Waldegrave and mixed strategies

In my online History of Game Theory I have an entry dated 1713 on the first use of a mixed strategy,

In a letter dated 13 November 1713 James Waldegrave provided the first, known, minimax mixed strategy solution to a two-person game. Waldegrave wrote the letter, about a two-person version of the card game le Her, to Pierre-Remond de Montmort who in turn wrote to Nicolas Bernoulli, including in his letter a discussion of the Waldegrave solution. Waldegrave's solution is a minimax mixed strategy equilibrium, but he made no extension of his result to other games, and expressed concern that a mixed strategy "does not seem to be in the usual rules of play" of games of chance.

The reference I gave for the belief that James was the author of the letter was to a work by Professor Harold Kuhn,

On Waldegrave see Kuhn, H. W. (1968), Preface to Waldegrave's Comments: Excerpt from Montmort's Letter to Nicholas Bernoulli, pp. 3-6 in Precursors in Mathematical Economics: An Anthology (Series of Reprints of Scarce Works on Political Economy, 19) (W. J. Baumol and S. M. Goldfeld, eds.), London: London School of Economics and Political Science and Waldegrave's Comments: Excerpt from Montmort's Letter to Nicholas Bernoulli, pp. 7-9 in Precursors in Mathematical Economics: An Anthology (Series of Reprints of Scarce Works on Political Economy, 19) (W. J. Baumol and S. M. Goldfeld, eds.), London: London School of Economics and Political Science, 1968.

But James was not the only Waldegrave who could have written the letter. Professor David Bellhouse published a paper in 2007 arguing that Charles, not James, Waldegrave was the author of the famous letter. Charles was an uncle to James.

This morning I received an email from Professor Kuhn alerting me to the fact that Professor Bellhouse has been continuing his research into which Waldegrave wrote the letter and now believes that it was neither James nor Charles but Charles's brother Francis. In light of this I have amended my history to show Francis as the likely author of the letter.

Professor Bellhouse is working on a new paper about Montmort, Bernoulli and Waldegrave. I look forward to seeing this in print so we can get the whole story.

Justifications for foreign aid

From the Economist

Where poor people live, it turns out, makes a big difference to justifications for foreign aid. Research by Andy Sumner of the University of Sussex’s Institute of Development Studies has found that four-fifths of those living on $2 a day or less live in middle-income countries (such as China and India). Most of these countries can afford to help poor people themselves—and usually do. India, for instance, as provides subsidised food for the poor through the Public Distribution System and temporary work for anyone who asks for it through a rural employment guarantee act. Of course, this fact says nothing about justifications for aid in general. The Indians may be spending their money wisely, they may not. But it does undercut one obvious justification for foreign aid, since if national governments can afford to send the needed help, what do foreigners have to offer?

My first question about this would be, What about Africa? What percentage of the really poor are in Africa? Many of the African government may be too dysfunctional to provide aid to their own people, here foreign aid could help.

Blogging on stadiums

Thanks to Close Up the economics of stadiums is back in the news. I'm not sure what planet Gerry Brownlee is on when it comes to economics but his defence of a Christchurch stadium wasn't great. He didn't have any answers to the points raised against stadiums in the Close Up video.

Sam Richardson from the Fair Play and Forward Passes blogs starred in the Close Up video but he has also blogged on the topic of stadiums a number of times: see his label Stadiums. Eric Crampton at the Offsetting Behaviour blog has also blogged on stadiums, see his label Stadiums. I have also blogged on the economics of stadiums, see my label Stadiums.

Bradley on Enron

Over at EconLib Robert L. Bradley Jr writes on Enron: The Perils of Interventionism. His conclusion is

Enron was essentially a political company, not a free-market one. Ken Lay's creation would be unknown to history were it not for the distorted incentives from the government side of the mixed economy.

For classical liberals, Enron is a case study in support of the separation of government and business. There is egregious rent-seeking, whereby the company worked to shape political intervention for economic advantage. There is bootleggers and Baptist politicking, whereby Enron teamed with nonprofit groups to win support for what was in the company's narrow self-interest.

