50-year times periods is misleading,
this blog post tells us:

As Lt. Col. Dave Grossman pointed out in his book On Killing, the
aggravated assault rate serves as a close proxy statistic for
attempted murders. And the aggravated assault rate has increased
dramatically since the 1950s even if the murder rate has not.
Criminologist Anthony Harris estimates today’s homicide rate would
triple if medical and rescue technologies had not improved since the
50s.

Grossman was kind enough to email me an excerpt from his new book On
Combat when I asked him for more detailed source citations for his
writing on this topic. He argues that in comparing today’s homicide
rate with the 1930s and before we ought to multiple today’s rate by
ten for a true comparison:

Since 1957, the U.S. per capita aggravated assault rate (which is,
essentially, the rate of attempted murder) has gone up nearly five-
fold, while the per capita murder rate has less than doubled. The
reason for this disparity is the vast progress in medical technology
since 1957, to include everything from mouth-to-mouth resuscitation,
to the national 911 emergency telephone system, to medical technology
advances. Otherwise, murder would be going up at the same rate as
attempted murder.

In 2002, Anthony Harris and a team of scholars from the University
of Massachusetts and Harvard, published a landmark study in the
journal, Homicide Studies, which concluded that medical technology
advances since 1970 have prevented approximately three out of four
murders. That is, if we had 1970s level medical technology, the murder
rate would be three or four times higher than it is today.

Furthermore, it has been noted that a hypothetical wound that nine
out of ten times would have killed a soldier in World War II, would
have been survived nine out of ten times by U.S. soldiers in Vietnam.
This is due to the great leaps in battlefield evacuation and medical
care technology between 1940 and 1970–and we have made even greater
progress in the years since. Thus, it is probably a conservative
statement to say that if today we had 1930s level evacuation
notification and medical technology (no automobiles and telephones for
most people, and no antibiotics), then we would have ten times the
murder rate we currently do. That is, attempts to inflict bodily harm
upon one another would result in death ten times more often.

Categories: crime, history, research, statistics Tags:

French Preface

February 16th, 2009 No comments

I finally got round to scanning in the 688K Francis Bismans preface to the French edition of Games and Information. It’s actually a 14 page essay.

Categories: game theory, research Tags:

Keynesianism

January 21st, 2009 No comments

I’ve started reading Professor DeLong’s “The Modern Revival of the “Treasury
View”
,January 18, 2009 draft. He certainly does write well.

[T]he silliest and stupidest arguments made against
Keynes’s policy proposals were made by the bureaucrats of H.M.
Treasury, with their so-called “Treasury View”1 of Britain’s economic
problems: that each extra pound sterling of British government spending
had to be financed by borrowing an extra pound from Britain’s savers,
which meant a pound less for Britain’s firms to invest. Hence investment
plus government spending was constant. So fiscal policy could never
boost employment or production no matter what.

Later:

[I]t is as obvious a fallacy as you ever find in economics. If no
government bureaucrat can boost employment and production even in the
shortest run by deciding to borrow and spend more—as the “Treasury
View” maintains—than an immediate corollary is that no private
entrepreneur can boost employment and production by deciding to borrow
and invest more in his firm’s capital stock.
If the “Treasury View” is
correct, then homebuilders’ and financial intermediaries’ decisions to build
more homes were not the cause of high employment in the mid-2000s. If
the “Treasury View” is correct, then venture capitalists’ decisions to
finance internet startups and telecom companies’ decisions to invest in
fiber optics were not the cause of high employment in the late 1990s.
Similarly, the huge unemployment of the 1930s was not due to any
unwillingness of businesses to invest produced by the panic of the stock
market crash and the waves of bank runs and failures in the early 1930s.
And the high employment and output in the 1920s was not driven by
private business enthusiasm for investing in the “new era” technologies of
radio, electricity, and internal combustion after World War I.

Later:

We can immediately recognize that Fama’s argument must be wrong.
First, it proves too much: not just that government spending cannot boost
employment and output, but also that private enthusiasm like the
enthusiasm for housing construction in the mid-2000s or high-tech
investment in the late-1990s cannot boost employment and output either.

