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On one hand, randomized experiments with a treatment and a control group are a very clean and effective way to determine the effects of a treatment. On the other hand, addressing the logistical caveats necessary in order to get a proper result is not always possible, as shown above. So let’s ruin the joke:
Technically, we don’t know whether the experiment in the cartoon is in fact double-blind, since, well, we don’t know whether the experimenters can tell who they are giving lot of sex to and who they are giving a placebo. (So many bad ways to envision this experiment…) There, joke ruined. But I’ll try to make it up to you…
Obviously, not very trial can be double-blind or even blind, but sometimes scientists can be super creepy in order to achieve scientific validity. For example, I bring you…wait for it…placebo surgeries!
A total of 180 patients who had osteoarthritis of the knee were randomly assigned (with their consent) to one of three groups. The first had a standard arthroscopic procedure, and the second had lavage. The third, however, had sham surgery. They had an incision, and a procedure was faked so that they didn’t know that they actually had nothing done. Then the incision was closed.
The results were stunning. Those who had the actual procedures did no better than those who had the sham surgery. They all improved the same amount. The results were all in people’s heads.
I guess I’m in favor of this, though I think that I’d be so pissed if I was in the placebo group…upon further reflection, however, I guess I wouldn’t really know so I wouldn’t have a reason to be mad, so now my brain hurts a little just thinking about it. (Perhaps it was the headache resulting from pondering the placebo surgery philosophy that distracted people from the knee pain!) That said, I definitely don’t want to think about how researchers could make this sort of experiment double-blind.
To quote from The Consumerist:
You may have noticed prices gradually falling at your neighborhood gas station over the last few months, what you may not know is that the price of oil has been falling even faster than that. Why aren’t station owners passing the savings on to drivers?
The article goes on to explain that gas prices for the end consumer have decreased by about a dollar, whereas the wholesale price of oil has decreased by 40 percent. To put this in a more reasonable context, I checked around in the neighborhood and saw that gas prices were currently around $2.70 per gallon. Applying the information in the article, I can conjecture that gas prices went from $3.70 to $2.70 per gallon- a 27 percent decrease. So yes, while consumers in fact aren’t seeing a proportional price decrease, the spread is not as dire as the article would like to make it seem, especially since oil prices are only one component of the gas stations’ overall costs (and we therefore shouldn’t expect to see a 40 percent price decrease even if all cost decreases were passed on to the consumer.) Besides, doesn’t Econ 101 tell us that cost decreases do in fact get shared between the consumer and producer? Behold:
(In case you forgot, the market is experiencing a supply increase thanks to OPEC, which drives down the input price of the gasoline that the stations sell.) Hopefully it’s clear that A will be bigger than B whenever there are typical upward-sloping supply curves and downward-sloping demand curves. The article goes on…
During that same period, investment bank Goldman Sachs estimates that gas stations’ profit margins are 18.5% higher than they were at the same time last year.
Well…duh? First off, I’m pretty sure that, mathematically speaking, profit margins are going to increase whenever price decreases are less than cost decreases. But, to think about producer welfare more generally, let’s go again to the picture:
A few flash backs to Econ 101 tell us the following:
Even though it’s not immediately obvious, I could make a convincing case that producer surplus does in fact go up as a result of the supply increase, which is consistent with the estimate given. (Note that, while profit and producer surplus are not technically the same thing, they do generally move together unless changes in fixed costs are involved.)
My point is that, while the facts in the article are most likely correct and fine, they do not imply that the big bad gas stations are screwing over the poor little consumer. Instead, what is happening is entirely consistent with the forces of supply, demand, and competition, which generally lead to good outcomes for consumers. (Yes, you can technically argue that market forces can still screw people from a fairness perspective and such, but I don’t think that that is what the tone of the article was getting at.)
Behaviorally speaking, there are reasons that gas stations (and other businesses) might not want to decrease prices when they experience a cost decrease- since consumers tend to be more sensitive to price increases than to price decreases, producers have an incentive to keep prices high because it often ends up being better in the long run than decreasing prices and trying to increase them again at a later point in time. (In other words, consumers hate price increases more than they like price decreases, so market actions aren’t perfectly reversible.) In this case, however, it’s not clear that this behavior is present to any significant extent since we’d be seeing what we see in the gas market even if producers weren’t thinking about this aspect of consumer psychology.
I’m beginning to think that the overlap in the Venn diagram of “Economic Theory” and “Good PR” is an area that my cat couldn’t resist trying to crawl through due to her obsession with small spaces. Case in point (re the economics, not the cat):
We are all concerned with events in CBD. Fares have increased to encourage more drivers to come online & pick up passengers in the area.
— Uber Sydney (@Uber_Sydney) December 15, 2014
Followed swiftly with the usual mea culpa…
Uber rides out of the CBD today are free for all riders to help Sydneysiders get home safely. See http://t.co/UIwoom25Bm for more info.
— Uber Sydney (@Uber_Sydney) December 15, 2014
On the plus side, Uber has started explaining the rationale behind the price increases. On the down side, people still hate it. On the…maybe up side, it appears that people may have progressed a bit from kidding themselves into thinking that regular prices and enough available supply is an option and are at least considering the relative suckiness of high prices versus a shortage:
@jbarro But everyone has a fair shot at the cars that are available, however limited they may be. Not just those with hundreds to fork over.