There is the peril of half-slave, half-free. Partially deregulated markets (such as with electricity in California) created a devil's sand box for profit-making that otherwise would have been absent in a free-market order.

Although an Enron could not have been predicted, it is yet another example of the unintended consequences of interventionism in the field of energy, as well as from the politicized accounting and tax systems that governed all corporations.

And then there is the ultimate consequence from the dynamics of intervention. Historically, the failures of the mixed economy have been an excuse to further politicize the economy. Richard Epstein warned: "The greatest tragedy of the Enron debacle is not likely to be the consequences of the bankruptcy, but from the erroneous institutional reforms that will take hold if its causes are not well understood." The Sarbanes-Oxley Act (2002) and the Bipartisan Campaign Reform Act (2002), enacted with Enron in mind, proved him right.

Both the false narrative and the real story of Enron impart lessons for intellectuals and pundits alike. Sound theory makes complex history intelligible; bad theory blinds us to recognizing what is there for the taking. Enron fooled many people in its active life, and it continues to fool in death. A true understanding of "Exhibit A" deserves to enter into the mainstream of thought.

No the usual way the Enron story is presented.

EconTalk this week

Neil Barofsky, author of Bailout and the former Special Inspector General for the TARP program, talks with EconTalk host Russ Roberts about his book and the government bailouts by the Bush and Obama Administrations. Barofsky recounts what he learned about how Washington works and the incentives facing politicians and bureaucrats. His book and this interview are a workshop in public choice economics. Along the way he unravels some of the acronyms of the last few years including TARP, TALF, and HAMP. The conversation concludes with lessons learned by Barofsky and what might be done in the future to prevent the corruption and ineffectiveness of past bailouts.

Firms reorganise to grow

Lorenzo Caliendo, Ferdinando Monte and Esteban Rossi-Hansberg have a new column up at VoxEU.org on the subject Firms reorganise to grow (by hiring workers that know and earn less). The basic idea is that firms that reorganise production to grow account for almost 40% of the value added created in the manufacturing sector. They add layers of management, increase by 7% the average hours worked in the firm, and reduce the average wage at pre-existing layers of managers or workers by 11%.

The Caliendo, Monte and Rossi-Hansberg column presents new stylised facts about the way firms organise production and explains how recent advances in economic theory can help to understand these findings.

In recent research (Caliendo et al. 2012) we identify a number of robust empirical patterns on the organisation of firms as well as the changes in this organisation as firms grow. We find that:

• Firms that expand (or contract) significantly are exactly those involved in a reorganisation process;
• Firms that do not reorganise typically change very little.

One part of the literature on firms thinks of firms as hierarchies of knowledge. This idea of a division of knowledge within a firm was first recognised by Demsetz (1988) and formalised by Becker and Murphy (1992). What these works suggested was simply a new interpretation of the role of the firm. Given that there are limitations to what a worker can know, the competence that a firm has to possess to produce must be divided into manageable portions and allocated between the workers. The actions of the different groups of workers are then coordinated by the firm’s management. Thus workers who produce on the basis of knowledge they themselves do not possess, have their activities directed by someone who does possess (at least more of) the necessary knowledge. This gives a rationale for management. As there are asymmetries in information among workers, management is required to coordinate the activities of the different groups of employees. If the workers knew everything about the production process they could carry out production without coordination. In this way, direction is a substitute for education, that is, a substitute for the transfer of the knowledge itself.

Caliendo, Monte and Rossi-Hansberg make the point that it is useful to interpret the data  if we think of firms as hierarchies of knowledge.

• Production requires labour and knowledge.
• Knowledge is embedded in individuals and is costly to acquire.
• The organisational problem is then the result of the limited time of individuals.

This time constraint implies that it is not optimal to have only very knowledgeable employees, but to have many agents with basic knowledge and fewer experts that focus on exceptions. Subordinates save the time of knowledgeable expert by dealing with the simple problems. This is the essential role of organisations.