Later in the post, Prof. DeLong mentions that if Fama is willing to use a classical full employment model, his conclusion might hold, but that Fama didn’t in his original post. Let’s try going through the story now, though.

Case 1a. Suppose that everybody in the economy is working and there is perfect information. When the entrepreneur borrows money from the bank and hires a new worker, he must hire the worker away from an existing firm. Thus, employment does not change. Output does rise, however, because the entrepreneur wouldn’t be doing this unless he had a higher-return project than the existing firms and hence can bid away the worker with a higher wage. Or, what happens is that he bids away the capital by offering to pay a higher interest rate to the bank, which calls in its loan from some other firm, which therefore cannot afford to hire the worker any more.

The example uses labor, but what the entrepreneur hires away might be machines, real estate, or iron ore instead.

This story is one I use in teaching my students about opportunity cost. For Silicon Valley to grow, Detroit must shrink. It is Schumpeter’s idea of Creative Destruction from The Theory of Economic Development. There is a Circular Flow of production in the stable economy, and The Entrepreneur breaks it by diverting resources to an innovation. Brahma can’t create without Shiva destroying.

Case 1b. Now let there be full employment, but imperfect information. The entrepreneur and the public generally think that the new project is better, but it’s actually worse. The bank knows this, but also the entrepreneur has enough capital in his firm to repay the loan even if the project goes sour.

The bank will make the loan. At first, the price of the entrepreneur’s company will rise, as will the apparent wealth of the economy. (Will the price of the existing company fall when it loses the worker? I don’t know.) Later, the failure of the project will be apparent, and it will be clear that the true wealth of the economy has fallen. The bank, however, will make a profit.

GDP’s course is interesting. Suppose the entrepreneur uses the loan to hire workers to build houses. Those houses have high market prices, and GDP rises that year because it is measured using the price of those houses (or, perhaps, what has previously been the price of houses of that size– this works either way). Then, it becomes apparent that nobody wants to buy those houses. They have little value. The entrepreneur (or whoever bought the houses at first, if they’re not still in his inventory) gets a lot poorer. Notice, though, that GDP does not fall because of this. GDP is a flow value, and doesn’t change when the value of stocks change. Also, we don’t go back and change GDP figures just because the output turns out to be less valuable than we thought. Nonetheless, we shouldn’t think that in that mistaken year the economy was doing wonderfully. It’s as if the houses that had been built turned out to be magical castles that turn into mist when someone tries to live there.

Something like that is what happened in the Telecom Bubble and the Housing Bubble.
If the government did the borrowing for a stimulus package instead of the entrepreneur, then it too would have to take the worker from some existing job. Employment wouldn’t change. Output would fall, though, because projects in a stimulus package are by definition those that the government doesn’t think pass a cost-benefit test in normal times. (I’m distinguishing here between stimulus spending and normal spending.)

We have to do these first two cases of analysis of the Treasury View to get to the more relevant cases:

Case 2. Some of the workers the entrepreneur hires come from existing jobs, and some were not employed before. (This is the real Telecom and Housing Bubbles case, I expect.)

Case 3. None of the workers the entrepreneur hires come from existing jobs. This is the case to understand when we come to analyze the Obama stimulus package. And, of course, we need to figure out if it is a possible case.

I’ll need to return to thinking about Cases 2 and 3 later. I should mention, though, that I have no firm opinion on them. I do oppose the Obama stimulus, but mainly because I think the government would botch it even if it’s true that a Keynesian stimulus would be helpful now. I’m a microeconomist, so that’s what I pay most attention to. Also, though I’m a fan of Schumpeter, don’t think that I am an “Austrian School” economist. I’m not sure what that means, actually, but I associate it with a distaste for equilibrium analysis, mathematical modelling, and price theory. I am a firm believer in all those things, and proud to be part of the MIT-Chicago Synthesis which is standard among modern economists. (I’d put both DeLong and Fama in that category too, despite their disagreements about Keynesian stimulus. Their methodology isn’t all that different, just their conclusions. Though maybe I should put Fama in the old Straight-Chicago School; I’m not sure.)