— Michael Zanchelli (@zanchema) December 16, 2014
To refresh your memory, the two options, in graph form, are the following:
If the higher price encourages more drivers to get off the couch (and empirical evidence suggests that it does in the case of Uber drivers- perhaps too well, since I always see drivers swarming around me when surge pricing is in effect), then Option B results in more people being able to flee hostage situations in Australia or whatever. Step 1 is to get people to understand this, but, while it’s a necessary step, it’s such a well-worn topic by economists that I find myself bored by even typing this. So let’s move on to step 2…
Step 2 is to think about fairness, which is a bit of a tricky subject because there’s no objective definition of fair. The tweeter above, for example, seems to think that a lottery system to allocate the cars would be more fair than a price system. On the other hand, suppose that, during this shortage, there’s a pregnant lady that needs to get to the hospital (and yes, there are no ambulances, just go with me here). Would everyone see the lottery system as more fair than a system where pregnant lady could convey that the car is more important to her than it is to other people? After all, that is what prices are supposed to do. But…I’m even half bored having this conversation, since prices as a rationing mechanism is also well-worn and often ignored/rejected territory. Why? Usually because of things like this:
“UBER charge, during a snowstorm (to drop one at Bar Mitzvah and one child at a sleepover.) #OMG #neverforget #neveragain #real” –Jessica Seinfeld
Yup, that’s Jerry’s wife. Which brings us to the thing that doesn’t bore me to tears (yet)…the notion that prices direct goods and services to those who value them the most is implicitly predicated on the assumption that an individual’s willingness to pay is a consistent reflection of how useful a good or service is to that individual. In other words, economists assume that, if person A is wiling to pay more for a good than person B, then that good must me more important/useful to person A than to person B. Using this logic, however, we could probably conclude that Bill Gates likes pretty much everything on earth (with the possible exception of women’s shoes, though I will be the first to admit that I don’t know his life) more than I do. Does he actually get more marginal utility from consumption than I do? Probably not, so the impact that income/wealth has on willingness to pay throws a bit of a monkey wrench into the basic economic analysis.
If we gave everyone the same amount of money and then conducted an auction for an Uber, I would be pretty confident that the Uber would go to the person who truly valued it the most, and I guess my optimistic step 3 would be to get people to accept that mostly hypothetical principle and stop assuming that price increases always make rich people hoard all of the cool stuff. (Though I do like to picture Warren Buffett going around and buying up all the $20 gas after hurricanes and laughing maniacally while doing so BECAUSE HE CAN.) In return, I will distance myself a bit from Econ 101 and acknowledge that, the more income/wealth equality exists in a market, the less likely the system of rationing via prices is to be either truly efficient or fair. Unfortunately, I don’t know where to go from there, since it’s unclear what a more optimal system would look like- a had a student once who suggested that everyone should write an essay about why they wanted a good so that a social planner could go through and decide which consumers got priority, but the transaction costs of such a system seem likely to outweigh the potential benefits.
Well, file this experiment in both the “cool” and “depressing” categories:
What’s in a Name: Exposing Gender Bias in Student Ratings of Teaching
Lillian MacNell, Adam Driscoll, Andrea N. Hunt
Student ratings of teaching play a significant role in career outcomes for higher education instructors. Although instructor gender has been shown to play an important role in influencing student ratings, the extent and nature of that role remains contested. While difficult to separate gender from teaching practices in person, it is possible to disguise an instructor’s gender identity online. In our experiment, assistant instructors in an online class each operated under two different gender identities. Students rated the male identity significantly higher than the female identity, regardless of the instructor’s actual gender, demonstrating gender bias. Given the vital role that student ratings play in academic career trajectories, this finding warrants considerable attention.
I think if you asked a random person what data they would want to see in order to determine whether female instructors are discriminated against (or, equivalently in this case, male instructors are discriminated for), they would ask for statistics related to the average ratings of male instructors and the average ratings of female instructors. Noting that the male average is higher, however, doesn’t really tell us anything about discrimination unless we can rule out the possibility that the male instructors are better teachers. (Unlikely, of course, but a theoretical possibility nonetheless. =P) If we wanted to do better, we could have people trained to objectively rate the instructors and then see whether the differential between the objective ratings and the student ratings is different for male instructors than for female instructors. Of course, this presumes the existence of an objective way to rate instructors and assumes that said trained observers are somehow immune from subconscious discrimination themselves. Ideally, then, we’d want to conceive of some Mrs. Doubtfire-type situation where an instructor could randomize across classes whether or not he or she was wearing an opposite gender disguise. If we did this, we essentially normalize for the teaching quality across classes and can therefore attribute difference in ratings to discrimination on the part of students.
This is basically what the paper did, sadly without the costumes, since the online courses were such that the instructors could just say what gender they were and didn’t have to back it up with visual evidence. (On a half sidenote, one of the reasons that I find this study depressing is that we are in a world where classes can be structured so that we never see the instructors. Technology being what it is certainly means that we can do better than that.) The researchers then did find what appears to be differential treatment for male versus female instructors. From the NC State press office:
To address whether students judge female instructors differently than male instructors, the researchers evaluated a group of 43 students in an online course. The students were divided into four discussion groups of 8 to 12 students each. A female instructor led two of the groups, while a male instructor led the other two.
However, the female instructor told one of her online discussion groups that she was male, while the male instructor told one of his online groups that he was female. Because of the format of the online groups, students never saw or heard their instructor.
At the end of the course, students were asked to rate the discussion group instructors on 12 different traits, covering characteristics related to their effectiveness and interpersonal skills.
“We found that the instructor whom students thought was male received higher ratings on all 12 traits, regardless of whether the instructor was actually male or female,” MacNell says. “There was no difference between the ratings of the actual male and female instructors.”
In other words, students who thought they were being taught by women gave lower evaluation scores than students who thought they were being taught by men. It didn’t matter who was actually teaching them.
The instructor that students thought was a man received markedly higher ratings on professionalism, fairness, respectfulness, giving praise, enthusiasm and promptness.
“The difference in the promptness rating is a good example for discussion,” MacNell says. “Classwork was graded and returned to students at the same time by both instructors. But the instructor students thought was male was given a 4.35 rating out of 5. The instructor students thought was female got a 3.55 rating.”