• Firms are hierarchical with a large base of workers, who know and are paid less, and with higher layers of management with more knowledgeable employees that earn more.

The next question worth asking is, Are firms different in their organisation? Caliendo, Monte and Rossi-Hansberg present new evidence on this point.

We use administrative data from the French manufacturing sector on the balance sheet of firms and the occupations of their workers from 2002 to 2007. To construct a picture of the organisation of firms our empirical analysis is guided by Caliendo and Rossi-Hansberg (2012). We can distinguish up to three layers of management (supervisors, senior staff and CEOs) above clerks and blue collars whom we refer to as production workers.

Firms do, in fact, differ in their organisation. On average firms have 1.5 layers of management above their production workers, many small firms have only production workers, and about as many large firms have all three of them (the maximum we can observe). Larger firms (i.e. firms that employ more workers and add more value) tend to have more layers of management. This fact makes perfect economic sense. If an artisan wants to produce more, he or she can of course hire other workers that perform exactly his or her tasks, but it is better just to hire apprentices, who know only the most common operations (and are therefore cheaper), and use his or her own time to deal with more infrequent matters. Organisations allow exactly this leveraging of the time of managers through the extensive use of a less able workforce. The data shows that firms are hierarchical, in the sense that higher layers of management tend to have fewer employees and pay them more than lower layers.

Now we get to the point of reorganising a firm. The question is, When do reorganisations occur?

Looking at all the firms with a given organisation type (i.e. with the same number of layers of management), we find that the larger the firm, the higher the likelihood that it will reorganise its production by adding one layer (symmetrically, the smaller firms are more likely to contract their production by dropping one). This fact also makes economic sense. Firms can respond to a given increase in the demand for their product with or without a reorganisation. In the latter case, they just expand their production base, i.e. they hire more workers. By doing so, however, a strain is put on the time of the managers above them, who now would have to deal with more people (and more problems). Hence, firms expanding this way must have more employees at each layer and must pay them more (in order for them to be more knowledgeable and ask less). Hence, the average wages at all layers must rise. Among all the firms with a given organisation, those which grow in this way are the small ones, since they employ fewer employees and so expanding the knowledge of all of them is cheaper. In contrast, if the firm is relatively large, it makes sense to add one layer of managers and reduce the knowledge of everyone below. In this case, firms grow by reorganising.

Another advantage of a more extensive division of labour was noted as far back as Charles Babbage. In his book “On the Economy of Machinery and Manufactures” Babbage observed that the greater the division of labour with workers knowing less about the overall production process reduced the less time required for learning any requisite skills. This results in a lessening of the period during which a new entrant to the workforce would be relatively unproductive and unremunerative. Because less knowledge and training was required to learn to undertake a single operation, as opposed to that required to undertake many different operations, a new employee would more quickly reach a situation where he generates a profit for his employer.

Caliendo, Monte and Rossi-Hansberg now ask, Why is growth through reorganisation different?

The data tells us that when firms reorganise, they have a larger number of employees than they used to in all layers, but the average wage at all pre-existing layers falls. Following the logic above this drop in average wages has a very clear economic rationale. The objective of the reorganisation is exactly to economise on the knowledge of all pre-existing layers. Apprentices are hired exactly because they know less than the master, and can deal with the most frequent and basic issues. So firms that expand by reorganising pay their workers less, because they prefer to employ less knowledgeable workers.

Caliendo, Monte and Rossi-Hansberg conclude that

While, in our data, only about 13% of the firms go through reorganisation episodes in a given year, these episodes account for almost 40% of the value added created in the manufacturing sector. These findings shed light on the process through which firms grow. Most of the existing literature documents a 'firm size – wage premium', whereas average wages are higher for larger firms; we show that this relation is just the result of the composition of many firms that grow little and raise wages, and a few firms that reorganise, grow a lot, pay the new top manager more, but reduce average wages in all pre-existing layers [...] Our analysis also explores the export behaviour of firms. Accessing a foreign market is a particularly important form of expansion for many firms, and we find that the same facts described above are reproduced for the subset of firms that grow and start exporting (or, of course, shrink and stop exporting). In particular, firms who start exporting are more likely to reorganise their activity than firms who keep operating only domestically, and new exporters who reorganise tend to reduce (rather than increase) average wages paid at all pre-existing layers.

