Alvin Roth on kidney exchange

This video is of Alvin Roth's second, of two, 2014 Marshall Lectures given at Cambridge University, February 20 2014. The topic of this lecture is kidney exchange.

Sexual harassment and compensating differentials

While reading a chapter in Ben Powell's new book Out of Poverty: Sweatshops in the Global Economy I came across the following comment,

If the risk of sexual harassment is part of the working conditions at a factory, them firms have to offer higher wages to attach workers. This is precisely what Professor Joni Hersch found when studying U.S. labor markets. She examines sexual harassment claims and wages by industry and finds that women were paid higher wages in industries in which they were at a greater risk of sexual harassment. She concludes that workers receive a wage premium for exposure to the risk of sexual harassment "in much that same way that workers receive a wage premium for the risk of fatality or injury." (Powell 2014: 68-9).

The Hersch article referred to is,

Hersch, Joni. 2011. "Compensating Differentials for Sexual Harassment." American Economic Review, 101(3): 630-34.

The abstract of the article reads,

Workplace sexual harassment is illegal, but many workers report that they have been sexually harassed. Exposure to the risk of sexual harassment may decrease productivity, which would reduce wages. Alternatively, workers may receive a compensating differential for exposure to sexual harassment, which would increase wages. Data on claims of sexual harassment filed with the Equal Employment Opportunity Commission are used to calculate the first measures of sexual harassment risks by industry, age group, and sex. Female workers face far higher sexual harassment risks. On balance, workers receive a compensating wage differential for exposure to the risk of sexual harassment.

The central empirical issue addressed in the paper is whether sexual harassment lowers wages by reducing productivity or raises wages as workers require a compensating differential to incur this risk. Hersch notes that while sexual harassment is illegal it is, in the same way as other job risks, costly for firms to eliminate, which may result in sexually harassing behaviour occurring in some workplace environments. She also notes that the direction of the relation between sexual harassment and wages is not predictable a priori. Sexual harassment may lead to lower pay if harassment reduces worker productivity by, for instance, inducing inefficient turnover, increasing absenteeism, and generally wasting work time as workers attempt to avoid interaction with harassers. Or harassment could be similar to other jobs in which workers face undesirable working conditions, like a high risk of death or disabling injury, and which generate a compensating pay differential.

Hersch writes,

[...] I estimate wage equations controlling for the risk of sexual harassment and for other determinants of wages, including occupation and the percent female in the worker’s industry. The wage equation estimates show that greater risk of sexual harassment is associated with a statistically significant wage premium. Women employed in jobs with an average probability of sexual harassment are paid a compensating differential of 25 cents per hour relative to comparable women employed in jobs with no risk of sexual harassment.

So labour markets deal with sexual harassment in much the same way as they deal with other on the job risks, That is, on balance, workers receive a wage premium for exposure to the risk of sexual harassment in much the same way that workers receive a wage premium for the risk of fatality or injury.

EconTalk this week

Bryan Caplan of George Mason University and blogger at EconLog talks to EconTalk host Russ Roberts about the value of a college education. Caplan argues that the extra amount that college graduates earn relative to high school graduates is misleading as a guide for attending college--it ignores the fact that a sizable number of students don't graduate and never earn that extra money. Caplan argues that the monetary benefits of a college education have a large signaling component rather than representing the value of the knowledge that's learned. Caplan closes by arguing that the subsidies to education should be reduced rather than increased.

A direct link is available here.

A conversation between Milton Friedman and Gary Becker

The following video is of an interview of Milton Friedman by Gary Becker. It was recorded in Chicago in November 2002.

The too big to fail subsidy debate Is over

Or so says Simon Johnson at The Baseline Scenario blog. Johnson writes,

No doubt there is still a lot of shouting to come, but this week a team at the International Monetary Fund completely nailed the issue of whether large global banks receive an implicit subsidy courtesy of the American government. Is there a subsidy, is it large, and how much damage could it end up causing to the broader economy?

The answers, in order, are: yes, there is an implicit subsidy that lowers the funding costs for very large banks; the subsidy is big, with costs of borrowing for these banks lowered by as much as 100 basis points, i.e., 1 percentage point; and yet this large scale of implicit support is small relative to the macroeconomic damage that is likely to be caused by the high leverage and incautious risk-taking that the subsidy encourages.

That subsidising banks, implicitly or explicitly, is dumb and likely to lead to big trouble is something of a no brainer but its good to see that the IMF is willing to come out and say so. This is a step in the right direction. Now for the big question, What to do about it? Answers on the back of a postcard should be sent to just about any world leader you can name.

Why long-term unemployment matters

Previously I have noted papers that deal with the effects of long-term unemployment, see here, here, here and here. Now Tim Harford is writing about it at the Financial Times.

Harford says,

A recent Brookings Institution research paper by Alan Krueger (a senior adviser to Barack Obama during the recession), Judd Cramer and David Cho examines this discomfiting thesis in greater depth. The researchers conclude that people who have been out of work for more than six months are indeed marginalised: employers ignore them, bidding up wages if necessary to attract workers from the ranks of the short-term unemployed.

I’ve written before about an experiment conducted by a young economist, Rand Ghayad. He mailed out nearly 5,000 carefully calibrated job applications, using a computer to tweak key parameters. He found that employers were three times more likely to call an applicant with irrelevant but recent employment experience, than someone who had relevant experience but had been out of work for more than six months. Long-term unemployment had become a trap.

In Ghayad’s experiment, the long-term unemployed were identical in every other way to other applicants. In reality, of course, it may be that people also become demotivated after a long spell of looking for work. The “benefits culture” at work? It seems not. Earlier research by Krueger and Andreas Mueller tracked job hunters over time and showed them becoming ever less active in the job market – and ever more depressed. They could not rouse themselves, even when unemployment insurance payments were about to expire. It wasn’t that the people joined the ranks of the long-term unemployed because they were demotivated to start with: the long-term unemployment came first, and the unhappiness and the lack of drive came later.

The important question, not answered above, is Why do employers ignor the long-term unemployed? Loss of human capital? Do employers see long spells of unemployment as a signal of some bad characteristic about the person? Or something else? Or, as Harford puts it, are

the long-term unemployed [...] people who are not very different to the rest of us – merely unluckier.

Without this question being answered its not clear how to deal with the problem.

Free banking in New Zealand

The following comes from a blog post, by Kurt Schuler, at the Free Banking blog,

Since the revival of interest in the history of free banking begun by Hugh Rockoff's work in the 1970s on American "free banking" of the early 19th century and Larry White's 1984 book on the far freer Scottish system of the same period, economists have studied a number of other free banking episodes in some depth. New Zealand has not been among them, though it has received passing attention. We are fortunate, then, that Harry D. Bedford's 1916 dissertation "The History and Practice of Banking in New Zealand" is now available online. Until this year only paper copies were available at the University of Otago, where it was submitted for the doctorate, and a few other libraries in New Zealand. The university has digitized the dissertation and readers around the world can now find it here.

The work was submitted for the higher doctoral degree Doctor of Letters at Otago in 1916. The Table of Contents reads:

Volume 1: Principles of English Banking current in the “Forties” – Commerce without Banks – Early Banking – Government Debentures as Currency in New Zealand – A State Bank of Issue – Several Banks – the Gold Discoveries – Years of Expanding Credit – Banks and Credit

Volume 2: Movements towards Crisis – The Assets Realisation Board – The Colonial Bank – The National Bank – The Causes of the Crisis – Commercial Influences – Bank Notes – Exchange – The Government Account – Since 1895

Who knew banking history was big back then?!

A grand gender convergence: its last chapter

is the title of a new paper by Claudia Goldin in the American Economic Review (104(4): 1091-1119.) which looks at the gender gap in pay. The abstract reads,

The converging roles of men and women are among the grandest advances in society and the economy in the last century. These aspects of the grand gender convergence are figurative chapters in a history of gender roles. But what must the "last" chapter contain for there to be equality in the labor market? The answer may come as a surprise. The solution does not (necessarily) have to involve government intervention and it need not make men more responsible in the home (although that wouldn't hurt). But it must involve changes in the labor market, especially how jobs are structured and remunerated to enhance temporal flexibility. The gender gap in pay would be considerably reduced and might vanish altogether if firms did not have an incentive to disproportionately reward individuals who labored long hours and worked particular hours. Such change has taken off in various sectors, such as technology, science, and health, but is less apparent in the corporate, financial, and legal worlds.