Categories: Economics, Keynes, research, stimulus Tags:

Unemployment Insurance

January 21st, 2009 No comments

Why don’t we have unemployment loans instead of unemployment insurance? Right now, the government gives money to people who are unemployed, for some period of time. As I recall, the economic reason is that we don’t want people to take jobs too soon– we want them to search. But why not just loan them the money, then? That solves the liquidity problem.

Categories: Economics, research Tags:

Does the Bible Esteem Happiness?

November 23rd, 2008 1 comment

That’s a good question my wife asked me. Answering it will involve a bit of word study, since it seems that Hebrew’s asher (ק ר א) and Greek’s makarios (&mu &alpha &kappa &alpha &rho &omicron &sigma) (sp?), which the King James Version translate as “happy” mean it in the sense “blessed”, so “joy” or “delight” might be the word to focus on. See, too, Aristotle, Aquinas, and Hooker. I wonder what Calvin and Luther have to say? I should also let Professor Kimball know what I find, since he gave an econ seminar last week on happiness as one of multiple goals.

Categories: religion, research Tags:

GM and the Unions

November 15th, 2008 No comments

Professor Bainbridge has a big comment discussion going about the amazingly high wages the UAW union has extracted from the automakers it is bankrupting. What is really going on is that the workers own the firm. They are the residual claimants, and the company is run for their benefit. A residual claimant has a risky claim, though, and in a bad year he will earn less. The workers have avoided this so far by letting the capital of the company run down. Now they are at the point where they must take a temporary wage cut, unless they can use their political clout.

Or so I hypothesize. This would make a good paper. Some facts are easily checkable. Has GM been investing less than the value of true depreciation? Has it been able to sell new stock? If it were freed of the unusually high pension obligations and wages, would it be in sound financial shape?

November 16: Here is one of the many good comments from the Bainbridge post (his readers seem to be far smarter than those of other blogs!):


I'm sorry, but if you try to make a point like this, and don't back it up
with an outside source supporting your assertion, you only leave yourself
open to people (like me) who will show you an outside source that proves
you wrong.

http://www.jdpower.com/corporate/news/releases/pressrelease.aspx?ID=2008115

JD Power 3 Year Vehicle Dependability Study

Problems per 100 Vehicles, by Brand, for the first 3 years of ownership,
for cars sold in 2005, surveyed in 2008.

(I'm only going to list the non-luxury brand names, since in the luxury
brands, Lexus/Toyota has been winning this thing for the past 15 years)

Mercury - 151
Toyota - 159
Buick - 163
Honda - 177
Ford - 204
Industry Average - 206
Nissan - 224
Pontiac - 225
GMC - 225
Chrysler - 229
Dodge - 230
Chevrolet - 239
Scion - 243
Saturn - 250
Jeep - 253

A little statistical analysis:

The average Ford has 1/3 more problems than the average Toyota.

The average GMC, Chrysler, Dodge, and Chevrolet has 50% more problems than
the average Toyota.

The average Saturn and Jeep has 2/3 more problems than the average Toyota.

Categories: Economics, research Tags:

The Optimal Savings Rate

November 6th, 2008 No comments

Some people think that although people make efficient decisions about how much to save personally, the social discount rate we use is too low. The market gets it right, but government does not. I think the opposite is true.

Individuals are too eager to consume in the present instead of the future. Think of a person as a sequence of selves over time. Most people are selfish and favor the present self over the future self. They save too little.

On the other hand, when it comes to decisions across generations, we have to remember that future generations will be richer than we are. Thus, we should not incur too much cost now in exchange for benefits for them later.

Categories: discounting, g406, research Tags:

Subsidiarity and Hierarchies

October 26th, 2008 No comments

The idea of “subsidiarity” came up today at a church meeting. The idea is that affairs ought to be handled at the lowest, most decentralized level. An individual congregation, for example, and not the denomination ought to discipline church members. The term is a Roman Catholic one.