I agree that the promptness category is a good one to point out, since it’s one of the few places where the underlying behavior can be objectively measured. Maybe I’m exaggerating a bit, but I now kind of feel like my students think I have nothing better to do than get their papers returned immediately whereas male instructors have other big and important things to attend to. Anecdotally, I’ve certainly gotten the impression that not everyone is cool with a female instructor, due to the authority figure nature of the situation if nothing else. This sometimes shows up in evaluation comments that are not exactly of an appropriate nature- I think my favorite was “she would make a good wife if only she learned how to cook.” I don’t think the intention was to make me annoyed that the student assumed that I cannot cook, whereas in reality I am quite proficient thankyouverymuch- I’ll have you over for a nice short rib risotto if you don’t believe me.
I found it interesting that, even after reading an article about this experiment, a number of people responded with “but I gave a male/female professor a really low/high ranking that one time!” This observation doesn’t actually run counter to the findings of the study, of course, since the study is examining whether the low/high ranking would have been even lower or higher had the instructor been of the other gender. Some of the comments on the article about the study are also worth reading- not necessarily the ones about the small sample size, since statistical significance takes that into account, but about the lack of what social scientists would call “double-blind” protocols in the study- it’s entirely possible (and, again, depressing) that the instructors actually acted differently when they were presenting as male than when they were presenting as female.
I also have to admit that the line from the article about student evaluations being important “because they’re used to guide higher education decisions related to hiring, promotions and tenure” made me laugh due to its adorable naive nature. =P Perhaps someday we can also have a discussion about the usefulness of student evaluations in the first place, since I can think of a lot of ways to get higher student ratings that don’t actually increase learning. (In fact, there is evidence that lower evaluations correlate with higher performance in subsequent courses, suggesting that student punish instructors in the short run for making them do things that are good for them in the long run. But no, tell me more about the “student as customer” mentality…)
I would like to begin with a few (mostly personal) anecdotes:
I remember one time in NY when my friends and I got in a cab and the driver tried to refuse to take us to Brooklyn. (In case you are not aware, one of the rules for those operating NYC cabs is that they have to take you anywhere in the five boroughs, and people are encouraged to call 311 and report cabs who don’t follow the rules.) He was 100% in the wrong and yet I was somehow the bitch for having the nerve to point it out and make him do his job rather than stand like a sucker on Houston for another 30 minutes at 3am. (My friend gave him a large tip for his “kindness,” and it made me more than a little ragey.)
The other day, I got an email from my apartment building management stating that they are kicking cars out of the garage for two days for cleaning and that we will need to park elsewhere at our own expense. This didn’t strike me as either fair or legal, so i sent a (polite as I could muster) wtf to the building management. Turns out that, because there are two floors to the garage (with one floor getting cleaned per day), they could just have me park on the other floor for one of the days. In fact, they explicitly said that the only reason they tried to kick everyone out for two days was that it was easier for them logistically.
I had a friend in grad school that would put up a web page that linked to all of the textbooks that we used, and he would ask us to buy the books via the links so that he could get the Amazon affiliate commissions. (And, before, you ask, no, I don’t know whether this added up to a reasonable sum of money.)
So, what do these stories have in common? Well…in the first two cases, I felt like I was on the wrong side of a coordination failure, namely that these stories represent cases where it’s not necessarily utility maximizing for one person to raise a stink, but the harm in the aggregate is substantial enough that the lack of protest results in an inefficient outcome (read, bullying by the cab driver and management company with the expectation that people will be too passive or lazy to complain). Not surprisingly, in both scenarios it became pretty clear that I was outside the norm in voicing a complaint, even though I know full well that many people had a reason to complain. (I may have surveyed the parking garage to see how many people didn’t typically move their cars during the day, for example.) Granted, I did ultimately get my way in both scenarios, but having to argue to get what has already been dictated as the proper outcome imposes a psychological cost, especially when one is called a bitch in the process. (Furthermore, it’s not like my complaining kept the non-complainers from getting screwed.) In other words, my dream is to one day live in a world where people internalize the positive externalities of enforcing the rules of markets so that my frequency of raising a fuss can be minimized.
In related news, the third anecdote is about a grad-school classmate of mine named Ben Edelman. You know, this guy:
Last week, Edelman ordered what he thought was $53.35 worth of Chinese food from Sichuan Garden’s Brookline Village location.
Edelman soon came to the horrifying realization that he had been overcharged. By a total of $4.
If you’ve ever wondered what happens when a Harvard Business School professor thinks a family-run Chinese restaurant screwed him out of $4, you’re about to find out.
(Hint: It involves invocation of the Massachusetts Consumer Protection Statute and multiple threats of legal action.)
In this particular instance, I think my friend summed up the situation nicely with one of my all-time favorite movie quotes, located at around the 0:24 mark:
(In case you’re wondering, the Amazon anecdote is in no way relevant, I just thought it was funny and totally something that an economist would do.)
Not surprisingly, the Internet is none too happy with Edelman right now, and that actually worries me quite a bit. Hear me out- yes, Ben could have been more reasonable in his interactions (demanding treble damages in a non-courtroom environment when intent hasn’t been proven is more than a bit much, for example), and, even if he was concerned about the restaurant not pulling the same move on others, a demand to update the online menu would have likely been a better request than the $12 refund. My concern is that non-thoughtful people have a tendency to equate assholery with being wrong, which is a problem if it’s mostly the “asshole” demographic that raises a fuss on principle. By criticizing the what rather than the how, people are sending a message that it’s not okay to protest when the rules of the marketplace get broken, which in turn virtually guarantees that more rules will get broken.
Economists are quick to point out that well-functioning markets are very dependent on property rights, rule of law, symmetric information, and the like, and it’s just as important to be mindful of the fact that such features don’t just appear magically, they often persist because market participants police the behavior of other market participants. (The logistics of a value-added tax are even designed such that firms have incentives to enforce payment among themselves.) Think about it this way- we know that financial markets, to a large degree at least, are kept in check because there are market participants looking to profit off of market inefficiencies and, by doing so, they make the inefficiency disappear. In a similar fashion, markets are kept in check by market participants calling out bad behavior and thus mitigating the bad behavior, but the difference is that such enforcers don’t always have the personal profit incentives for doing so. Therefore, I propose two simple rules for continued market functionality:
1. If you come upon an individual who calls out a rule breaker so that you don’t have to, say thank you. Maybe buy them a cookie to help internalize the externality.