Presumably firms  reward individuals who labour long hours and work particular hours because it is profit maximising for them to do so and thus this may be a feature of the particular industries in which it occurs. If so this could be a difficult thing to change, it would take either a change in the cost structure of the industry, what would bring about such a change?, or a change on the demand side, that is, customers would have to start demanding a different set of goods or services. Why would they do so?

EconTalk this week

John Cochrane of the University of Chicago talks to EconTalk host Russ Roberts about the experience of teaching a massive open online course (MOOC)--a class delivered over the internet available to anyone around the world. Cochrane contrasts the mechanics of preparing the class, his perception of the advantages and disadvantages of a MOOC relative to a standard in-person classroom, and the potential for MOOCs to disrupt traditional education.

A direct link is available here.

Love it or hate it... the dollar's here to stay

In this audio from VoxEU.org Eswar Prasad talks to Viv Davies about Prasad's recent book, ‘The Dollar Trap: How the US dollar tightened its grip on global finance’, which examines how, paradoxically, in light of the financial crisis, the dollar continues to play a central role in the world economy and why it will remain the cornertsone of global finance for the forseeable future. They also discuss the current frameworks for international economic cooperation as well as currency wars, unconventional monetary policy and the prospects for the renminbi becoming the world's reserve currency.

A direct link to the audio is available here.

A revised version of a paper

you really want to read.

Yes you do!!!

Simple models of a human-capital based firm: a reference point approach by Paul Walker

The economics of the America's Cup - did we lose or win?

A question I'm very pleased to see Sam Richardson asking. As I'm sure most of you will have heard by now the Minister for Economic Development has been going round saying that the taxpayer money that went into the America's Cup campaign was money well spent. I wonder if he has asked any taxpayers about that?

Well now Sam Richardson of the econ department at Massey, likely the best guy in the country to do this, has given the Market Economics Limited report, written for MED,  the once over. Richardson writes,

The Government's share of the total Team NZ revenues of approximately $180m was 20 percent (it was capped at $36 million), with 66 percent coming from overseas. The report found that the total outcome of $87 million to the New Zealand economy would not have occurred without the Government's involvement.

and he continues,

I'm not going to question the final point - it isn't unreasonable to assume that the Government's contribution was pivotal to the challenge - but then, one could also argue that it wouldn't have happened without the overseas or private domestic funding either. That being said, however, there are two aspects of this report that do require challenging.

Getting down to business Richardson writes,

First, attributing the entire economic impact of a project to a 20 percent contribution is something I (and many others) have a real problem with. You could just as easily credit the economic impact figure of $87 million to the overseas funding (and you could do so with confidence, as it is 'new money' and thus more likely to be beneficial to the New Zealand economy) more than the Government's investment. Still, it is not an easy issue to resolve. It's not as easy as saying that because the Government contributed 20 percent means it should be 'credited' with 20% of the economic impact. The combination of public and private funding makes attributing the economic impact to one or the other parts problematic. A more accurate statement would be that the entire project (regardless of where the money came from) generated $87 million in impacts. After all, the tax revenues generated by Team New Zealand were between $38 and $40 million.

The second issue is the absence of opportunity costs of public funding in the report, which would help us to determine to what extent the $87 million impact be considered an economic benefit, and therefore money well spent. If there was no Team New Zealand, would nothing have happened? Of course not - life (and the economy) would have continued to tick away as per usual. $36 million of taxpayers money went into this campaign. Public funding has alternative uses, which should at the very least be considered as part of an objective analysis. If there was no Team New Zealand, what would have happened to the $36 million in taxpayer funding that was invested there? Chances are it would have gone to some other worthy recipient, for example the health sector or the education sector. In order to determine whether the $36 million spent on the America's Cup was money well spent, we need to know what $36 million would do when put to an alternative use. If the $36 million for Team New Zealand returned a higher impact than, say, paying each and every New Zealander $8 as compensation for there being no Team New Zealand, then it might have been money well spent. Determining what the appropriate alternative use for $36 million is the subject of debate - and my example above is very much tongue in cheek - but one thing is for sure: it is certainly not nothing. $87 million is the economic impact with no alternative use of public (and other) funds. Is it realistic to attribute this as a benefit?

