Alcohol and adverse selection

Another positive to drinking. Drinking can be helpful if you wish to reveal that you are a trustworthy person! Jan Heufer has a paper in which he shows that drinking can help people reveal that they are trustworthy since alcohol can act as a technology to give up some control over your actions and words which makes your actions and words more credible. Thus it helps you reveal your "type", thereby helping overcoming adverse selection problems. The abstract of the paper reads:

It is argued that drug consumption, most commonly alcohol drinking, can be a technology to give up some control over one’s actions and words. It can be employed by trustworthy players to reveal their type. Similarly alcohol can function as a “social lubricant” and faciliate type revelation in conversations. It is shown that both separating and pooling equilibria can exist; as opposed to the classic results in the literature, a pooling equilibrium is still informative. Drugs which allow a gradual loss of control by appropriate doses and for which moderate consumption is not addictive are particularly suitable because the consumption can be easily observed and reciprocated and is unlikely to occur out of the social context. There is a tradeoff between the efficiency gains due to the signaling effect and the loss of productivity associated with intoxication. Long run evolutionary equilibria of the type distribution are considered. If coordination on an exclusive technology is efficient, social norms or laws can raise efficiency by legalizing only one drug.

Markets and moral hazard

In the Marsden Jacobs report on the costs and benefits of alcohol (available here and here) Marsden Jacobs write, at paragraph 58:

They do not bear the full costs because friends, families, partners and governments act to offset these costs. A rational fully informed drinker would recognise and anticipate this support when making his consumption decisions. If the subsidy from the welfare system and/or from the support of other individuals were removed, the individual would make different choices. This is a form of moral hazard since drinkers (even if perfectly informed of the costs and risks) know that they will not bear the full costs. The individual drinker does not count the cost of these subsidies since they are a benefit to him, but they are a cost elsewhere.

In a reply to this argument at Offsetting Behaviour Eric Crampton writes,

Is there any consumption - cars, movies, anything at all - for which this would not be true? Do we say that the cost of McDonald's food is not internalized because people on welfare would buy less McDonald's food if they didn't get welfare payments? Do we reckon that Corvettes are horrible things because men in their late 40s buy them and impose those costs on their families? This is ludicrous.

and further writes,

On cost shifting to family and friends, I can't help but wonder whether their argument proves too much: all kinds of consumption decisions we make have effects on friends and family. I may spend too many late nights reading shonky alcohol policy reports and be grumbly the next day; if I had to bear all of the costs thereby imposed on my family, I might do less of that. But, of course, families have ways of internalising those effects: my wife rightly ensures as much.

Even if we accept the Marsden Jacobs argument that there is a moral hazard problem here we still have to ask what is the best way of dealing with it? We know from other examples of moral hazard that markets can, and do, deal with the problem better than the government does. Insurance companies, for example, deal with moral hazard via things like excesses or no claim bonuses. Most research shows that asymmetric information isn't a big problem for most markets. We can buy insurance or a good used car so the asymmetric information problems have to have been dealt with, at least, to a degree which allows the market to function. So why would government action be better in this alcohol related case?

As Eric notes Mrs C can internalise any costs that Eric imposes on his family from spending too many late nights reading shonky alcohol policy reports and being grumpy the next day and his friends at work can also take action to deal with the problem. What I don't see is how the government could do any better. Would a tax on alcohol reports really better than the actions of Mrs C and Eric's workmates?

The question that the Marsden Jacobs argument raises is that even if we accept the reasoning, is government action really the best way of dealing with the problem? Many would have doubts that it is.

Olympic Games have no long-term impact on employment

We are told about all the great things that having big sporting event in our country will so for us, but is any of it true? This posting comes from the Economic Logic blog:

Is it worth holding mega-event like Olympic Games? Repeatedly, they turn into a financial fiasco, yet new organizers keep believing they can pull it off. Usually, they manage to obtain some public guarantees or even financing on the grounds that such an event and the infrastructure will kick-start an economy and encourage tourism beyond the event.