2. If you are going to call out a rule breaker, at least start by being polite. You can always escalate to assholery when you learn that the rule is being broken on purpose and/or the other party is unwilling to fix the error. I believe that’s what economists refer to as “option value.”
P.S. To those pointing out that the overcharge isn’t a problem because Ben can afford it, do you really want to live in a world where it’s ok to screw people as long as it doesn’t bankrupt them? As I’m writing this, I’m forced to confront the reality that it’s entirely possible that many people do. I’m going to go hide under the bed with the cat now.
Don’t ever say I don’t bring you interesting things in a timely manner…(ok fine, you can say that, mainly because it’s often true- sorry about that) Here’s Jean Tirole’s Nobel Prize lecture, delivered today (time zone changes between here and Sweden are a bitch, apparently, but if you get to it quick you can still watch the end live):
The talk, entitled Market Failures and Public Policy, gets at the fact that Tirole studies various forms of imperfect competition, which, since they give firms market power, are suboptimal for society and therefore fit under the heading of market failures. Tirole’s introduction is also a nice reminder that one doesn’t get a Nobel Prize for writing textbooks. =P
So…”causal Fridays” are totally going to be a thing now, because a. I think that program evaluation is cool and important, and b. I love nerdy puns. If you want to blame someone, go find Zach Weinersmith, since he totally started it. The general idea is that, each Friday, I’ll dig up a paper that has an interesting causal result and put it here for you to ponder (and hopefully discuss at work happy hours and hot Friday night dates). This week we’ve got a paper on peer effects and educational investments:
Leonardo Bursztyn, Robert Jensen
When effort is observable to peers, students may act to avoid social penalties by conforming to prevailing norms. To test for such behavior, we conducted an experiment in which 11th grade students were offered complimentary access to an online SAT preparatory course. Signup sheets differed randomly across students (within classrooms) only in the extent to which they emphasized that the decision to enroll would be kept private from classmates. In non-honors classes, the signup rate was 11 percentage points lower when decisions to enroll were public rather than private. Sign up in honors classes was unaffected. To further isolate the role of peer pressure we examine students taking the same number of honors classes. The timing of our visits to each school will find some of these students in one of their honors classes and others in one of their non-honors classes; which they happen to be sitting in when we arrive to conduct our experiment should be (and, empirically, is) uncorrelated with student characteristics. When offered the course in a non-honors class, these students were 25 percentage points less likely to sign up if the decision was public rather than private. But if they were offered the course in one of their honors classes, they were 25 percentage points more likely to sign up when the decision was public. Thus, students are highly responsive to who their peers are and what the prevailing norm is when they make decisions.
You can have the paper emailed to most university email addresses, or you can find a non-gated version of the paper by googling the title. Note that this paper fits the “causal” requirement in a trivial but clean way, since the researchers essentially run a randomized trial (not to be confused with a randomized controlled trial, which is apparently a subtly different animal) such that, in each type of classroom, they have equivalent groups where the only systematic difference is what type of privacy is offered. (It’s then pretty intuitive that any differences in outcome are attributable to the difference in treatment.)
From a content perspective, this is…depressing but not surprising? I specifically like that the researchers tested for the effect in both regular and honors classes, since I’ve thought for a while now that this difference in peer pressure and incentives is underappreciated and needs to be studied more in order to understand differences in outcomes such as educations levels, earnings, etc. (The idea isn’t entirely new- Roland Fryer has a theoretical analysis of “acting white,” for example, but it’s important to see the empirical evidence as well as observe that this effect doesn’t only pertain to minorities.) I think I started thinking about this when somebody asked me if I was bullied in high school- I went to what I will refer to as “nerd school,” so the notion hadn’t really occurred to me before, and I think I responded with “does Brian S. trashing me in his campaign speech for National Honor Society President count?” (Apparently the answer to that question is a resounding no accompanied by an eye roll.) But this got me thinking- given that people respond to incentives, where would I have ended up if I had been given negative reinforcement every time I excelled at something nerdy? It’s hard enough to stay in and do work now when my friends want to go out and give me crap for my choices, and I doubt that my self-control as a teenager was markedly higher than it is now.
As I am writing this, I am watching an episode of the Carrie Diaries (don’t you dare judge me, the outfits are fantastic) where the class vixen is afraid of people finding out that she’s smart because it would jeopardize her chances of becoming prom queen. (Oh, Donna LaDonna, you are so my spirit animal.) I guess that this is a decent strategy- as the paper result suggests, if one can’t change one’s environment, the best option likely is to keep one’s utility-maximizing choices secret. This is not ideal, but what worries me more is that these same environments can also provide incentives to not make the nerdy investments in the first place. If this is the case, then early outcomes lead to different environments (eg. regular versus honors classes) that provide different incentives, which then magnify the initial differences in outcomes.
From a policy standpoint, it’s unclear what the best way to mitigate this discrepancy in incentives is. On one hand, it’s possible that throwing the honors kids into the regular classes could create a critical mass of what I will call “achievement culture” and drown out the negative peer pressure. On the other hand, it’s hard to have students at significantly different levels of achievement in a single classroom, and, if such a critical mass of achievers is not reached, such a policy could just end in the honors students smoking weed in the parking lot rather than going to class. (On that note, somebody should investigate whether the relationship between weed and performance suffers from a reverse causality problem.)