The great ideas of the social sciences

At the ThinkMarkets blog Gene Callahan put forward a list of great ideas in social science:

* The state as the individual writ large (Plato)

* Man is a political/social animal (Aristotle)

* The city of God versus the city of man (Augustine)

* What is moral for the individual may not be for the ruler (Machiavelli)

* Invisible hand mechanisms (Hume, Smith, Ferguson)

* Class struggle (Marx, various liberal thinkers)

* The subconscious has a logic of its own (Freud)

* Malthusian population theory

* The labor theory of value (Ricardo, Marx)

* Marginalism (Menger, Jevons, Walras)

* Utilitarianism (Bentham, Mill, Mill)

* Contract theory of the state (Hobbes, Locke, Rousseau)

* Sapir-Worf hypothesis

* Socialist calculation problem (Mises, Hayek)

* The theory of comparative advantage (Mill, Ricardo)

* Game theory (von Neumann, Morgenstern, Schelling)

* Languages come in families (Jones, Young, Bopp)

* Theories of aggregate demand shortfall (Malthus, Sismondi, Keynes)

* History as an independent mode of thought (Dilthey, Croce, Collingwood, Oakeshott)

* Public choice theory (Buchanan, Tullock)

* Rational choice theory (who?)

* Equilibrium theorizing (who?)

I would add:

*Organisational theories explaining why a given organisational form gets used in a given situation (Coase)

Others?

Cutthroat v. cuddly capitalism

Why, ask Daron Acemoglu, James A. Robinson and Thierry Verdier, can't we all be more like Scandinavians? They have a new working paper out on the question Can't We All Be More Like Scandinavians? Asymmetric Growth and Institutions in an Interdependent World.

Acemoglu, Robinson and Verdier argue that many people perceive average welfare to be higher in Scandinavian societies than in the United States due to Scandinavian countries having more limited inequality and more comprehensive social welfare systems. This raises the question of Why doesn't the United States adopt Scandinavian-style institutions? Why isn't the U.S. more like the Scandinavians? More generally, in an interdependent world, would we expect all countries to adopt the same institutions? To provide theoretical answers to this question,  Acemoglu, Robinson and Verdier develop a simple model of economic growth in a world in which all countries benefit and potentially contribute to advances in the world technology frontier. A greater gap of incomes between successful and unsuccessful entrepreneurs (thus greater inequality) increases entrepreneurial effort and hence a country’s contribution to the world technology frontier. Under plausible assumptions, the world equilibrium is asymmetric: some countries will opt for a type of "cutthroat" capitalism that generates greater inequality and more innovation and will become the technology leaders, while others will free-ride on the cutthroat incentives of the leaders and choose a more cuddly form of capitalism. Paradoxically, Acemoglu, Robinson and Verdier are able to show that those with cuddly reward structures, though poorer, may have higher welfare than the cutthroat capitalists; but in the world equilibrium, it is not a best response for the cutthroat capitalists to switch to a more cuddly form of capitalism. They also show that domestic constraints from social democratic parties or unions may be beneficial for a country because they prevent cutthroat capitalism domestically, instead inducing other countries to play this role.

Stadiums and opportunity costs

John Spry, an economist with St. Thomas University in the Twin Cities, has written an opinion piece in the St. Paul Pioneer Press in which he takes issue with proposals to build a new stadium for the St. Paul Saints (an independent league baseball team) and to renovate the Target Center, the arena for the NBA’s Minnesota Timberwolves.

Spry make a number of points against these ideas, but one of the most important is

Finally, politicians erroneously claim that construction spending for these sports facilities will create jobs for Minnesotans. These claims ignore the basic economic concept of opportunity cost. Instead of building duplicative facilities, we could have either more productive public spending, such as improved courts or roads, or reduced taxes on private-sector investments.