The discussion made me think of the following problem. Suppose we have a worker who is misbehaving. It makes sense for his immediate boss to discipline him, since the boss knows the situation best. His immediate boss, however, likes his employees and is reluctant to bear the emotional cost of intervening. Thus, it may actually work out better to have the top boss– or some central committee– begin the discipline process. Perhaps the immediate boss can then handle details, having been positioned as the friend of the worker rather than as the “tough guy”.

This reminds me of the style of hierarchy models in economics. I’m not sure whether modelling is useful here or not.

Categories: Economics, research Tags:

Longer Sale Times in Depressed Housing Markets

September 15th, 2008 1 comment

Why should it take longer to sell a house in a depressed market? The answer may seem obvious– nobody wants to buy– but it is not. If the price fell enough, somebody would buy. The question is why the weak market is reflected in both lower prices and longer waiting times, rather than just lower prices.

I think there is a 1995 Jeremy Stein article on this where he thinks about the financing of housebuying. Christopher Mayer has some papers too. But I wonder whether the answer may not lie in transaction costs.

Suppose too many houses have been built by mistake. It will take a few years before population growth catches up. We can forecast the house price will recover by that date. We could sell now, though, and somebody now renting could live in the house until demand recovered. If transaction costs were zero, that is what would happen. The person would buy the house, live in it cheaply until demand recovered, and then move out when a house that size became expensive again. But if there is a fixed cost to moving in and out (or to arranging sale or rental) then that won’t happen.

This seems too obvious an explanation, but I haven’t heard it mentioned. It could be modelled by assuming that there are big houses and little houses, with two types of people who prefer each at their construction cost. Everyone prefers a big house, but poor people would prefer a small house if they must pay the cost of building a house. Population grows steadily, but then there is a shock and not enough rich people enter in one year. If there is no transaction cost, then some poor people move into big houses, and some small houses stay empty. If there is a big enough transaction cost, big house prices fall somewhat, but no poor people move into big houses. The best model might have a distribution of moving costs across people, so that there would be some poor people moving into big houses, but some big houses staying empty. Note that the price of small houses would fall too, because of poor people’s demand for them falling as some move into big houses.

Categories: research Tags:

Mutual Insurance Companies

June 6th, 2008 1 comment

From Answers.com comes a useful article:

Over 200 mutual life insurance companies have demutualized since 1930. At the end of the 20th century and beginning of the 21st century numerous large mutuals such as Prudential, MetLife, John Hancock, Mutual of New York, Manufacturers Life, Sun Life, Principal, and Phoenix Mutual decided to demutualize and return to policyowners all the profits they had accumulated as mutual life insurers. Policyowners were awarded cash, stock and policy credits exceeding $100 billion in a wave of demutualizations, which have been regarded as socially desirable.

Other large mutual life insurance companies decided to not return their accumulated profits to policyowners. The boards of directors of these other companies, which include Northwestern Mutual, Massachusetts Mutual, New York Life, Pacific Life, Penn Mutual, Guardian Life, Minnesota Life, Ohio National Life, National Life of Vermont, Union Central Life, Acacia Life, and Ameritas Life decided to either remain mutual or they decided to form mutual insurance holding companies. In either case, policyowners were awarded nothing. At the end of 2006 there were less than 80 mutual life insurers in the United States whose continued existence as mutuals rests largely on the financial ignorance of their policyowners….

A mutual holding company is a hybrid concept, part stock company and part mutual company. Technically, the members still own over 50% of the company as a whole. Because of this, they are generally not significantly compensated for what would otherwise be viewed as loss of property. (This is also why many jurisdictions, including Canada,[1] disallow the formation of MHCs.) The core participants are isolated into a special segement of the company, still viewed as “mutual”. The rest is a stock company. This part of the business might be publicly traded, or held as a wholly owned subsidiary until such time that the organization should choose to go public.

Mutual holding companies are not allowed in New York where attempts by mutual insurance to pass permissible legislation failed. Opponents of mutual insurance holding companies referred to the establishment of mutual holding companies in New York as “Legalized Theft.”