The fall academic semester is quickly approaching, so it’s a good time to remind readers that one of the goals of this site is to give economics instructors interesting examples and discussion topics for their classes. Those of you teaching Principles of Economics this term (as well as those of you teaching Environmental Economics and other related topics) will probably get to a discussion of externalities somewhere toward the middle of the semester, but here’s something for those of you who are inclined to plan ahead:
The Coase Theorem is a crucial topic in a discussion on externalities, since it shows that, under certain conditions, an efficient outcome will result via bargaining regardless of how property rights are initially assigned. This is an important concept because the policy implication is something along the lines of “just do something to define property rights and the rest will sort itself out.” I usually illustrate the Coase theorem via the following scenario:
Let’s suppose that there are two people on an airplane, one seated directly behind the other. The person in front, let’s call him Josh (you’ll wee why later), values the ability to recline his seat at $20. The person in back, let’s call him Hamilton, values the space in front of him at $15. These valuations imply that the efficient outcome for the system overall is for Josh to recline, since doing so confers larger benefits on Josh ($20) than it costs Hamilton ($15).
If the airline assigns property rights to Josh, there is no room to bargain since Hamilton doesn’t value his space enough to be willing to offer Josh enough money to get him to not recline (i.e. more than $20). In this case, the result will be that Josh reclines. If the airline assigns property rights to Hamilton, a logical Josh would be willing to offer Hamilton somewhere between $15 and $20 in return for Hamilton allowing josh to recline his seat. A logical Hamilton would accept this offer, since he is getting paid more than he values his space, and the outcome would once again be that Josh gets to recline. As the Coase theorem postulates, reclining is the outcome that transpires regardless of how property rights are assigned- the difference between the two scenarios is what the payment structure looks like. (It should be acknowledged that the payment structure will of course affect how good the different parties feel about the eventual outcome, so the initial allocation pf property rights is still relevant from a distributional perspective.)
I like this example because it highlights why the assumptions underlying the Coase theorem are necessary. There are three main assumptions that are, in practice, not always satisfied:
With all of this in mind, consider the following incident:
According to the Associated Press, a United Airlines flight from Newark to Denver was diverted to Chicago’s O’Hare International Airport after two passengers, both sitting in the “economy plus” section of the flight – which comes with extra legroom – began arguing because the man prevented the woman sitting in front of him from reclining her seat.
The man was allegedly using a $22 device, known as the Knee Defender, that locks onto the tray table on the back of the seat, making it impossible for the person in front to recline. The device is banned on United Airlines flights, but the Federal Aviation Administration leaves it up to individual airlines to set rules for the device.
According to law enforcement officials, the man used the device to stop the woman in front of him from reclining while he was using his laptop. When a flight attendant asked him to remove the device, he refused. The woman directly in front of him then allegedly stood up and threw a cup of water at him.
The flight crew determined the situation had escalated to the point that the flight needed to make an unscheduled stop at O’Hare.
I think we can all acknowledge that “grounding the plane and inconveniencing everyone on board” is not the efficient outcome, so let’s examine how the assumptions of the theorem were not satisfied:
Those of you who have ever flown on Virgin America may have noticed that their seat-back menus offer the option to send a drink or other item to another passenger- I would really like to see what would happen if the company added the functionality to bargain for space via touchscreen…and, let’s be honest, Richard Branson totally seems like the guy to get on that- after all, he’s the guy who thought that this was a good use of resources:
Who am I kidding, that video is worth every penny.
Update: IT HAPPENED AGAIN. Do people not watch the news? Or take basic economics classes?
Since we talked about Burger King and tax inversion yesterday, I figured it was only fair to point out that Stephen Colbert was ahead of the trend, since he did a couple of tax inversion segments (though he calls them “corporate inversion” segments) on his show on July 30:
(To further give credit where credit is due, I learned about this because my significant other was watching it he was on the Stairmaster and I was stuffing my face with Thai food.) I find the point that Obama makes about having a headquarters in a foreign country while most operations are in the U.S. to be less than satisfying for two reasons- first, are there really that many large companies whose businesses aren’t sufficiently international that it only makes intuitive sense for them to be based in the U.S.? Second, about three seconds of Thai-food-enabled pondering led me to the suspicion that most policies of a “your business is here so your taxes are here” nature is going to take the business away rather than bring the taxes in. Remember kids, a decent tax policy has got to work with the incentives of producers and consumers, not against them. OR…and I know this is totally out there, but perhaps the U.S. could work on providing institutional value to the companies that it houses such that the companies would find it worthwhile to pay the higher taxes and stay put. In this way, Allan Sloan seems to be going down a reasonable path in the second video when he suggests that the benefits that the U.S. can provide to companies be matched with the responsibility to pay U.S. taxes.
People seem to like analogies, so I’ve potentially got one for you- say my apartment is more expensive than the ones in the building next door. It would be absurd for me to be obligated to keep renting the more expensive apartment, but I might choose to do so if the more expensive apartment were also nicer. If it wasn’t, it’s completely reasonable for me to move…but most likely unreasonable for me to expect to keep using the roof deck, gym, etc. of the building that I moved out of. On a corporate level, however, we basically do have a system where residents and non-residents alike can use the facilities, so it’s not surprising that we are seeing the behaviors that we are seeing.
I was reminded earlier today by Ronan “I’ll be damned if Frank Sinatra isn’t your father” Farrow that the world is a little obsessed with Burger King’s potential acquisition of Tim Hortons. (In case you aren’t familiar, Tim Hortons is sort of like a Canadian Dunkin Donuts, assuming of course that all of the U.S. looks like New England in terms of having a Dunkin Donuts every 12 feet. Also, betcha didn’t know that Burger king was already itself owned by a Brazilian private-equity firm named 3G Capital.) I have to admit that I get both confused and intrigued when I hear new names for concepts that already have perfectly good names. Case in point: the term “tax inversion” has gotten thrown around in basically every article about the deal to refer to the fact that one of the terms of the deal is that Burger King will move its headquarters from Miami to Canada, thereby avoiding U.S. corporate tax liability as well as U.S. capital gains taxes in some cases. In my day, this was referred to as a form of the deadweight loss of taxation.
Deadweight loss can generally be thought of as an economic black hole, since it measures the economic value that is lost when a market deviates from what maximizes the economic value created for society. With taxation specifically, the deadweight loss comes about because the tax reduces economic activity (and, as a result value created for producers and consumers) but then shafts the government as well since it can’t collect tax revenue on transactions that don’t happen. This intuition suggests that taxes create less inefficiency when they don’t cause consumers and producers to change their behavior very much. (An exception to this, however, exists with taxes to correct for negative externalities, since in that case reducing the amount of economic activity is actually good for society.) Unfortunately, what we seem to be learning as of late is that companies are getting really good at changing their behavior for tax purposes- check out this chart from Goldman Sachs and Business Insider:
If this behavior is strong enough, it could even be possible that, in addition to keeping business activity in the country, the U.S. could even increase the amount of revenue it collects in corporate taxes by reducing the tax rate. (In other words, it’s possible that the U.S. corporate tax rate is on the bad side of the Laffer curve.)
It turns out that Greg Mankiw was somewhat prescient in his latest NYT column:
One Way to Fix the Corporate Tax: Repeal It
If tax inversions are a problem, as arguably they are, the blame lies not with business leaders who are doing their best to do their jobs, but rather with the lawmakers who have failed to do the same. The writers of the tax code have given us a system that is deeply flawed in many ways, especially as it applies to businesses.
The most obvious problem is that the corporate tax rate in the United States is about twice the average rate in Europe. National tax systems differ along many dimensions, making international comparisons difficult and controversial. Yet simply cutting the rate to be more in line with norms abroad would do a lot to stop inversions.
I’m not sure that I’m as gung-ho about a broad consumption tax as Greg is, but the rest of the piece is pretty spot on. I mean, it’d be nice to get companies to chant “U-S-A” while throwing money at the IRS, but it’d be nice to live in a world of unicorns and rainbows as well, and the sooner we acknowledge that publicly-traded firms do in fact have a fiduciary responsibility to maximize profit in addition to a general disposition to do so, the more we can focus on fixing the game rather than hating the player.
But wait- is it possible that the headquarters move is not actually tax driven? Burger King asserts that taxes are not the main consideration…and for context, I guess it’s helpful to know that there are far more Tim Hortons locations in Canada than there are Burger King locations in the U.S., so it’s more of a coming together of equals than the term “acquisition” would suggest. in any case, I hope that this discussion as at least convinced you that there are more productive things for policymakers to do than try to arrange a boycott of Burger King.
UPDATE: All this talk of tax inversion suspicions is distracting us from the real horror that Tim Hortons is unleashing on the world.
I probably say this every year, but how is the summer over already? I feel like I go in with the best of intentions and then feel like I never accomplish enough by the time the end of August rolls around. This time, though, I swear it’s not my fault. (Ok, I’ve probably said that before too.) I just had an opportunity that was too interesting to pass up:
See? I know that’s a bit cryptic, but, for now, you can see a bit more about what I am working on here. (Fun fact: I located that URL by googling “Vulcan economics,” and now I kind of want to go back and read some of the non-relevant search results. =P) Special thanks to James Tierney from Penn State and Matt Kahn from UCLA for contributing to the nerdiness of the film set- especially James, who got roped into being an extra for one of the videos! And who puts photos together better than I do:
— James Tierney (@James_Tierney) August 10, 2014
Overall, I am super excited to see how the project comes out, since it really highlights how hard it is to explain economic concepts by showing rather than just telling but how powerful it can be when done right. So stay tuned!
One of the first things we generally cover in intro microeconomics is the determinants of demand- i.e. the factors that influence how much of a good we are willing and able to purchase. The price of a good is obviously one of these determinants, but so are the prices of what economists call “related goods.” related goods are broken down into two categories:
More precisely, economists define substitutes and complements in terms of the relationship between the price of a related good and the demand for the good in question. By this definition, the demand for a good decreases when the price of a substitute decreases (and vice versa). Conversely, the demand for a good increases when the price of a complement decreases (and vice versa). While this definition isn’t wrong per se, I’m surprised that few (if any) textbooks address how this relationship applies when substitutes and complements enter the world in the first place. After all, it stands to reason that substitutes entering a market decreases demand for an item, and complements entering a market increases demand for an item. (Hence the existence of iTunes and the Apple app Store, for example.) In order to reconcile this with the textbook explanation, I usually have to dance around some story about how a price of an item is technically infinite if a product doesn’t exist, which then implies that a product entering the market at a finite price is a form of a price decrease (which makes the official definitions apply).
Ok, now I’m even boring myself, but I think about this more than is reasonable and therefore wanted to put it on the Internet. Now what was my actual point…oh, right- sometimes it’s not obvious whether goods are substitutes or complements, and I am often reminded of this when I make up exam questions that I think are obvious and then have students students complain when they lose points. (I actually had a student rather convincingly argue that lemons and limes are complements because lemon-lime soda is a thing.) Therefore, it’s often helpful to work backwards from the data to infer whether goods are substitutes or complements. Take Broadway musicals and movies made from them, for example- substitutes or complements? On one hand, they might be substitutes because people don’t want to watch the same story twice. On the other hand, however, they could be complements because the widespread release of the movie could make people more interested in going to New York to see the musical. Even though I didn’t know which way the relationship would go, I wasn’t expecting to see this from the data:
(You can see more on the topic here.) So I am to believe that Chicago and Chicago are complements but The Producers and The Producers are substitutes? (Yes, I realize that the chart shows revenue and not demand specifically, but revenue seems like a reasonable proxy in a way that quantity of tickets does not because revenue accounts for price changes.) The article that this chart comes from gives more detail and, at a rough level, rules out the possibility that the differences are attributable to how long the musical had been out prior to the movie or when during the year the movie came out.
I thought I would point this out not only because it could make for an interesting classroom discussion but also because we tend to make a lot of assumptions about how goods are related when we discuss intellectual property protection, and it’s important to remember that these relationships aren’t necessarily obvious or even consistent, as evidenced above. Or, put more simply, why assume when you can actually go to the data and find out for real?
I swear I know how to use the Internet in general, but I somehow managed to type my name in the wrong place when trying to access my Facebook page, which mysteriously lead to Googling myself. (I don’t care how completely that verb enters the popular lexicon, it will always sound dirty.) Anyway, those of you who have ever, well, Googled anything know that a few image search results show up near the top of the first page- I noticed one of the photos and was like “heh, I don’t remember taking that photo…” Luckily, that is because the photo was originally part of a video and not because I am ridiculously unaware of stalkers, given that I was looking at the camera in said photo:
Anyway, the video…I did a few videos a while back for a production company that was looking to put together subscription-based materials for introductory econ classes, and the company made the video on natural monopoly one of their free preview videos, which you can see here. (Hopefully, watching this video will help you understand why I am posing with a Verizon truck, if it wasn’t already obvious.)
Or, tl;dw (didn’t watch, get it?): Regular monopolies get to be monopolies because of some usually artificial barrier to entry such as intellectual property protection. Natural monopolies get to be the only game in town because their fixed costs have already been paid (and are therefore sunk) and their marginal costs are low, so they can lower price in order to make it unprofitable for others to enter. In related news, the cost structure of natural monopolies means that it makes economic sense for only one to exist in an industry at a time, but regulation is often a good idea, since natural monopolies left to themselves result in the same inflated prices and reduced supply that regular monopolies do.
Okay, so my last post mentioned my desire for an Economist political party, but I don’t think that this is what I had in mind:
(See here if you are feeling procrastinatory and want to watch the second part of the segment.)
First off, I can’t help but focus on the fact that Rate My Professors is apparently fair game for information sleuthing, so, in all probability, the student review that said I would make a good wife if only I learned how to cook will come to light if I ever become famous and/or infamous. (And yes, I’m still pissed that the little sh*t incorrectly assumed that I can’t cook.) More generally, this story is making the ambivalence center in my brain hurt. Let’s take a quick inventory:
Overall, I don’t think I agree with Brat’s ideology (though I will admit that he does have his moments), but I do think that he’s better than the Tea Party label suggests. That said, I am frustrated that one side effect of this development is that everyone watching cable news is getting the phrases “Tea Party,” “economics professor,” and “Ayn Rand” in close proximity over and over, so I do understand and feel the desire to point out that this guy’s views don’t represent those of the typical economist. Especially as far as immigration is concerned.
The more I read about this, the more interested I become in how UNH’s Dan Innis will fare in his Congressional bid.
This is from a book on climate change, but the principle definitely holds more widely…(click for larger)
(thanks to EconLog for the images!)
This concept- that researchers don’t have the luxury of always running randomized controlled experiments (i.e. randomized controlled trials, or RCTs) to determine what affects what- is what leads a growing number of microeconomic researchers to search for good instrumental variables in order to, to a degree, simulate some form of randomization. In addition, researchers in microeconomics have been increasingly able to go out and perform field experiments in order to have a good deal of control over the data that they create and collect- just ask John List or Esther Duflo, for example.
In macroeconomics, however, it’s hard to even conceive of how experiments to answer most questions would be carried out. Say you want to analyze tax policy- do we tell people that if their social security number ends in an even number then they get a tax break (and that if it ends in an odd number they don’t) and then see what happens? In an immediate sense, I don’t need to do the experiment to tell you what’s going to happen- some combination of rioting and a deluge of of those petitions that the White House has to respond to if they get enough signatures, depending on how much initiative the nation is feeling at the time. Even in an economic sense, though, this experiment wouldn’t be very useful- after all, in order to get a clean result, we’d basically have to have the tax break consumers only interact with one another and the non-tax-break consumers to only interact with one another. (Just imagine the strife this would cause in households where one spouse has an even social security number and the other has an odd one.)
The experimental logistics problem only gets worse when we look to answer questions regarding economic growth- can we form an econ army and take over a country, divide it randomly in two, subject the two parts to different institutions or capital investment and observe what happens over time? Probably not, though the idea does dovetail nicely with my suggestion of an Economist political party. Luckily, we don’t have to, since countries like Korea have pretty much done this for us, in a way, and they provide interesting natural experiments to study.
If you don’t think that being limited to observational data is bad enough, just consider the fact that government economic policy is usually endogenous to the economic situation at hand- people think I’m crazy when I advocate for a government that conducts monetary and fiscal policy in an unpredictable manner, but that would actually be a big win, for research purposes at least. (Insert lame joke about the government seeming to want to help out researchers here.)
It’s no secret that many economists believe in the efficiency of markets- in fact, there’s a fairly well-known joke that goes something like the following:
Normal person: Hey look, somebody dropped $20 on the sidewalk.
Economist: Nonsense- that can’t be a real $20 bill, since, if it was, somebody would have picked it up already.
More generally, one feature of efficient markets is that all transactions that are profitable for all parties involved actually happen. This, however, doesn’t mean that no one can profit in an efficient market (which is why the economist in the joke’s logic is absurd), it just means that profit opportunities aren’t left on the table indefinitely in an efficient market.
The efficient-markets hypothesis puts a bit more structure on this concept, especially as it relates to financial markets (i.e. markets for stocks, bonds, etc.). The efficient-markets hypothesis, at its core, suggests that asset prices are “correct” in that they properly and rationally reflect all available information. This feature of efficient markets, according to economists, occurs precisely because market participants quickly take advantage of all of the ways to profit from asset mispricings, and these actions bring prices to their proper levels.