Thinking about the opportunity cost of such proposals is important in any situation but it is doubly important for cities like Christchurch were there is so much that needs to be done.

(HT: The Sports Economist)

Interesting blog bits

1. Matt Nolan writes In defence of inflation targeting in NZ

   Why the RBNZ is a scapegoat for the failure of government

2. Steven Horwitz writes Ezra Klein Mistakes the Arsonist for a Firefighter

   In Friday’s Washington Post, Ezra Klein raises a number of criticisms of the gold standard using as his hook the call for a new Gold Commission that appears in a draft of the new Republican Party platform. Putting aside the question of party politics and what a new Commission might do, Klein’s arguments against the gold standard are not as strong as he thinks. I want to respond to three of them here, and in reverse order of importance.

3. John Cochrane on Gordon on Growth

   Bob Gordon is making a big splash with a new paper, Is US Growth Over?

4. Francisco Ceballos, Tatiana Didier and Sergio Schmukler on Different facets of financial globalisation

   A lot has been said about the pros and cons of financial globalisation. But what exactly is ‘financial globalisation’? This column argues that we can’t be clear about the pros and cons of financial globalisation unless we are clear on what it actually is.

5. Chris Dillow writes on Bad Incentives in Politics

   Why do politicians not solve social problems? One reason, of course, is that such problems are intractable. But there's another reason - politicians sometimes lack the incentive to do so because politicians need to keep their enemies alive just as parasites need to keep their hosts alive.

6. Russ Roberts on Competition

   In this conversation with Roger Noll, we talked about how much more purposive and less relaxed sports are for kids these days. There are travel teams. Coaching is much more intense and serious. Training and conditioning is much more intense and serious. All of it starts young. Roger and I chalked this up to the increased amount of money coursing through the sports pipeline. That money makes professional sports more competitive which in turn makes the stakes higher for college sports (which has its own cash pipeline) which in turn make high school and middle school more intense.

7. Donald J. Boudreaux on Inconceivable Complexity

   Nevertheless, too many people, including politicians, continue to believe that because they can observe a handful of bulky facts about the economy, they can thereby know enough to intervene into that economy in ways that will improve its operation. That belief, though, is hubris. It’s very much like believing that you’ll fly if you simply strap on a pair of wings and commence to flapping madly.

What is it about Labour and economics?

Another example of Labour getting basic economics wrong. Thanks to a message at the Homepaddock blog my attention to drawn to this comment on the upcoming partial sale of Mighty River Power:

Labour's state-owned assets spokesman, Clayton Cosgrove, seized on the result as evidence the company was in no fit state for sale.

"Mighty River's profits have almost halved. That will have a real impact on their share price if the Government rushes ahead with the sale. Listing a struggling company in a market like this is economics for dummies."

But the current level of profits of the company doesn't determine what people will pay for (part of) the company. The sale price will be determined by the expected future profits of the firm. Even if this years profits are down, what matters to investors are future profits. If investors think the future is likely to be good they will pay more for the firm no matter what the current level of profits are. Investors are forward looking, not backward looking as is the case with Clayton Cosgrove.

There are, I would argue, good reasons for not liking the partial sell-off of SOEs but Cosgrove's argument isn't among them.

Incentives matter: organ donation file

A new NBER working paper looks at the incentives for organ donation and bone-marrow donations. The paper, Removing Financial Barriers to Organ and Bone Marrow Donation: The Effect of Leave and Tax Legislation in the U.S., is by Nicola Lacetera, Mario Macis and Sarah S. Stith. The abstract reads,

In an attempt to alleviate the shortfall in organs and bone marrow available for transplants, many U.S. states passed legislation providing leave to organ and bone marrow donors and/or tax benefits for live and deceased organ and bone marrow donations and to employers of donors. We exploit cross-state variation in the timing and passage of such legislation to analyze its impact on organ donations by living and deceased persons, on measures of the quality of the organs transplanted, and on the number of bone marrow donations. We find that these provisions did not have a significant impact on the quantity of organs donated. The leave legislation, however, did have a positive impact on bone marrow donations. We also find some evidence of a positive impact on the quality of organ transplants, measured by post-transplant survival rates. Our results suggest that these types of legislation work for moderately invasive procedures such as bone marrow donation, but may be too low for organ donation, which is riskier and more burdensome to the donor.

So getting the incentives right matters for donation rates and what "right" means depends on what is being donated.

One instrument can't achieve two goals

From Don Brash

The Reserve Bank has got only one instrument, and that's monetary policy. You can't deliver two objectives with one instrument, and David Parker at least should have the brains to know that. Apparently not.

In short the RB can't control both inflation and the exchange rate.

The idea that some economic quantities can be classified as targets and others as instruments goes back to the 1950s and is due to the Dutch Nobel Prize winning economist Jan Tinbergen. He argued that targets are those macroeconomic variables the policy maker wishes to influence, whereas instruments are the variables that the policy maker can control directly. The important point that Tinbergen made, but David Parker has missed, is that achieving the desired values of a certain number of targets requires the policy maker to control an equal number of instruments.

Caplan v. Dickens on poverty and welfare (updated)

Bill Dickens and Bryan Caplan argue about poverty and welfare. Just read it all: start here then go here and then go here. The debate is obvious about the U.S. welfare system but but many of the issues carry over to New Zealand.

Update: Bryan responds to Bill's essay at Reply to Bill Dickens on Poverty: Part 1. David Henderson also has some Thoughts on Dickens.

EconTalk this week

Roger Noll of Stanford University talks with EconTalk host Russ Roberts about the economics of sports. Noll discusses the economic effects of stadium subsidies, the labour market for athletes, the business side of univeristy sports, competitive balance in sports leagues, safety in sports, performance-enhancing drugs, and how the role of sports in the lives of children has changed.

The interview begins with a discussion of the financial impact of sports stadiums. Noll makes the point that for a stadium to just break even it has to be used around 250-300 nights a year! This is something to keep in mind when you hear local councils arguing that their city should have a new sports stadium. Ask yourself, Will it be used 300 days a year?

The above comments refer to multiple-use stadiums. As for single use stadiums, rugby/cricket here in New Zealand, baseball/football in the U.S., Noll says,

Baseball and football stadiums, however--there aren't any that have been substantially subsidized where the local community has received anything remotely resembling a reasonable return on investment. They are financial black holes.

Preaching to the unconverted

The good news of the day is that there is now an economics blog on Sciblogs. It's called The Dismal Science and will pull posts from New Zealand economics blogs such as Fair Play and Forward Passes (Sam Richardson), Groping Towards Bethlehem (Bill Kaye-Blake), Offsetting Behaviour (Eric Crampton and Seamus Hogan) and The Visible Hand in Economics (Matt Nolan, James Zucollo and co-bloggers).

Eric Crampton explains there are still a few problems workings of the new blog:

We're still working out some back end issues to let me efficiently curate the different inbound feeds. When everything is working right, I'll see a morning dashboard with a list of new posts up at the source blogs that their authors deemed worthy, then schedule them for appearance at Dismal. I'd also like to be able to pull classic posts from our combined back archives when topics like capital gains taxes or stadiums become timely. Peter Griffin, the Editor at SciBlogs, is seeing what we can do to set up the system's back end.

But the problems will be sorted quickly, so keep an eye on The Dismal Science to add to your daily fix of economics blogging!

Growth and wages

I have made the point in the past that economic growth leads to wage growth. Paul Krugman makes the point when he writes,

Economic history offers no example of a country that experienced long-term productivity growth without a roughly equal rise in real wages. In the 1950s, when European productivity was typically less than half of U.S. productivity, so were European wages; today average compensation measured in dollars is about the same. As Japan climbed the productivity ladder over the past 30 years, its wages also rose, from 10% to 110% of the U.S. level. South Korea's wages have also risen dramatically over time. ("Does Third World growth hurt First World Prosperity?" Harvard Business Review 72 n4, July-August 1994: 113-21.)

Now James Otteson shows that Adam Smith was ahead of us on this issue, as he was on so many things.

It is not the actual greatness of national wealth, but its continual increase, which occasions a rise in the wages of labour. It is not, accordingly, in the richest countries, but in the most thriving, or in those which are growing rich the fastest, that the wages of labour are highest. [...] But though North America is not yet so rich as England, it is much more thriving, and advancing with much greater rapidity to the further acquisition of riches. ("An Inquiry into the Nature and Causes of the Wealth of Nations" I.viii.22-23)

De jure and de facto determinants of power

Is political power the result of the formal rules of the game or the result of more informal social conventions or both? Are the political rights of one group suppressed by legislation or by the use of extralegal forces, violence and intimidation. A new working paper (CEPR Discussion Paper No. 9064) from the Centre for Economic Policy Research looks at this question. The paper, De Jure and de Facto Determinants of Power: Evidence from Mississippi, is by Graziella Bertocchi and Arcangelo Dimico.

The paper evaluates the empirical relevance of de facto vs. de jure determinants of political power in the U.S. South (Mississippi) between the end of the nineteenth and the beginning of the twentieth century. The main message emerging from the paper is that on the one hand, there is clear evidence of an effect of legislation on political outcomes but on the other, the process of black disfranchisement starts well before the introduction of the new constitution and disfranchisement is stronger in counties where a black majority represents a threat to the de facto power of white elites. Moreover, the effect of the black share of voters becomes stronger after 1890, suggesting that the de jure barriers may have served the purpose of institutionalising a de facto condition of disfranchisement.

The abstract reads,

We evaluate the empirical relevance of de facto vs. de jure determinants of political power in the U.S. South between the end of the nineteenth and the beginning of the twentieth century. We apply a variety of estimation techniques to a previously unexploited dataset on voter registration by race covering the counties of Mississippi in 1896, shortly after the introduction of
the 1890 voting restrictions encoded in the state constitution. Our results indicate that de jure voting restrictions reduce black registration but that black disfranchisement starts well before 1890 and is more intense where a black majority represents a threat to the de facto power of white elites. Moreover, the effect of race becomes stronger after 1890 suggesting that the de jure barriers may have served the purpose of institutionalizing a de facto condition of disfranchisement.

Interesting blog bits

1. Carlo Altomonte, Tommaso Aquilante and Gianmarco I.P. Ottaviano on Triggering competitiveness: A 'decalogue' from new firm-level evidence
   

   Competitiveness is one of the most debated issues in policy circles. But, what triggers it? Capitalising on the first existing harmonised cross-country dataset measuring the entire range of international activities of firms in seven European countries, this column identifies the triggers of competitiveness. It argues that policymaking could be improved by firm-level evidence if there were less reluctance to the use of micro-founded indicators to inform policy decisions.

2. Eric Crampton on A symposium, of sorts

   The latest issue of the New Zealand Medical Journal features three papers on alcohol policy, including one from Matt Burgess, Brad Taylor and me, along with a commissioned editorial piece on the set. I have not yet had a chance to read the other two papers in the series but the editor of the journal kindly forwarded along a copy of the editorial piece late Thursday night.
   
   Doug Sellman, lead author on the editorial piece, says about what I expected he would say about our work on alcohol.

3. Alexander de Ville points out that the EU trade plans will increase protectionism and hinder development

   In June, the European Commission drew attention to the increase in protectionist tendencies worldwide. It claimed that over the previous eight months 123 new trade restrictions had been put in place, an acceleration of 25% compared with the previous period studied. However, the Commission’s own proposed trade reforms, published in January, were overlooked. These will push the EU itself towards further protectionism. They will 'hamper the global economy' and ‘hurt developing countries', according to a recent ODI study.

4. Ben Vollaard on How to cut prison numbers

   How to reduce incarceration rates without fuelling a crime boom? This column argues that by being more selective over whom to lock up and for how long, scarce public funds can be put to better use.

