Paul Milgrom on market design

This video is of Paul Milgrom's 2009 Nemmer's Prize Lecture on "The Promise and Problems of Market Design".

The abstract of Milgrom's talk is:

"Market design has become an exciting area of economics research, with many of its findings useful for setting detailed rules in real markets. For matching markets, most proposed designs aim to be "straightforward" - making it a dominant strategy for participants to report information truthfully. But some recent matching and auction designs sacrifice incentive-compatibility conditions to give priority to various other desiderata. This lecture reviews the goals of market design and the unavoidable trade-offs that are sometimes required, and explores how economists should seek to resolve these trade-offs. "

Paul Milgrom Nemmers Prize Lecture from Steve Goldband on Vimeo.

Incentives matter: football helmet file

This comes from a story in the Wall Street Journal about head injuries in football in the US. Are helmets part of the answer to head injuries or part of the cause? The incentives on how you play the game change depending on whether or not you are wearing a helmet.

The authors of the article write,

"Some people have advocated for years to take the helmet off, take the face mask off. That'll change the game dramatically," says Fred Mueller, a University of North Carolina professor who studies head injuries. "Maybe that's better than brain damage."

and

But while these helmets reduced the chances of death on the field, they also created a sense of invulnerability that encouraged players to collide more forcefully and more often.

and

What nobody knew at the time is that these small collisions may be just as damaging. The growing body of research on former football players suggests that brain damage isn't necessarily the result of any one trauma, but the accumulation of thousands of seemingly innocuous blows to the head.

The problem is that there's nothing any helmet could do to stop the brain from taking lots of small hits. To become certified for sale, a football helmet has to earn a "severity index" score of 1200, according to testing done by the National Operating Committee on Standards for Athletic Equipment, or Nocsae. Dr. Robert Cantu, a Nocsae board member and chief of neurosurgery at Emerson Hospital in Concord, Mass., says that to prevent concussions, helmets would have to have a severity index of 300—about four times better than the standard. "The only way to make that happen, Dr. Cantu says, "is to make the helmet much bigger and the padding much bigger."

The problem with that approach, he says—other than making players look like Marvin the Martian—is that heavier helmets would be more likely to cause neck injuries.

The article also makes an interesting comparison,

One of the strongest arguments for banning helmets comes from the Australian Football League. While it's a similarly rough game, the AFL never added any of the body armor Americans wear. When comparing AFL research studies and official NFL injury reports, AFL players appear to get hurt more often on the whole with things like shoulder injuries and tweaked knees. But when it comes to head injuries, the helmeted NFL players are about 25% more likely to sustain one.

Andrew McIntosh, a researcher at Australia's University of New South Wales who analyzed videotape, says there may be a greater prevalence of head injuries in the American game because the players hit each other with forces up to 100% greater. "If they didn't have helmets on, they wouldn't do that," he says. "They know they'd injure themselves."

This is just the latest example of what economists call the Peltzman Effect. That is, the tendency of people to react to a safety regulation by increasing other risky behaviour, offsetting some or all of the benefit of the regulation.

The effect of maternal fasting during pregnancy

This audio comes from VoxEU.org. In it Douglas Almond of Columbia University talks to Romesh Vaitilingam about his research with Bhashkar Mazumder on women who are pregnant during the Islamic holy month of Ramadan and the impact of fasting on their children – in terms of birth weight and the likelihood of being a boy or girl, as well as later life health outcomes.

Interesting blog bits

1. Brad Taylor on Corporatism in Everything or: How to Have Government Work for You without Resorting to Bribery
2. BK Drinkwater is Paging Brad Taylor
3. BK is also talking about The Corporatism Files: Diaries
4. Eric Crampton on Heresthetics
5. Peter Klein get us some Coasean Humor
6. Céline Carrère and Jaime de Melo ask Has distance died? The distance puzzle is the surprising finding that the volume of trade has become increasingly sensitive to distance. This column shows that low-income countries, which increasingly trade with geographically closer partners, drive the finding. This regionalisation of trade for low-income countries may reflect progress – or problems.

Arnold Kling on economic development

In this Cato Daily Podcast Arnold Kling talks about what drives economic development.

Innovation and entrepreneurship are amazingly good things ... and predatory government and corruption are amazingly bad things.

More unemployment, less crime

This from Tyler Cowen at Marginal Revolution,

With a lot more unemployed people, a lot more people are staying home, and they see more in their neighborhood," said Sgt. Thomas Lasater, who supervises the burglary unit of the police department in St. Louis County, Mo., where authorities recorded a whopping 35 percent drop in burglaries during the first six months of 2009.