Categories: Economics, research Tags:

Deriving Utilitarianism from First Principles

May 13th, 2008 No comments

(revised May 14, May 16, June 2, in light of the objection that the argument doesn’t have several people’s small gains justifying one person’s big loss; that characteristics shouldn’t matter)

I heard Professor Terence Irwin talk on ‘Prudence, morality, and the importance of persons: a dilemma for Sidgwick’ yesterday. He said that Sidgwick does a poor job of moving from his two axioms to utilitarianism, which is correct. Even the axioms aren’t spelled out very clearly, it seems. Here’s a fix-up.

Axiom A1. Pareto Improvements Are Good. If you can make one person better off without hurting anybody else, do it.

Axiom A2. Impartiality. Whether a change in welfare is good or bad shouldn’t depend on the identity of the particular person affected or any personal characteristics. more precisely, whether an action that changes welfare by amount A affects person i instead of person j does not affect the action’s moral goodness.

Result R1. By A1, if Jones can take an action that increases his welfare by 800 utils, he should do it.

Result R2. Suppose Jones can either do nothing or take the trio of actions T1:

Action X reduces Jones’s welfare by 2000 utils.

Action Y1 increases Jones’s welfare by 700 utils.

Action Z1 increases Jones’s welfare by 500 utils.

By R1, Jones should take the trio of actions T1.

Result R3. Suppose Jones can either do nothing or take the trio of actions T2:

Action X reduces Jones’s welfare by 2000 utils.

Action Y2 increases Smith’s welfare by 700 utils.

Action Z2 increases Lee’s welfare by 500 utils.

By A2 and R2, Jones should take this trio of actions T2.

Result R4. R3 would remain true for any trio of numbers (a,b,c) such that a is less than b+c. Thus, we have utilitarianism.

A possible flaw: Trio T1 has the same identity label for both actions, whereas Trio T2 has a different identity label for each action. Does A2 really require them to be treated in the same way?

Axiom 2 is different from saying that welfare pairs (2,3) and (3,2) are equivalent, and stronger. Even if (2,3) and (3,2) are equivalent, that does not imply that (3,3) and (2,4) are equivalent. Using Axiom 2, though, if start by saying (2,3) and (3,2) are equivalent, then the actions of “give 1 to person 1″ and “give 1 to person 2″ are equivalent, so we do get the implication that (3,3) and (2,4) are equivalent. Probably we can derive that (x,y) and (y,x) are equivalent too, from Axiom 2, though I don’t see how immediately.

Now that I think about it, Axiom 2 is not so different from the contractarian axiom that if a person is willing to accept a gamble, then he should not complain if he is the loser. A contractarian introduces probability, though, and so needs expected utility perhaps– or at least some comment on what happens to non-expected-utility maximizers.

Categories: Economics, philosophy, research Tags:

Seminar Presentation Ideas

May 12th, 2008 No comments

I thought of two ways to improve seminars today:

1. Put all my references on a slide, so people can tell me if I am missing anything. Do this AFTER the model is presented, so they know what is relevant.

2. Start the presentation on the blackboard and put the notation and main proposition there, and diagrams, for later reference. Then go to the projector. This is a substitute or supplement for a handout.

Categories: research Tags:

November 26th, 2007 No comments

Democracy: Elections and Referenda. At my workshop today at the business school, the issue came up of whether people’s votes express their preferences or whether they are too easily misled. Can we decide the intensity of feeling over abortion by seeing which candidate wins an election? A referendum would not work as well, since it is a vote on a single issue, so there is no opportunity for tradeoff. Everyone who voted would vote their preference, intense or mild, and the only opportunities for intense preferences to count for more would be in turnout and in spending on advertising to convince those with mild preferences. Interestingly enough, in such a case the presence of many almost indifferent voters could be very helpful in making the vote display intensity too. Someone who is almost indifferent is up for grabs, and so the intensity of other voters can obtain a double vote where it could not if the voter had somewhat stronger views. The danger from a tyranny of the majority is greatest not when there is a large number of voters with weak views, but where there are few such people, but many whose views are just strong to induce them to vote on their own initiative and to be immune to persuasion by the efforts of those with intense feelings.

Categories: politics, research, social regulation Tags: