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Chicago’s Booth school surveys select Economics faculty (the IMG panel) on a variety of questions. Panelists are emailed a question and respond electronically, if so moved. They are asked to state whether they agree, strongly agree, disagree, are uncertain etc. as well as provide a level of confidence and, if they wish, some words of explanation. Here is one of the questions:
Using surge pricing to allocate transportation services — such as Uber does with its cars — raises consumer welfare through various potential channels, such as increasing the supply of those services, allocating them to people who desire them the most, and reducing search and queuing costs.
The correct answer to this question is: it depends. See below for the explanation. Back to the IMG panel. What is its purpose? According to the web site:
This panel explores the extent to which economists agree or disagree on major public policy issues. To assess such beliefs we assembled this panel of expert economists. Statistics teaches that a sample of (say) 40 opinions will be adequate to reflect a broader population if the sample is representative of that population.
Yes, but what is the underlying population? The IMG site does not say, instead it summarizes the cv’s of the sample:
The panel members are all senior faculty at the most elite research universities in the United States. The panel includes Nobel Laureates, John Bates Clark Medalists, fellows of the Econometric society, past Presidents of both the American Economics Association and American Finance Association, past Democratic and Republican members of the President’s Council of Economics, and past and current editors of the leading journals in the profession. This selection process has the advantage of not only providing a set of panelists whose names will be familiar to other economists and the media, but also delivers a group with impeccable qualifications to speak on public policy matters.
This is the high table of Economists, a group so select that the sample probably is the population. Why bother with the remarks about sampling?
How did the panelists respond to the surge pricing question? One strongly agreed with the statement but with a level of confidence of 1 (which I think is the lowest). This panelist also provided an explanation that makes clear that the reported confidence level was incorrect. Another, offers an `Agree’ with level of confidence of 3. Why not declare `uncertainty’? Or is the panelists trying to say: generally true but with some exceptions. The other responses suggest busy people trying to be helpful (recall Truman) on a task that is low priority for them.
Only one panelist provides an answer that can be interpreted as `it depends’. That panelist reports being uncertain with a level of confidence of 10. This panelist also provides an explanation:
`Consumer plus producer surplus should rise but in the absence of competition consumer surplus may not. With competition consumers will gain.’
Two make things concrete, consider a monopolist who faces two states of the world characterized by two demand curves: peak and off-peak, with off-peak state occurring most of the time. Now compare consumer surplus in two scenarios: same price in both states of the world, different price in each state. In which scenario will consumer surplus be higher? Which is a lovely intermediate micro question! In addition, if buyers are liquidity constrained, a price mechanism will not efficiently match rides to riders who value them the most.
I think the answer to the question posed reveals less about agreement on policy than the default assumption of the responder about the nature of the underlying market (passenger transportation).
Because I have white hair and that so sparse as to resemble the Soviet harvest of 1963, I am asked for advice. Just recently I was asked about `hot’ research topics in the sharing economy. `You mean a pure exchange economy?, said I in reply. Because I have white hair etc, I sometimes forget to bite my tongue.
Returning to topic, the Economist piece I linked to above, gets it about right. With a fall in certain transaction costs, trades that were otherwise infeasible, are realized. At a high level there is nothing more to be said beyond what we know already about exchange economies.
A closer looks suggests something of interest in the role of the mediator (eBay, Uber) responsible for the reduction in transaction costs. They are not indifferent Walrasian auctioneers but self interested ones. eBay and Uber provide an interesting contrast in `intrusiveness’. The first reduces the costs with respect to search, alleviates the lemons problem and moral hazard by providing information and managing payments. It does not, however, set prices. These are left to participants to decide. In sum, eBay it appears, tries to eliminate the textbook obstacles to a perfectly competitive market. Uber, also does these things but more. It chooses prices and the supplier who will meet the reported demand. One might think eBay does not because of the multitude of products it would have to track. The same is true for Uber. A product on Uber is a triple of origin, destination and time of day. The rider and driver may not be thinking about things in this way, but Uber certainly must in deciding prices and which supplier will be chosen to meet the demand. Why doesn’t Uber allow riders to post bids and drivers to post asks?
Three items on copyright and revenue all on the same day.
First, is Taylor Swift’s open letter to Apple upbraiding them for not paying royalties to artists for their music during the trial period of its new streaming music service. It caused the weenies at Apple to change their tune.
Second, a high court ruling in the UK which erased an earlier UK decision that made it lawful for users to copy purchased content for personal use. Related is freedom of panorama which permits the photographing of copyrighted buildings and sculptures in public places. Up for vote this summer before the European parliament is legislation that would restrict such rights.
The Swift letter echoes the points she made earlier when she pulled her wares from Spotify:
“In my opinion, the value of an album is, and will continue to be, based on the amount of heart and soul an artist has bled into a body of work, and the financial value that artists (and their labels) place on their music when it goes out into the marketplace.”
One of the more poetic renditions of the labor theory of value I’ve read. Here is another line from the same missive:
“Valuable things should be paid for.”
No. Its the added value of a good or service that commands a premium. Pearsall-Smith got this right when writing of the novelists of his age.
“The diction, the run of phrase of each of them seems quite undistinguishable from that of the others, each of whose pages might have been written by any one of his fellows.”
Thus, the question is whether the heart and soul each artist bleeds into their work serve to differentiate it in a way that matters from others. The effectiveness of music recommender systems suggests not.
Enough of `Swiftian’ logic and lets turn to the UK high court ruling. The Electronic Frontier Foundation complained that it contained more economic theory than common sense. An irritating remark as the level of theory barely exceeded that you would find in an intermediate micro-economics course. It makes me wonder whether the pundits at the EFFs ever went to college.
The ruling is a perfect example of how consistency can become a procrustean bed. The UK government had earlier made the duplication of copyrighted material for personal use legal. It claimed that its reasons for doing were consistent with an EU copyright directive that requires the copyright holder to be compensated for forgone revenues lost to copying. The Judge concluded that the government’s rulings were, in fact, inconsistent with the EU directive and overturned it making copying for personal use illegal.
The law, as Dickens said, is an ass (the quadruped not the posterior). So, lets focus on the economics. The ruling by the way quotes Varian’s 2005 piece in the Journal of Economic Perspectives as well as Boldrin and Levine.
Suppose I sell you a song in a medium which is costly to reproduce and transport. If you want to listen to the song both at home and in your office you must purchase two copies. Now, a sea change. The medium on which the song is transmitted changes. The cost of duplication and transport is now zero. Am I worse off? If I am, then under the EU directive I should be compensated for this loss.
With this sea change, you would buy one fewer copy. However, I, recognizing the sea change gives you the same benefit as buying two copies, can simply raise my price to account for this. The High court ruling called this pricing-in and the case turned upon whether the music seller, me in this example, could perfectly price-in. If not, then under the EU directive I am entitled (bizarre, I know) to compensation for lost profits.
If the sea change allows you to consume music in ways you previously could not (in the bathroom, in your car at night etc.) then it seems obvious that I could anticipate this and price-in. If the sea-change allows you to copy and distribute my music costlessly, then, I may be forced to sell my music at a discount or withhold it (see the Varian paper for intermediate cases). Whether I am harmed or not depends on whether you intend to use the sea change for personal use or to compete with me.
Interestingly, the discussion in the ruling as well as Varian’s paper ignores those who own the devices for transmitting, duplicating, storing and playing the music. Lets use the example in Varian pg. 11. You are willing to pay $20 for home use of a CD and $10 (actually 10 to break ties) for office use. The cost of copying is initially infinity.
The revenue maximizing price is clearly $20 for a CD, unless I could use a 2-part tariff. Now a third party develops a technology for copying CDs that is simple and convenient. Copying is now legal. Under the pricing-in story I should just charge $30 (assuming you have the technology). I’m better off and you are no worse off. However, we have ignored the owner of the copying technology. You, the music consumer have $30 to shell out. I can certainly capture $20 of it but to capture the remaining $10, I need the owner of the copying technology. Any simultaneous split of the $10 is a Nash equilibrium. The point is that the music and the technology that allows one to copy, format shift etc complements the music itself. That $10 is a joint gain to the owner of the song as well as the owner of the copying technology. One might argue that the owner of the copying technology is entitled to the full $10 as it is her innovation that allowed one to capture it. Hence, the copyright holder, me in this example, suffers no loss from the fact you can now copy my music.