An upside to unemployment. Cowen also notes another possible factor helping reduce burglaries,

The falling price of raw materials -- which had been producing copper and other thefts -- may be another reason for the change in trend.

EconTalk this week

Scott Sumner of Bentley University and the blog The Money Illusion talks with host Russ Roberts about monetary policy and the state of the economy. Sumner argues that tight money in late 2008 precipitated the recession. He argues that the standard measures of monetary policy--growth in reserves or the Federal Funds rate--are misleading. Sumner suggests focusing instead on nominal GDP. He argues that the failure of the Fed to counter the drop in nominal GDP in late 2008 intensified the recession and points to the growth in unemployment. Along the way he discusses the Taylor Rule and other monetary prescriptions.

Offshoring and local employment

How do firms who offshore change their local workforce? According to this article at VoxEU.org offshoring is one of the reasons that firms, in Germany at least, employ more highly educated workers at home. In the article Sascha O. Becker, Karolina Ekholm and Marc Muendler say

This column, using evidence from German multinationals, shows a positive correlation between offshoring and the firm’s proportion of highly educated workers. Offshoring firms have relatively more domestic jobs involving non-routine and interactive tasks. But offshoring is far from the only explanation for the shift towards more educated employees carrying out more advanced tasks.

The articles authors argue there are two important lessons from their work,

• First, at the level of the individual firm, offshoring seems to be associated with a shift towards more educated workers. We also report a positive correlation between the increase in offshoring and the proportion of highly educated workers in the firm. Both these results suggest that offshoring is associated with an increased relative demand for more educated workers, as traditional theories would predict.
• Second, our results support the view that the degree to which jobs involve non-routine and interactive tasks is relevant for their propensity to be offshored.

Famine and a free press

In a comment to the posting Famine and trade, John Small notes the argument by Amartya Sen that no substantial famine has ever occurred in a country with a relatively free press,

I have discussed elsewhere the remarkable fact that, in the terrible history of famines in the world, no substantial famine has ever occurred in any independent and democratic country with a relatively free press. We cannot find exceptions to this rule, no matter where we look: the recent famines of Ethiopia, Somalia, or other dictatorial regimes; famines in the Soviet Union in the 1930s; China's 1958-61 famine with the failure of the Great Leap Forward; or earlier still, the famines in Ireland or India under alien rule. China, although it was in many ways doing much better economically than India, still managed (unlike India) to have a famine, indeed the largest recorded famine in world history: Nearly 30 million people died in the famine of 1958-61, while faulty governmental policies remained uncorrected for three full years. The policies went uncriticized because there were no opposition parties in parliament, no free press, and no multiparty elections. Indeed, it is precisely this lack of challenge that allowed the deeply defective policies to continue even though they were killing millions each year. The same can be said about the world's two contemporary famines, occurring right now in North Korea and Sudan. (Amartya Sen, "Democracy as a Universal Value", Journal of Democracy 10.3 (1999) 3-17)

But I won't mind betting that there is a positive correlation between countries who allow relatively free trade and countries who have a relatively free press. Economic and political freedoms go together. Milton Friedman, for example, argued in "Capitalism and Freedom" that economic freedom is not only desirable in itself but is also a necessary condition for political freedom.

Famine and trade

Famine is an all too common fact of life in many parts of the world. But why do these areas suffer from such food shortages? Climate change? Lack of aid to the effected regions? In an article in the Wall Street Journal Julian Morris argues that we should blame famine on neither of these two reasons. He explains that we should blame famine on trade restrictions, not on climate change or a lack of Western aid. Morris writes,

Although thousands of individuals like Ms. Weldu have been saved by Western charity and taxes, millions more have suffered and died needlessly from famine in East Africa in the past quarter century. But their suffering was not caused by a lack of aid. Nor was it caused primarily by climate change (Western-induced or otherwise). Rather, it was and is the result of policies in the affected countries that inhibit freedom and incentives to trade, own land, and invest in diverse, prosperity-enhancing economic activities.

and continues,

Since the 1920s, global deaths from drought-related famines have fallen by 99.9%. The reason? Continued specialization and trade, which has skyrocketed the amount of food produced per capita, and has enabled people in drought-prone regions to diversify and become less vulnerable.

In places where trade is restricted, people are forced to remain subsistence farmers. So, when drought occurs, the majority suffer and many die.

Children and happiness

Children and happiness, a posting for Eric. One common result from empirical studies on the happiness of people is that the number of children has a negative impact on happiness indicators. The more kids, the lower the happiness of people. This rises an obvious question: Why would people have children? Bad luck? Social pressures? Stupidity? An less obvious answer to this question is that the empirics underlying the result are flawed.

Over at the Economic Logic blog it is noted that

Leonardo Becchetti, Elena Giachin Ricca and Alessandra Pelloni find that the typical way the empirical studies are conducted is flawed. Among the controls, there is usually income. But this make it difficult to disentangle the monetary for the non-monetary impact of children. Using equivalised household income (income adjusted for the number of people in the household) allows to focus only on the impact on happiness, and children now have a positive impact. Decomposing their sample (the German Socio-Economic Panel), they find that opportunity costs do matter. Theory is saved.

So two kids is better than just one.

Government failure versus market failure

John B. Taylor looks at Government Failure versus Market Failure at his blog Economics One. He writes,

Cliff Winston of the Brookings Institution carefully reviews three decades of empirical research on a wide range of microeconomic policy studies in his important book Government Failure versus Market Failure. He comes to the same basic conclusion; as he puts it "thirty years of empirical evidence... suggests that the welfare cost of government failure may be considerably greater than that of market failure."

Taylor makes the point that government failure should be at the top of the list of what went wrong in the recent financial crisis,

My Forbes magazine column this week reviews the latest empirical evidence on why government actions and interventions--government failure rather than market failure--should be at the top of the list of what went wrong in the recent financial crisis. Some continue to be surprised by my finding. While I focus on macroeconomic policy, mainly monetary policy and fiscal policy, my finding that government failure rather than market failure rises to the top of the list is not at all unsual in the broader context of empirical policy evaluation research.

This last sentence is supported by the Winston book.

John Stuart Mill, "On Liberty"

Mill makes a basic point which the government should consider much more deeply and often:

The object of this Essay is to assert one very simple principle, as entitled to govern absolutely the dealings of society with the individual in the way of compulsion and control, whether the means used be physical force in the form of legal penalties, or the moral coercion of public opinion. That principle is, that the sole end for which mankind are warranted, individually or collectively in interfering with the liberty of action of any of their number, is self-protection. That the only purpose for which power can be rightfully exercised over any member of a civilized community, against his will, is to prevent harm to others. His own good, either physical or moral, is not a sufficient warrant. He cannot rightfully be compelled to do or forbear because it will be better for him to do so, because it will make him happier, because, in the opinions of others, to do so would be wise, or even right. These are good reasons for remonstrating with him, or reasoning with him, or persuading him, or entreating him, but not for compelling him, or visiting him with any evil, in case he do otherwise. To justify that, the conduct from which it is desired to deter him must be calculated to produce evil to some one else. The only part of the conduct of any one, for which he is amenable to society, is that which concerns others. In the part which merely concerns himself, his independence is, of right, absolute. Over himself, over his own body and mind, the individual is sovereign.

Why Armen Alchian should win the Nobel Prize

A posting for Brad Taylor. Fred S. McChesney makes the case as to why Armen Alchian should win the Nobel Prize in economics in this article: Armen Alchian: An Economist-Lion in Winter.

The virtues of limiting executive pay

Yes there are virtues to limiting executive pay. Bruce Yandle makes the case in his article, Regulating Executive Pay Can Reduce Systemic Risk: If they are the right executives,

Yes, it is high time that pay and investment guidelines be mandated for all top level executives who may in the normal course their daily work push the entire economy too close to or even over the edge of systemic risk falls. If nothing else, this Great Recession has taught us that top executives can practically capsize the economy.

But the chief concern is not with presidents and vice presidents of too-big-to-fail banks and other bailed-out enterprises. As large as they are, they are small potatoes relative to the big generators of systemic risk. The critical concern is with top government executives who can create national and international panic, lay the groundwork for international inflation or deflation, and just by voting and writing regulations can change the risk profile of entire industries.

In other words limiting the effects and the creation of regime uncertainty can only help the economy.

More on George Soros's "Institute for New Economic Thinking"

Donald J. Boudreaux sent the following letter to the Financial Times,

Sir, You report (October 27) that George Soros is committing $50m to start a new think-tank whose purpose will be to displace what he considers (as you summarise it) “the unwavering belief in unchecked free markets, which remains pervasive in universities”. Or, to quote Mr Soros directly: “The ideologists in the free markets are still in command and I think they’ll be very difficult to remove because they have tenure.”

Mr Soros should check his facts before wasting his money. As my colleague Bryan Caplan writes in The Myth of the Rational Voter (2007), surveys show that, while economists are to the right of their university colleagues in other disciplines, “compared to the general public, the typical economist is left of centre”.