Arne Feddersen and Wolfgang Maennig show that these beliefs are wrong, at least for the 1996 Olympic Games in Atlanta. They concentrate on the impact of these games on employment, and using monthly data they cannot find any impact in any sector, except for the sectors directly affected by the event, and only for the duration of the Games: retail trade, accommodation and food services, arts, entertainment, and recreation.

Now if only the organisers of events like the Rugby World Cup and the government could understand this point, it would save the taxpayers a lot of money.

Three weeks of EconTalk

Paul Romer of Stanford University talks with EconTalk host Russ Roberts about charter cities, Romer's idea for helping the poorest of the poor around the world. Romer envisions a city where the rules about property and safety and contract and so on are rules that allow individuals to flourish in an urban setting in contrast to the cities they live in now where so many aspects of economic and personal life are dysfunctional. Charter cities would be havens for the world's poor and could be created on uninhabited land in either rich or poor countries. This concept raises many difficult practical questions--some of them are discussed here along with how Romer came to be interested in creating the concept and how he hopes to bring it to reality.

Mike Munger of Duke University talks with EconTalk host Russ Roberts about the world of profit, money, love, gifts, and incentives. What motivates people, self-interest or altruism? Both obviously. But how do these forces interact with each other? Does relying on one always provide a stronger incentive than the other? Do charities, for-profit businesses or government agencies do a better job providing a good or service? Munger and Roberts have a wide-ranging discussion across these issues including a section where they discuss whether Christmas gift-giving and gift-giving in general is inefficient.

Diane Ravitch of NYU talks with EconTalk host Russ Roberts about the ideas in her new book, The Death and Life of the Great American School System: How Testing and Choice Are Undermining Education. Ravitch argues that the two most popular education reform movements, accountability and choice, have had unintended consequences that have done great harm to the current generation of students. She argues that the accountability and testing provisions in legislation like No Child Left Behind and similar reforms have actually corrupted the testing process, taken time away from subjects other than math and reading, and failed even to boost success in math and reading. She argues that the empirical record has provided little evidence that school choice as it has been implemented has boosted achievement. The discussion closes with a discussion of what reforms might indeed make a difference.

Banking panics and banking reform

From VoxEU.org comes this audio in which Michael Bordo of Rutgers University compares US banking panics in the early 1930s with panics in the shadow banking system and the repo market in 2007 and in investment banks and the universal banking system after Lehman failed. He argues that the bailouts of ‘too big to fail’ banks may lead to future crises, and discusses possible remedies.

The use of aggregates

In the previous post the following point is made about the use of aggregates in economics:

The “aggregates” of the mainstream economists are merely statistical totals. But one total does not affect another: what actually drives things is the specific actions of the individuals who face the specific choices. [...] Statistical formulae tell us nothing.

I'm not sure this is a uniquely Misesian idea. In work I'm currently involved in I say about whether or not we can know if we are in a "knowledge" or "new" economy:

However while this macro level [productivity] data can tell us that something has changed, it can not tell us what changed and why. The productivity data is the aggregated result of changes at the micro level, in this case at the level of the firm. Such changes require a microeconomic explanation.

So I'm not convinced that mainstream economists are as unaware of the uses and limitations of aggregates as the first quote would suggest. Also aggregates can tell us somethings. In my example the aggregate productivity data shows that for the US there was an increase in productivity post 1995. This alerts us that we need to go looking for a micro explanation of what caused this jump.

Ludwig von Mises – A Primer

A new book by Eamonn Butler from the IEA.

Mises brought new life and insights into the Austrian School of economics, and cultivated many of the leading Austrians today. He developed and systematised the Austrian view that, to understand economics, we must trace it back to the actions and motives of individuals as they make choices. The “aggregates” of the mainstream economists are merely statistical totals. But one total does not affect another: what actually drives things is the specific actions of the individuals who face the specific choices. Different people react differently to events – and the same person may react differently to the same choice at different times. Statistical formulae tell us nothing. To understand economics, we have to understand human values.

Mises applied this insight to a particularly important economic phenomenon, namely money. It is not some lifeless medium of exchange, nor even some objective measure of value, he insisted. It is an economic good like any other – the more of it that people value what it does for them (facilitating exchange), the more they demand (to keep in their wallets or bank accounts), and so the more its price (what we call its purchasing power) rises. Again, the behaviour of money is not mechanical but depends entirely on how individuals value it.

From there, Mises (along with Hayek) explained that booms and busts, like the crash we have just suffered, stem from governments and banks creating too much money and too cheap credit. That makes people feel wealthier and they spend more freely. Encouraged by this and by low interest rates, entrepreneurs invest more in new plant and equipment. But when the money and credit boom subsides, reality reasserts itself, and those investments are exposed as over-optimistic malinvestments that cannot be sustained. Factories are closed, plant scrapped, and workers fired. Only strict limits on the creation of money – such as a gold standard – can prevent such monetary booms and their inevitable, real, human consequences.

Mises also exposed the fact that socialism had no rational way of working out what to invest in, making malinvestment inherent in its system. Under socialism, the means of production are collectively owned, so never bought and sold. There is therefore no way to price them. We cannot know which of the millions of possible production processes are the cheapest – and effort and resources are wasted. The market economy, by contrast, places producers under daily pressure to deliver the highest-valued outputs for the cheapest feasible mix of inputs.

Ludwig von Mises – A Primer can be purchased here and downloaded here. While you are buying this book you should also purchase a copy of another Eamonn Butler book, Adam Smith - A Primer. Both well worth the money.

George Selgin interview

An interesting interview with George Selgin at the Daily Bell. Selgin is very interesting when discussing free banking:

Daily Bell: Can you please compare Austrian economics and free banking.

George Selgin: I suppose that all self-styled Austrian economists favor "free" banking, understood to mean banking with no special government regulations or barriers to entry. However [free-market Austrian economist] Murray Rothbard believed, and his followers continue to believe, that in the absence of special government interference all banks would hold 100-percent reserves – presumably of gold or silver coin or bullion –against any of their notes or deposit balances redeemable on demand.

Daily Bell: You don't hold that view?

George Selgin: Larry and I and other non-Rothbardian students of "free banking" generally take for granted that unrestrained market forces would favor "fractional" reserve banking. The disagreement has given rise to numerous articles from both sides. As these are readily available there's no point in my trying to summarize them.

Daily Bell: It's been a passionate debate because Murray Rothbard has proven a very powerful force in Austrian economics, especially in the US.

George Selgin: I am always shocked when I read some Rothbardian assertion to the effect that "if we had real freedom in banking, banks would be forced to hold 100 percent reserves, or something close to that," as if the question were entirely hypothetical and there was no empirical evidence to draw upon. In fact, there have been many past episodes of free banking, or of banking that was approximately free, and every one of them refutes the claim in question.

Daily Bell: That brings us to Scottish free banking.

George Selgin: In the Scottish free banking system, which flourished from roughly the mid 18th century to the mid-19th, banks often held gold reserves equal to less than 2 percent of their combined notes and demand deposits. Yet the system performed very well, with what were (in comparison to other arrangements both then and since) very meager banknote and deposit-holder losses. The Scottish people were in fact so trusting of their banks that they considered it a nuisance to be handed a gold coin rather than a Scottish banknote.

I must confess that I have never understood why free banking shouldn't be "fractional" reserve banking. As long as people know what the bank is doing and are ok with that, I don't see why "fractional" reserve banking couldn't be the result of free banking.

Debating the merits and morality of trade

Don Boudreaux at the Cafe Hayek blog notes that,

The eloquent, wise, and well-informed Scott Lincicome debates free trade with Ian Fletcher of the US Business and Industry Council). Very much worth the read.

Begin here.

Then go here.

And then here.

Is "unpaid" below the minimum wage?

This question is asked by Greg Mankiw on his blog. Mankiw points us to an article in the New York Times for discussion. Apparently, some government regulators think unpaid internships might violate minimum-wage laws. Mankiw also notes that the internship as the Council of Economic Advisers is unpaid! The CEA provides the US President with economic analysis and advice on the development and implementation of a wide range of domestic and international economic policy issues.

Why take an unpaid internship? The fun of it? May be, if you enjoy the work. But if it increases your human capital then it could make economic sense as well. An increase in human capital leads to better and more highly paid jobs in the future and so can increase the discounted value of your lifetime income stream.

EconTalk this week

Yochai Benkler of Harvard University talks to EconTalk host Russ Roberts about net neutrality, access to the internet, and innovation. Benkler argues in favor of net neutrality and government support of broadband access. He is skeptical of the virtues of new technology (such as the iPad) fearing that they will lead to less innovation. The conversation closes with a discussion of commons-based peer production--open source software and Wikipedia.

Repugnant transactions in New Zealand

Al Roth at his Market Design blog has a posting on Repugnant transactions in New Zealand: Easter Sunday sales. He quotes from the NZ Herald:

"The number of shops found to be trading illegally over the Easter weekend appears to be similar to last year, the Department of Labour says. The Department will consider the prosecution of 38 retailers after 19 were caught trading on Good Friday and another 19 on Easter Sunday.

"The issue of Easter trading hours remained a contentious issue this year, with business owners calling for more clarity on the laws. Auckland business advocate Cameron Brewer, who was lobbying this year for changes to the law, said "confusion reigned high" as some towns were banned from trading while others were not. Licensed premises, cafes, gardening and hardware stores were also a problem, he said. "Cafes can open if they have ready-to-eat food, but what is ready-to-eat food? More and more hardware stores, most of which have big gardening departments, are opening and facing $1000 fines, even though gardening shops can legally open on Easter Sunday. "This weekend there has been more confusion and frustration than ever before around Easter trading laws. It can't go on any longer."

Personally I don't find Easter trading at all repugnant, in fact I'm all in favour of it. I wonder just how many people really do find Easter trading repugnant. Perhaps we should do a comparison of the number of people who went to church over Easter versus the number of people who went shopping over Easter. The obvious solution is just let any business who wants to trade over Easter do so. Or do the Churches just not like competition when it comes to what people can do with their time.

The effect of lottery prizes on physical and mental health

In this audio from VoxEU.org Andrew Clark of the Paris School of Economics talks to Romesh Vaitilingam about his research on the relationship between income and health, which examines changes in the health and health behaviours (smoking and drinking) of British people who win prizes in the national lottery.

And for what its worth, if you win money on lottery you smoke and drink more! Just don't tell the health fascists, they will want to do away with lotteries.

Leaky homes and taxes

Recently both Matt Nolan and myself got irritated about this report of a comment made by North Shore City Mayor Andrew Williams with regard to government tax revenues from leaky buildings repairs,

Williams said the report showed that the Government's contribution to a rescue package should be at least 25 per cent because the tax receipts would make it cost-neutral.

Williams made this comment based on a report by economic consultants Covec which stated that about 25 per cent of spending on leaky building repairs would go back to the Government in tax revenue. I now see that the Covec website has the following statement on it:

Following work we carried out recently regarding leaky buildings, some comments have been made in the media which, unfortunately, have not accurately characterised our analysis. Consequently, we have provided the report below along with the following clarifications:

* Tax receipts from leaky building repairs should not be considered additional ‘windfall’ revenue. In the absence of spending on leaky buildings, the Govt would have collected revenue from other spending.
* The fact that the Govt obtains 25% tax revenue from spending on leaky building repairs does not provide an economic justification for the Govt to fund repairs to the tune of 25%, or any other amount. (Emphasis added.)
* However, there is a strong policy rationale for some form of Govt involvement. Although the costs of repairs has been estimated at approximately $8bn, the total economic cost of this problem, including dispute costs (e.g. legal expenses, expert witnesses, court time) has been estimated at $11.3bn. Consequently, without effective Govt intervention, the country could end up incurring $11.3bn in costs to fix an $8bn problem.
* From an economic perspective, the extent to which the Govt intervenes should be based on a full cost-benefit analysis, where the costs of intervention (i.e. costs of Govt funding) are compared to the benefits, which include avoided dispute costs and public health benefits of quicker repairs.

Well done Covec for correcting misinformation about their work.

The broken window fallacy

Tom Palmer and Austin Petersen from the Atlas Economic Research Foundation have put together a nice, short video looking at Bastiat's Broken Window Fallacy by asking why people think natural disasters are good for the economy.



(HT: Coordination Problem)

Academic writing in one lesson

I have had a copy of this cartoon on my door for years:

April fools posting from Aid Watch

Laura Freschi and William Easterly at Aid Watch put up the following post on April 1st:

IRINA News, April 1, 2010

Geneva, Switzerland—A coalition of aid agencies meeting in Geneva today announced a historic agreement to reform the international aid system. In signing the agreement, heads of aid agencies formally committed to accept the verdicts of independent evaluators of the programs and projects in their portfolios.

The new measures require the 39 multilateral and bilateral aid agencies to scale up only those programs with a proven track record of success. Programs shown by independent evaluation to have no impact—or a negative impact—on their intended beneficiaries will not be funded.

“An international agreement of this type is long past due,” said Mr. Poshtoff Van der Peet, the spokesperson for the coalition. “We believe this is a major step towards making sure our aid monies are spent in such a way that they actually reach the poor. Some of use may even have to go out of business, but this is a price well worth paying to make sure aid reaches the poor.”

We were very glad to see this story on the wires today. Because of this breakthrough, Aid Watch blog will discontinue operations itself effective immediately. Laura Freschi and William Easterly will shift to doing research on the fundamental determinants of long run prosperity, leaving the commentary on aid in the safe hands of independent evaluators.

I guess the Pope has become an atheist as well.

Reminder: 2010 Condliffe Memorial Lecture

2010 Condliffe Memorial Lecture

by Professor Charles Plott

Tuesday, 13 April, 5:30 - 6:30pm

Coppertop, Commerce Building, University of Canterbury.

The lecture outlines the development and use of laboratory methods, including the key discoveries and applications. The early science focused on the basic laws of supply and demand and how they operate to create a process of price discovery.The science evolved to include how information is transmitted through prices and the possibility of bubbles and market instability. More recent evolution finds the research focused on the design of competitive institutions to solve complex resource and environmental problems. The lecture focuses on the nature of the discoveries and how they are known through the application of laboratory experimental methods.

RSVP: Please RSVP, by Friday 9th April, for this event by contacting: Glenda.Lorimer@canterbury.ac.nz.

Cameras in taxis: why regulate? (updated)

I have written on this idea before when I pointed out How not to organise an industry. At that time the issue was that the Government was looking at forcing taxi companies to install cameras or screens in cars. It turns out that its cameras. I said in the previous post,

Why does Joyce think the government has to mandate anything? If the taxi drivers want extra safety equipment do they not have all the incentive they need to install it? After all it is the taxi driver's lives that are at risk, that would seem like the best possible incentive to attend to safety measures.

And I still say that. Matt Nolan at the TVHE blog takes a similar line. Eric Crampton claims its just an anti competition measure. May be, but show me who is being kept out of the market. Is the cost of a camera really so high that it will keep people out of the market? Don't see it myself.

More likely the taxi federation is just trying to score brownie points with the government so that when the federation wants something in the future the government will play ball. Either that or both the government and the taxi federation are working on "we must do something about this problems, this is something, lets do it" type logic.

Update: Not PC on Nanny Joyce on camera.

EconTalk this week

Arthur De Vany, of the University of California, Irvine, and creator of Evolutionary Fitness, talks with EconTalk host Russ Roberts about performance-enhancing drugs in baseball and Evolutionary Fitness, De Vany's ideas about diet and fitness. In the first part of the conversation, De Vany argues that there is little physiological or statistical evidence that steroid use increases home run totals in baseball. The second part of the conversation turns to De Vany's theories of diet and exercise. De Vany argues that our diet and exercise regime should take account of our evolutionary origins, an earlier time when we ate no grains and our exercise was a mix of intense activity punctuated by much milder activity. He argues that jogging is unhealthy and that we would live longer and feel better if we followed a different exercise routine than most Americans do today.