The first sound in the mornings was the clumping of the mill-girls’ clogs down the cobbled street. Earlier than that, I suppose, there were factory whistles which I was never awake to hear. There were generally four of us in the bedroom, and a beastly place it was, with that denied impermanent look of rooms that are not serving their rightful purpose. One afternoon, early in October, I was invited to black coffee at Fritz Wendel’s flat. Fritz always invited you to ‘Black coffee’ with emphasis on the black. He was very proud of his coffee. People used to say that it was the strongest in Berlin. Fritz himself was dressed in his usual coffee-party costume–a very thick white yachting sweater and very light blue flannel trousers.
This, then, is the penalty for writing for the masses. As the writer goes out to meet them half-way he is joined by other writers going out to meet them half-way and they merge into the same creature-the talkie journalist, the advertising, lecturing, popular novelist.
Fox News and CNN have been in knots recently about how to allocate scarce debate slots to the many Republican pretenders to the oval office. Should Poll numbers be the criteria? What about gender, race, state office etc. etc. There is a simple and transparent way to allocate the slots: an auction. Neither CNN or Fox are charities. If the debates are a public good, there is no reason why Fox and CNN alone should forgo profits to host them. They should, instead auction off the rights to participate in the debates.
What design questions would have to be answered? First, how much time to allocate to the debate, i.e., what is the supply of the resource to be allocated? Second, should one auction slots or time. For example, should it be 10 slots of equal time lengths in a 2 hour time period? Or, should one allow the bidders to bid on the actual amount of time they would get in the 2 hour period? Are candidates the only ones allowed to bid, or can anyone submit bids on their behalf? Can one bid to deny time to the candidates? Actually, as these are not debates at all, but parallel news conference, perhaps one should auction off the right to answer questions. In real time. That would be entertainment!
Is it the business of the US Government, indeed any government to police FIFA? Lets start with the legality of bribing of FIFA officials? Under a variety of laws related to commercial bribery, bribing them is indeed illegal. Were I to bribe the CEO of a public company to sell me, below cost, the wares of her company, it is right and proper for the shareholders to have the ability to punish the CEO. However, is it the obligation of the Government to police the CEO for the shareholders? When a FIFA spokesperson announces that it is the damaged party in this, why aren’t they mounting the investigation and bringing charges against those accused of accepting bribes?
When someone burgles my house, the state, upon being informed will mount an investigation. In the event they should identify the burglar the State will, on my behalf, prefer charges and prosecute. The State does not charge me a `user fee’ that is directly tied to the efforts it has made on my behalf. The expenses of the State are covered through my taxes. Were each individual to bear the full costs of investigation, prosecution and punishment, few would elect to do so unless the private gains exceeded the costs. This in a nutshell is the public goods argument for why the Government should police FIFA.
Government resources, however, are limited. Not every crime reported is investigated with equal fervor. Not every suspect is pursued with equal vigor. We give the Government the discretion to decide how best to provide the `public good’. What is the argument for prioritizing the prosecution of FIFA officials for accepting bribes? A New Republic article by John Affleck suggests it is to preserve the `integrity’ of the game. I suppose the Bravo network is next in line for attention to preserve the `integrity’ of reality TV. Affleck goes on to quote Transparency International:
“Sport is a multi-billion dollar business engaging billions of people. It is also a global symbol of fair play and a source of great joy for many people on this planet, whether participating, attending or watching events,” the group’s introductory statement says. “With so much public involvement, political influence and money at stake, corruption remains a constant and real risk. Mounting scandals around match-fixing, major events and elections, and systemic deficiencies in sports governance are now so undermining public trust that it is reaching a tipping point.”
Billions of people can vote with their eyeballs. Read a book, watch Real Housewives of Atlanta, have sex, see a play. There are many ways in which we can spend our time while hanging around waiting to die. Soccer is just one. If Soccer is in danger of losing its audience surely this is a powerful incentive for FIFA `clean up’. The private benefits probably exceed the private costs of enforcement.
What if FIFA itself suffers from a collective action problem? Each official by themselves would prefer not to take bribes, but given everyone else is doing so, what is one to do? This is easily solved. Allow FIFA officials to be bribed. Instead of running beauty contests to decide where to hold FIFA events, auction off the right to the highest bidder. This can be done in two ways. Allow each FIFA official with a vote to auction off their vote to the highest bidder. Or, do away with the officials altogether and have countries bid directly for the right to hold FIFA events. Full transparency, no bribery and FIFA may be richer than before!
See the notice on the Game Theory Society website.
A word that Paul Romer used in a recent piece in the Papers and Proceedings of the AER. Its inspired, no doubt, by Stephen Colbert’s notion of `truthiness’. Romer defines it as
Like mathematical theory, mathiness uses a mixture of words and symbols, but instead of making tight links, it leaves ample room for slippage between statements in natural versus formal language and between statements with theoretical as opposed to empirical content.
Romer is not the first to coin the term. Credit goes, I think, to Jordan Ellenberg. Ellenberg defined it as
…..a series of fervent gestures that gives the impression that mathematical ideas are being expressed, but doesn’t actually deliver the goods.
The recent turmoil in Baltimore and the news of Ray Fisman’s impending move to Boston University reminded me that he (along with Tim Sullivan) had penned a column for Slate on Jan 7, 2013 entitled:
In hindsight, the title seems ironic. The article itself is an excerpt from the author’s book on Organizations (in the genre pioneered by Freakanomics) and can be interpreted as illustration of Goodhart’s law. The article itself does not align perfectly with the title. Apparently, what the Baltimore PD has to teach us is what not to do as the following quote suggests:
To illustrate the double-edged sword of arrest incentives, Moskos recounts the example of a fellow officer who decided to set a record for monthly arrests. His plan: lock people up for violating bicycle regulations. At night, all bikes need a light. The officer would stop cyclists in breach of the bike light rule (which was most of them), ask for ID, and pull out his pad to write a citation. Most riders, though, were biking without ID, and since all offenses become arrestable without identification, the officer’s little scheme netted 26 arrests in a single month. A record. His sergeant was thrilled, telling Moskos, “Look, I don’t know what his motivations are. But I think it’s good. He’s locking people up, which is more than half the people in this squad.”
Having caught your eye, I direct you to an article in the April 9, 2015 edition of the Grey Lady. It discusses attempts by various countries to boost domestic birthrates. The same issue had been considered earlier by Noah Smith. There are two questions lurking here. First, what is the optimal population size for a country? If the goal was to shrink the population then a declining birth rate is not a bad thing. Suppose the goal is keep the population fixed, because, say of pension obligations. Then, one wants a replacement birth rate of roughly 2 per couple.
If the birth rate is below the target, what should one do? Interestingly, I cannot recall anyone I have asked or read who does not turn to Government interventions of various kinds. Noah Smith, for example, only discusses Government interventions before concluding one should imitate the French. If the birth rate is below what is optimal for society, why doesn’t the market take care of it? Do we have a missing market? Is this a public goods problem? (If so, then, Mankiw who is often castigated for being a selfish beast, is, in this case, an unstinting provider of public goods, see here.)
Analogies are sometimes helpful (if biology is the study of bios, life; geology is the study of geos, earth, what does that make analogy?). Farmers plant crops and after a period, the fruits of their labor are harvested and sent to market. The Farmer must anticipate what will be demanded in the future to decide what to plant now. What if she plants turnips when what is desired are parsnips? This problem is solved with a futures market for parsnips (or turnips or pork etc). Why not a futures market for babies? Those who want warm bodies in the future to support them in their dotage pay for babies now. Swiftian, I know, but interesting to consider. Once one thinks about how to implement the idea, difficulties emerge. One might, for example, be concerned with moral hazard on the part of parents. However, these same difficulties are present even with various Government subsidies.