In another context, then, the efficient-markets hypothesis taken to the absurd extreme gets us this:
Full disclosure: I helped with this one, so you should probably blame me if you don’t like it. Also, my economist friends and I found a $10 bill on the ground at the zoo last week, and we actually picked it up- good thing I’m a behavioral economist, otherwise I might worry that my economist membership card would get taken away. (Then again, we did have a longer than reasonable conversation about how we should split the $10, so perhaps not.)
In related zoo news, economists understand the value of scarcity as it pertains to animals:
Also, I need this sign for my office…
…mainly because it would mean I get to research the economics of pandas.
First off, I will be the proud owner of this in 4-5 business days:
In related news, Stephen Colbert offers up an explanation for the above item as it relates to Thomas Piketty’s Capital in the Twenty-First Century:
In case you haven’t been following along, allow me to get you up to speed: French economist Thomas Piketty wrote a book that is essentially 600 and some odd pages on wealth inequality in French, it got translated into English and became the number one seller on Amazon. (Not number one in economics, number one overall, as Colbert notes. Colbert made a Harry Potter joke, but you can basically think of of the book as 50 Shades of Economics, though better written than the original- not that I would know. This is actually a big deal if for no other reason than it follows a lot of discussion on how nobody pays attention to economic scholarship.) Various scholars and media outlets, most notably the Financial Times, have accused Piketty of errors reminiscent of the Reinhart-Rogoff austerity paper debacle, but Piketty responded with what basically amounts to an intellectual smackdown. (You can read a far more elegant summary here.)
The r and g, as Piketty uses them, refer to the return on property and investments and the rate of economic growth, respectively, and he argues that r being larger than g leads to increasing concentration of wealth. This is mostly reasonable but initially seemed a little odd to me from a notation perspective, since, if I remember my macro correctly, r generally represents the real interest rate and g generally represents the growth rate of technological progress. BUT…I suppose that the real interest rate if capital markets are competitive is equal to the return on capital (i.e. the marginal product of capital minus depreciation) and, along a steady state balanced growth path, the growth rate of the economy is in fact equal to the growth rate of technological progress. (Now who’s deathly boring, Colbert?)
Let’s go to Piketty directly, since he can obviously explain himself better than I can do so on his behalf:
Actually, the book is more interesting and nuanced than that interview suggests (at least the beginning of it), since Piketty certainly does a lot more than rehash the minimum-wage debate.
While watching the Colbert segments, I couldn’t help but giggle at Colbert’s choice to commiserate with Tony Stark, since Stark and the actor that plays him show up in a related work on the subject of income inequality:
Yes, the Wealthy Can Be Deserving
by N. Gregory Mankiw
In 2012, the actor Robert Downey Jr., played the role of Tony Stark, a.k.a. Iron Man, in “The Avengers.” For his work in that single film, Mr. Downey was paid an astounding $50 million.
Does that fact make you mad? Does his compensation strike you as a great injustice? Does it make you want to take to the streets in protest? These questions go to the heart of the debate over economic inequality, to which President Obama has recently been drawing attention.
I’m not sure whether I would rather think that the significance of the bit was a conscious choice or that the world just happens to come full circle when appropriate. (Who am I kidding- I absolutely want the Colbert writers to read as much of the econ interwebs as I do.)
Traditional economic models assume that the utility, or happiness, one gets from consuming an item depends only on how fundamentally useful the item is to the consumer. Under this model, an item’s utility must be independent from the price that the consumer paid for the item, since it’s hard to envision a scenario where the price paid for an item actually affects how useful it is (holding item quality and such constant, of course). Our own intuition, on the other hand, suggests that we get psychological warm fuzzies (or, conversely, cold…uh, slimies?) when we feel like we got a good deal on an item.
Behavioral economists recognize this phenomenon, and they even have a name for it- “transaction utility.” Under the behavioral model, the total utility that that an individual gets from an item is the sum of “acquisition utility” (roughly speaking, what traditional economists just call utility) and “transaction utility.” This model is interesting because it suggests that consumers can be convinced to buy stuff that they don’t rationally like enough to buy by making them feel like they are getting a good deal. (I think I’ve mentioned before how I am convinced that transaction utility is what keeps Christmas Tree Shops from going under.)
Economist Richard Thaler discusses the concept of transaction utility in his paper “Mental Accounting Matters”. In this paper, he gives the following anecdote to illustrate the irrational behavior that transaction utility can cause:
A friend of mine was once shopping for a quilted bedspread. She went to a department store and was pleased to find a model she liked on sale. The spreads came in three sizes: double, queen and king. The usual prices for these quilts were $200, $250 and $300 respectively, but during the sale they were all priced at only $150. My friend bought the king-size quilt and was quite pleased with her purchase, though the quilt did hang a bit over the sides of her double bed.
So let’s think about this- from what we know, we can probably infer that the double size quilt would give the friend the highest level of acquisition utility, since people generally like to have items that fit on the other items they are designed to go on. But the consumer is lured away from that choice by transaction utility, which is likely highest with the king-size quilt, since it had the biggest discount. (More specifically, the king-size quilt has the highest sum, or total utility, even though it probably doesn’t have the highest acquisition utility.)
Now that you are primed with this lesson, let me ask you a hypothetical question: What would you do if you got a coupon that would give you any drink at Starbucks for free? If you answered this, you’ve likely missed the point of the above discussion:
Apparently that is a sexagintuple vanilla bean mocha Frappuccino, and it has a regular price of $54.75. (The container for said drink, in case you were wondering, is a vase that the customer brought from home.) I am very tempted to think that this beverage is the equivalent of the king-size quilt, since what person in his right mind actually finds this beverage to be coincident with rational optimal consumption, even when taking cost out of the picture? That said, I am willing to reconsider my judgment, given the subsequent news that the customer actually drank the whole thing…eventually. In related news, let’s discuss how this beverage and gout medication are likely to be complementary goods.