In other words Soros is trying to fix a problem that doesn't exist. Or may be he just want economists to be even more left-wing.

Incentives matter: tax file

From Carpe Diem comes this example of how taxes affect incentives.

TAMPA - Last spring, the cigar industry fretted that the government might tax so-called "little cigars" into oblivion. Several months later, though, it appears the makers of cigarette-shaped little cigars have found a way to escape the high taxes. The cigar makers have added more weight to their cigars, reclassified them as large cigars and now are subject to a lower tax rate, said Norman Sharp, president of the Cigar Association of America.Under the new tax rates, little cigars and large cigars are taxed differently, which apparently has given rise to some major changes in cigar production. For example, factories in the United States and Puerto Rico produced about 743 million large cigars in August, according to data from the U.S. Department of the Treasury. That's up 85 percent from August 2008, when they made 402 million large cigars (see chart above).

Meanwhile, production of little cigars plummeted. In August, factories in the United States and Puerto Rico produced about 145 million little cigars, down from about 480 million little cigars in August 2008. Cigars made outside of the United States and Puerto Rico saw a similar rise in large cigar production and decline in production of little cigars (see chart).

What's going on? Sharp, the cigar association president, said it appears cigar makers changed their production techniques to factor in the SCHIP tax. Cigar makers began adding enough extra weight to their little cigars so they exceeded the 3-pounds-per-1,000 threshold. So they could be classified now as large cigars.

The economic lessons from this are: If you tax something you get less of it and taxes are always distortionary, because taxpayers will change their behaviour in a effect to avoid or minimise the taxes. In other words taxes affect incentives. A possible exception incentive effect is a lump-sum tax.

Climate change and the world trading system

In this audio from VoxEU.org, Gary Hufbauer of the Peterson Institute for International Economics talks to Romesh Vaitilingam about potential conflicts between global agreements on tackling climate change and the rules of the international trading system, including possible outcomes from the upcoming Copenhagen climate conference.

Pay-by-the mile insurance

One for the markets in everything file. This from the Carpe Diem blog:

A first-of-its-kind plan is MileMeter available only in Texas, which last year began offering six-month policies with chunks of insured miles ranging from 1,000 to 6,000 miles. When the "tank" runs dry, motorists buy more.

Spending money on economists

At the Knowledge Problem blog Michael Giberson says In principle I’m in favor of spending money on economists. He is referring to the announcement that George Soros has promised to spend $5 million a year for 10 years to support an Institute for New Economic Thinking to be hosted at Central European University in Budapest, which Offsetting Behaviour commented on here and I commented on here. Giberson writes

As part of the announcement, Soros said:

The entire edifice of global financial markets has been erected on the false premise that markets can be left to their own devices, we must find a new paradigm and rebuild from the ground up. I decided to sponsor INET to facilitate the process. I hope others will join me.

I’d be surprised if we could find any significant part of the “global financial market” that wasn’t thoroughly entangled with law, regulation and politics, so I’m not sure which edifice he is talking about or where it has been erected. Furthermore, the idea that we can discard an existing social system, “find a new paradigm and rebuild from the ground up”, strikes me as intellectual arrogance of a very high order

Giberson also makes the same point I made about claim that the likes of Joseph Stiglitz, George Akerlof, Michael Spence, and Sir James Mirrlees in "marginalised" in the economics profsssion:

But whatever you think of economics, economists, or heterodox viewpoints, it seems odd to characterize winners of the Nobel price in economics and other distinguished economists as having been “marginalized” in the profession, as Michael Hirsch does in this Newsweek story on the INET announcement when he mentions the board of advisers. Yes, yes, pity the poor economist who was “marginalized” into tenured faculty position at some of the top universities in the world: Cal-Berkeley, Columbia, Harvard, Stanford, Oxford and Cambridge. In addition to the Nobel Prize, we have John Bates Clark awardees, former members of the President’s Council of Economic Advisers, and so on. The INET board of advisers is a collection of talented and honored members of the profession. Hirsch is discovering victims who perhaps didn’t notice their victimization during the recent spell of “free market fundamentalism” Hirsch observes in economics.

But Giberson also notes that it is Soros's money and thus he can do what he likes with it,

But he’s going to spend a lot of money on economists, and in any case I accept the premise that philanthropists should largely be left to their own devices, so I say he should go for it. It’s Soros’s money – largely built up from participating in that edifice of global financial markets, I understand – and he may as well spend it this way as on fancy cars or the Center for American Progress.