That all costs are opportunity costs is stage one stuff, all economists know this. So not considering opportunity costs and comparing the campaign outcome with alternative uses of the money is big miss and I find myself wonder why the report did it. Or is it the only way they could put a positive spin on the campaign?

Just asking.

Football as a workers cooperative - or lack thereof 2

In a response to my previous post on Football as a workers cooperative - or lack thereof the always interesting Tim Worstall says, at The Pin Factory blog, But football clubs are already effectively owned by the players. Tim writes,

Football does, as we know, come in a number of different forms and codes. It also comes in a number of different organisational forms. The way that leagues are formed, franchises handed out, how teams are promoted and or relegated. And the effect, at least as I see it, is that large numbers of clubs that are supposedly capitalist in their form are in fact workers' cooperatives. Which makes an argument about why there aren't such workers' cooperatives a touch difficult: for I'm asserting that there are.

and

So far I agree except for the one point: that I think most clubs, European ones at least, are, in effect, workers' cooperatives. I agree entirely that in legal form they are not. There's a few fan cooperatives but no workers' ones. But pure legal form isn't quite, to my mind, the total definition. Of importance is to look at the flows of money. If the money flows as if an organisation were indeed a workers' cooperative then I'd be inclined to call it one even if the legal form wasn't so. And even a brief look at football club accounts shows that almost all of them make a loss almost all of the time. That's certainly not what we would imagine to be a defining feature of a seris of capitalist organisations. Further, the money all ends up in the pockets of the players.

Now why do I disagree with Tim? Why do I say there are no worker cooperatives in sport? The short answer I think is the definition of "ownership". For ownership you don't follow the money. The basic definition of ownership I'm using is that of Grossman and Hart ("The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration", Journal of Political Economy, 94: 691-719) who define the owner of an asset as the person who has residual rights of control over the asset; that is whoever can determine what is done with the asset, how it is used, by whom it is used, when they can use it etc - note that ownership is not defined in terms of income rights. Note, for completeness, that the legal scholar Oliver Wendell Holmes Jr. states that the rights of ownership are

[...] substantially the same as those incident to possession. Within the limits prescribed by policy, the owner is allowed to exercise his natural powers over the subject-matter uninterfered with, and is more or less protected in excluding other people from such interference. The owner is allowed to exclude all, and is accountable to no one. (The Common Law, p193, (1963 edn.))

What is important for our purposes is that ownership is not defined with regard to income.

To see why income is not a feature of the definition of ownership ask yourself what would happen if I have the control rights over a piece of land which is currently being used to grow politicians. The profits from the sale of politicians, say $1000 per year, goes to Tim. He has the income rights. Now let us assume that Eric Crampton, the smart lad that he is, has worked out that as cabbages are smarter than politicians they are worth more. So profitable are cabbages that Eric would be willing to rent the land for $1200 per year. Eric makes this offer to Tim who thinks its great but can not doing anything about it because he does not have control right over the land. (One such right is the right to rent out the land.) I on the other hand can agree to the rental deal as I have the control rights over the land. I get to make the decision as I am the owner. As an aside note that this example shows why ownership and income rights normally go together: income rights give you the incentive to do things, control rights give you the ability to do things. For efficiency reasons you normally want both of these rights to be held together.

Another way to see why economists define ownership in terms of control right is to consider the fact shareholders of a firm have both control rights and income rights. Income rights meaning they get a part of the firm's profits. Now consider a manager at the firm who is on an incentive contract which says he will receive a (small) part of the firm's profits so that his interests are aligned with the shareholders. Both the shareholders and the manger have income rights (claims to part of the firm's profits) but only the shareholders are considered owners. This is because they hold the control rights.

Also in a workers cooperative payments to workers are normally roughly the same. Some worker cooperatives do require all staff to be paid the same wages while others have a limit on the range of pay offered. Such a limit is normally expressed as a ratio of the highest paid worker to the lowest paid, e.g. 3:1 or 4.5:1 or some such ratio. Also an owner's allocation of the "profits" of the firm will be proportionate to that owner's labour input, so for similar labour inputs, owners receive a similar allocation of "profits". Thus overall compensation is commonly roughly equal. Ricketts (1999: 20) explains the situation as ``[f]urther, to minimise antagonism a rough equality in the division of the residual will be necessary and this may conflict with outside opportunities. Those with high transfer earnings reflecting high productivity elsewhere will desert the co-operative. It is for these reasons that control of the firm by its labour force is usually found in circumstances which permit a high degree of common interest." Jossa (2009: 709-10) explains the basic issue in terms of the management of capitalistic versus co-operative firms: ``[g]iven the tendency of cooperatives to distribute their income equitably among all the members, it is difficult to deny that few cooperatives are in a position to pay the high salaries that able managers can expect to earn in capitalistic firms. Whenever a group of people resolve to work as a team-we may add-the member who outperforms the others in initiative and organizational skills will inevitably take the lead. The crux of the matter is that such a person has no incentive to establish a cooperative and share power and earnings with others. He or she will prefer to found a capitalistic firm, where he or she will hold all authority and, if sole owner, appropriate the whole of the surplus [references deleted]"

Clearly equal payment is not the case for football clubs. Some players earn a lot more than others. Given heterogeneity among playing talent there is large variation in earning potential. This acts as a disincentive to the formation of a worker cooperative, with its equality of payment, since those players with the greatest earning potential, the largest outside options, will transfer away from the cooperative to maximise their income stream. Differential payment schemes can occur, especially within partnerships, but they require that the individual employee productivities are sufficiently easy to measure so that a relatively objective method of productivity related pay is possible. Given the team production nature of team sports productivities are difficult, if not impossible, to estimate and thus payment by productivity is not feasible, which argues in favour of equality in payments. Thus a worker-owned team would have few, if any, star players, a handicap in the winner-takes-all world of professional sports.

The question of ownership comes down to who has the control rights and the "who" isn't the players. The money may end up in the pockets of the players but that just makes them very well paid employees, not owners. They don't have the control rights.

Note that if by capitalist Tim means profit making, I make no such assumptions. The owners of the clubs may be trying to maximise profits, or they may be trying to maximise their utility. For my argument it doesn't matter.

Are business schools to blame?

This video is of a presentation by Professor Peter G. Klein at the Mises Circle in Newport Beach, California in November 2009 on "Are Business Schools to Blame?" for the financial crisis.

Football as a workers cooperative - or lack thereof

Everyones third favourite Marxist, Chris Dillow, wants to discuss Football as Financial Economics while the not-so-Marxist Jim Rose asks Why are there so few workers co-ops? Is there a connection here?

For me, yes. Right now I should be working on a revise and resubmit on a paper in which, in its conclusion, I argue why there are no worker cooperatives in football and in fact in professional sport more generally. So for me its "Football as a workers cooperative - or lack thereof".

As Chris highlights football is a great subject for the application of economics, even the theory of the firm. When considering a football team we have a situation where human capital, talent at playing football, is the basis for the "firm" which we may think would favour ownership by the workers. When human capital is the major input into production ownership by, at least some of the workers, is common, e.g. partnerships in law and accounting etc. This was also true of pirates! The interesting thing for professional sports is that ownership by the human capital, i.e. the players, is extremely rare. This is, I would argue, because a worker-owned team would be at a disadvantage relative to a player-as-employee based team.

There are many forms of ownership of football teams, from teams having shareholders and being traded on the stock exchange, to teams being owned by an individual, but one form of ownership not seen (as far as I know -a counter example would be great!) is a labour (in this case, player) owned firm.

Heterogeneity among playing talent and thus earning potential acts as a disincentive to the formation of a worker cooperative, which involves (rough) equality in payment¹, since those players with the greatest earning potential, the largest outside options, will transfer away from the cooperative to maximise their income stream.² Differential payment schemes can occur, especially within partnerships, but they require that the individual employee productivities are sufficiently easy to measure so that a relatively objective method of productivity related pay is possible. Given the team production nature of team sports productivities are difficult, if not impossible, to estimate and thus payment by productivity is not feasible, which argues in favour of equality in payments. Thus a worker-owned team would have few, if any, star players, a handicap in the winner-takes-all world of professional sports.^{3, 4}

Another issue for a cooperative sports team is that while the star players may leave the team too soon, the "average players" may stay too long. The average players will have smaller outside options and thus less incentive to leave but as they are also owners of the team it would be more difficult to get rid of those who are not performing. It would be easier for an employee-based team to remove under performing players as they are not owners of the firm.

Also to the degree that exit barriers are entry barriers a worker-owned organisation is at a disadvantage. Such an organisation could hinder rapid transfers between clubs. Problems with transfers could arise, for example, if the terms of the exit have to be negotiated with the remaining player-owners at the time of exit. Or the remaining owners may be unable or unwilling to buy out the exiting player - under a "right of first refusal" or "right of first offer" scheme - or any of them could veto an incoming replacement player-owner. Also there is the question of the value of a player's interest in the team as well as the question of the time period over which an agreed upon value would be paid. These costs make exit more difficult than it would be under an employment contract and thus tend to lock-in the player/owner to the team. Such lock-in is a disincentive to forming, or joining, a labour-owned firm, especially for the best players.⁵ Many of these problems can, to a degree, be contracted around but this imposes additional negotiation costs at the time of entry into the team, which again is a disincentive to forming an worker-owned team. Utilising a worker-owned organisation results in additional haggling costs, either ex ante or ex post, relative to a player-as-employee team.

Put simply, an employee can leave a organisation more quickly and easily than an owner and in the case of professional sports, transfers between teams, or at least a credible threat to transfer, are particularly valuable to the best players. Therefore a player-owned team would be at a competitive disadvantage compared to teams comprised of employee players.

What this suggests is that a labour-owned, human-capital only, firm with heterogeneous human capital, as in the football example, is likely to be unstable and thus a long lasting human-capital only firm which is labour owned will consist of homogeneous human capital, e.g. the pirate example. Thus the "types" of human capital in a firm is an important determinant of the organisational form the firm will take. This doesn’t mean you cannot have a firm which involves heterogeneous human capital but such a firm will require some “glue”, in the form of non-human capital of some kind, to remain viable. Given the importance of this glue to the firm, ownership of the firm by the owner of the non-human capital is likely. Hart (1995: 56) notes that such non-human capital could be as simple as “[ ... ] patents, client lists, files, existing contracts or the firm's name or reputation.” Or it could be a good location for carrying out the firm's business or a contract preventing the non-owner from working for competitors, etc

So overall we get two basic organisational forms for human-capital based firms: 1) a homogenous human capital firm which could be a labour owned firm and 2) a heterogeneous human capital firm which is owned by the owner of the "glue" that keeps the human capital in place.

Notes:

(1) Some worker cooperatives do require all staff to be paid the same wages while others have a limit on the range of pay offered. Such limit is normally expressed as a ratio of the highest paid worker to the lowest paid, e.g. 3:1 or 4.5:1. Also an owner's allocation of the "profits" of the firm will be proportionate to that owner's labour input, so for similar labour inputs, owners receive a similar allocation of  "profits". Thus overall compensation is commonly roughly equal.

(2) Ricketts (1999: 20) explains the problem as ``[f]urther, to minimise antagonism a rough equality in the division of the residual will be necessary and this may conflict with outside opportunities. Those with high transfer earnings reflecting high productivity elsewhere will desert the co-operative. It is for these reasons that control of the firm by its labour force is usually found in circumstances which permit a high degree of common interest." Jossa (2009: 709-10) explains the basic issue in terms of the management of capitalistic versus co-operative firms: ``[g]iven the tendency of cooperatives to distribute their income equitably among all the members, it is difficult to deny that few cooperatives are in a position to pay the high salaries that able managers can expect to earn in capitalistic firms. Whenever a group of people resolve to work as a team-we may add-the member who outperforms the others in initiative and organizational skills will inevitably take the lead. The crux of the matter is that such a person has no incentive to establish a cooperative and share power and earnings with others. He or she will prefer to found a capitalistic firm, where he or she will hold all authority and, if sole owner, appropriate the whole of the surplus [references deleted]

(3) Scully (2008) notes that there is a relationship between a team's finances and a team's success since better financed teams can buy the best players: ``[h]ow good a professional sports team is depends, of course, on the quality of its players. Because teams compete for better players by offering higher salaries, the quality of a team depends largely on how strong it is financially. The financially stronger teams will, on average, be the better teams."

(4) One way around he problem is to pay all players the amount necessary to retain the best player. But this implies paying most players more than their productivities and has obvious implications for the teams budget constraint. This would also aggravate the problem of non-performing average players-owners not wanting to leave the team.

(5) There are also problems such as those which could arise between the manager or coach and the player/owners in their roles as players and as owners. In addition to this there is the problem that if the players provide any financial capital the team needs themselves they risk being badly underdiversified. If the team goes bankrupt they lose not only their job but also (at least part of) their savings. Given the short time span that a player is likely to be a member of the team there is the issue of the return on any capital the player has invested in the team. To ensure a suitable post playing standard of living players are likely to place an emphasis on high returns on their investments.


Refs.:

• Hart, Oliver D. (1995).  Firms, Contracts, and Financial Structure, Oxford: Oxford University Press.
• Jossa, Bruno (2009). `Alchian and Demsetz's Critique of the Cooperative Firm Thirty-Seven Years After', Metroeconomica, 60(4) November: 686-714.
• Ricketts, Martin (1999).  The Many Ways of Governance: Perspectives on the control of the firm, The Social Affairs Unit, London.
• Scully, Gerald W. (2008). `Sports'. In David R. Henderson (ed.), Concise Encyclopedia of Economics, 2nd edn., available from http://www.econlib.org/library/Enc/Sports.html

EconTalk this week

John Christy, Distinguished Professor of Atmospheric Science and Director of the Earth System Science Center at the University of Alabama in Huntsville, and Kerry Emanuel, Cecil & Ida Green Professor of Atmospheric Science, Massachusetts Institute of Technology, talk with EconTalk host Russ Roberts about climate change. Topics discussed include what we know and don't know about global warming, trends in extreme weather such as hurricanes, rising sea level, the likely change in temperature in the next hundred years. Both scientists also give their perspective on what policies might be put in place to reduce risk from climate change. This episode was recorded before a live audience at the College of Business Administration at the University of Alabama in Huntsville.

A direct link to the audio is available here.

Another example of the law of unintended consequences

One of the more obvious problems with economic regulation is the law of unintended consequences. You can end up with results that are the opposite of those intended. What happens when product liability is strengthen in a world where production is vertical and crosses jurisdictional lines? If goods are produced by an upstream national or international firm and improved or distributed by local firms downstream does a strengthening of product liability have unintended consequences on product sales and consumer safety? This question is asked in a new NBER working paper, Unintended Consequences of Products Liability: Evidence from the Pharmaceutical Market by Eric Helland, Darius Lakdawalla, Anup Malani and Seth A. Seabury. The paper's abstract reads,

In a complex economy, production is vertical and crosses jurisdictional lines. Goods are often produced by an upstream national or global firm and improved or distributed by local firms downstream. In this context, heightened products liability may have unintended consequences on product sales and consumer safety. Conventional wisdom holds that an increase in tort liability on the upstream firm will cause that firm to (weakly) increase investment in safety or disclosure. However, this may fail in the real-world, where upstream firms operate in many jurisdictions, so that the actions of a single jurisdiction may not be significant enough to influence upstream firm behavior. Even worse, if liability is shared between upstream and downstream firms, higher upstream liability may mechanically decrease liability of the downstream distributor and encourage more reckless behavior by the downstream firm. In this manner, higher upstream liability may perversely increase the sales of a risky good. We demonstrate this phenomenon in the context of the pharmaceutical market. We show that higher products liability on upstream pharmaceutical manufacturers reduces the liability faced by downstream doctors, who respond by prescribing more drugs than before.

So when liability is increased on the upstream firm we can see greater risks being taken by the downstream firm and an increase in the sales of a risky good, which it seems fair to assume is not the intended outcome of an increase in product liability.

Selling a kidney: would the option necessarily be beneficial?

This is the question asked by Timothy Taylor at this blog Conversable Economist. Important here is the claim, popular among economists, that offering people an additional option--in this case to sell a kidney--must make the people better off, because they don't need to choose the option, but if they wish to do so, they can. That is to say, the basic idea that trade is voluntary.

Taylor is responding to an argument by Simon Rippon against this idea,

[...] that when an option is available, at least some people will find themselves under social pressure to select that option, or will be held responsible for failing to choose it. "For example, imagine a cashier at a rural filling station that is potentially vulnerable to an overnight robbery. It may be better for the cashier to have no key to the safe (and to have a prominent sign displaying that information) than for the cashier to have the key which gives him the option to open it. Possession of the key would make the cashier vulnerable to threats, and the filling station worth robbing."If selling a kidney was a legal option, Rippon argues:

"This means that even if you have no possessions to sell and cannot find a job, nobody can reasonably criticise you for, say, failing to sell a kidney to pay your rent. If a free market in organs was permitted and became widespread, then it is reasonable to assume that your organs would soon enough become economic resources like any other, in the context of the market. Selling your organs would become something that is simply expected of you as and when financial need arises. ...

We should ask questions such as the following: Would those in poverty be eligible for bankruptcy protection, or for public assistance, if they have an organ that they choose not to sell? Could they be legally forced to sell an organ to pay taxes, paternity bills or rent? How would society view someone who asks for charitable assistance to meet her basic needs, if she could easily sell a healthy ‘excess’ organ to meet them? ... Wherever there is great value in not being put under social or legal pressure to sell something as a result of economic forces, we should think carefully about whether it is right to permit a market and to thereby impose the option on everyone to sell it."

These are interesting arguments but do they not apply to any number of things we already allow to be traded, eg in the US blood, tissues, sperm and eggs? Do these bad things happen in these other markets? If not, why are kidneys different? If so how are they dealt with in these other markets? Surely the question is one of balancing the costs and benefits of allowing trade, not just pointing to a few possible bad outcomes and banning trade on that basis.

Taylor makes two points in the conclusion to his post,

First, at present, the main source of kidney donations is people who die unexpectedly, with a few voluntary donors. In the meantime, thousands of Americans die every year awaiting a kidney transplant. I can easily imagine that a substantial group of healthy people might not be willing to donate a kidney for free, but would be willing to do so for substantial compensation, and encouraging transplants from healthy donors could save thousands of lives. Second, it troubles me that we often expect the donors of kidneys and blood to act out of sheer altruism, but we have no such expectation of any of the other participants in an organ transplant, like the health care providers or the hospital.

The puzzling pervasiveness of dysfunctional banking

In this interesting audio from VoxEU.org Charles Calomiris talks to Romesh Vaitilingam about Calomiris's recent book, co-authored with Stephen Haber, ‘Fragile by Design: The Political Origins of Banking Crises and Scarce Credit’. They discuss how politics inevitably intrudes into bank regulation and why banking systems are unstable in some countries but not in others. Calomiris also presents his analysis of the political and banking history of the UK and how the well-being of banking systems depends on complex bargains and coalitions between politicians, bankers and other stakeholders.

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It appears Alfred Marshall is not guilty after all

One of the strangest things about basic microeconomics is that we write demand curves in the form,
q=D(p) that is, quantity demanded is a function of price,

but we draw them in the form,

The diagram is wrong, as any mathematician will tell you, since given the way the function is written, quantity demanded should be on the vertical axis.

This oddity I always thought was due to Alfred Marshall, which I found a bit odd since Marshall was trained as a mathematician and thus would know perfectly well how to graph a function.

But now I have, belatedly, discovered that Marshall may not be to blame for starting this habit of drawing after all.

In an essay "The influence of German economics on the work of Menger and Marshall" Eric W. Streissler writes,

The "peculiar curve" is Rau's demand curve, which is published in his later (not earlier) editions-to be more precise, from the fourth edition of 1841 onwards. Cournot has presented the first demand curve in the history of economics in 1838; Rau's was the second, only three years later. But Cournot posits his curve without explanation, i.e., quasi-axiomatically, Rau presents a derivation of it, the typical German derivation: individuals differ in their preferences or, more precisely, in their willingness and ability to pay. (His curve assumes each individual buying one unit of a commodity, the typical case for reservation analysis and thus for "price bounds.") But what is more interesting in relation to Marshall: Rau's demand curve alone is drawn exactly like Marshall's, with price on the vertical axis; Cournot's (or Mangoldt's) demand curves are drawn the other way round with prices measured horizontally.(Emphasis added)

The Rau mentioned is Karl Heinrich Rau and the book is Grundsatze der Volkswirthschaftslehre, 1st ed. 1826, 4th ed. 1841.

Ref.:

• Streissler, Eric W. (1990). 'The influence of German economics on the work of Menger and Marshall'. In Bruce J. Caldwell (ed.), Carl Menger and his legacy in economics, Durham: Duke University Press.