5. Art Carden asks Isn't it high time we legalize marijuana?

   On a couple of different occasions, I have used this space to call for an end to the economic, moral, and cultural disaster that is the drug war. American governments at all levels have been fighting the war on drugs for over four decades now, and it’s overwhelmingly clear that it’s time to cut our losses, admit that the whole thing was a mistake, and work toward restoring the lives that have been destroyed by the drug war.

6. Olivier Coibion and Yuriy Gorodnichenko say we should be Paying attention to inattention

   Economics and economists have taken a beating in the last few years. One practice on the receiving end of much criticism has been the use of models that assume rational expectations when individuals are well informed. This column proposes some tests of these assumptions and argues that 'imperfect information' models may succeed where others have failed.

Hype v. reality

As Sam Richardson and Eric Crampton have been interviewed for a Close Up segment, that will air early next week on TV One, on the economics of sports stadiums Sam has written a brief summary of why people should not be taken in by the hype around a stadium build. Sam writes,

Tangible economic impacts from sports facilities often fail to materialise for a variety of reasons. These include:

1. A substantial proportion of the crowds at stadiums are local rather than visitors. Some estimates I've seen in the literature suggest that it ranges from 80 to 95% of attendance being local.

1a. Spending by locals within a city on attending games is usually substituted from elsewhere within the local economy, for example, movie theatres, video rental stores, and other entertainment venues. A game merely redistributes spending rather than generates it.

2. Spending within a city often leaks outside the local area, as not all goods and services purchased by event attendees are produced locally, so a proportion of the spending has to go out of the local economy to pay for imported goods and services.

3. Government spending on stadiums, contrary to popular opinion, is not costless. That is, the funding has opportunity cost that must be considered. Money spent on a stadium could have been spent elsewhere in the local economy, and as such alternative activity is forgone. A benefit is only observed if the stadium activity more than outweighs the lost activity elsewhere.

4. Stadiums are almost always underutilised. Westpac Stadium in Wellington has around 45-50 event days per year. That is around one day per week. Game days are usually a hotbed of activity, but six of the seven days there is nothing going on. Surrounding development feels this too. Are businesses located nearby dependent on stadium activity going to survive with more off days than game days? It is unlikely.

5. Much of the projected activity that a new facility attracts comes from within the city at the expense of other facilities. Things such as conferences, conventions, trade shows, etc would by and large have been hosted elsewhere within the city at another venue. Thus we see another form of substitution in action here, which works towards reducing the overall realised impact of a new facility.

6. A replacement facility can not realistically be expected to do a lot more than a pre existing facility. Research in the US has suggested that there is a short term honeymoon effect of up to ten years where attendances spike due to the novelty of the new facility, but beyond this the experience has been that attendance returns to pre facility levels.

What about the intangible benefits? Surely they matter?

Relevant intangible benefits include consumer surplus that locals enjoy from attending games at the facility as well as the public good aspects. They are recognised as benefits but there are weaknesses in their ability to justify government funding. Firstly, consumer benefits are often captured to a greater or lesser degree by event organizers through ticket pricing structures - season tickets, family/adult/children, concessions, etc. It is in the organizers interest to capture as much of this as possible so as to maximize event profits. Secondly, it isn't just within the stadium that these benefits are appropriated. To watch your team elsewhere, you pay for it via Sky TV subscriptions. To read about your team you pay for it via newspapers, magazines, internet access, etc. A lot of benefits can be captured privately. Thirdly, one can argue that just about any activity or enterprise has some intangible benefits, but this doesn't mean we should subsidise every activity that generates intangibles!

The bottom line is that if tangible benefits don't materialise, the intangible benefits have to be substantial and international evidence suggests that while they aren't insignificant, they are nowhere near the size of subsidies given to build sports facilities and/or attract sports franchises.

People in Christchurch should think about these points very carefully and ask, Can spending $500 million on a new covered stadium really be justified? I can't help thinking the answer is no. I would also like to see the justification that CERA or the City Council or the government have for the idea of a new stadium.