As a female who used to have a job that paid pretty decently, I couldn't help but find this article in the NYT interesting. Granted, the article doesn't really bring up a new idea- it talks about the social awkwardness and frustration that can result from situations where women have higher earning power- but it's a concept that is becoming more prevalent over time as women become increasingly career-focused and (financially) successful.
From an economic perspective, what I really found notable was the following set of statistics:
"For the first time, women in their 20s who work full time in several American cities — New York, Chicago, Boston and Minneapolis — are earning higher wages than men in the same age range, according to a recent analysis of 2005 census data by Andrew Beveridge, a sociology professor at Queens College in New York.
For instance, the median income of women age 21 to 30 in New York who are employed full time was 17 percent higher than that of comparable men.
Professor Beveridge said the gap is largely driven by a gulf in education: 53 percent of women employed full time in their 20s were college graduates, compared with 38 percent of men. Women are also more likely to have graduate degrees. `They have more of everything,' Professor Beveridge said."
So there. :-P
P.S. Okay, I wasn't going to get further into this, but I couldn't resist. The current trend, as alluded to in the above quote, is for women on average to be more educated than men in the same age bracket. This is a recent phenomenon, so it applies mostly to current 20-somethings and young 30-somethings. I hope that there will be a (continuing) change in family structure that goes along with this education trend, since it is not an efficient use of educational resources for the more educated women to drop out of the work force in order to raise children. People are entitled to their preferences of course, but the employment issue becomes relevant when one considers that university education is subsidized by various parties, including the government, in the form of financial aid.
Monday, September 24, 2007
Tuesday, September 18, 2007
News Flash!
Even Alan Greenspan is jumping on the behavioral bandwagon! Apparently he too concedes that human beings are more complex (and presumably less focused on pure self-interest) than Adam Smith professed, and he asserts that an understanding of human nature is crucial to developing suitable models of the economy. I certainly agree.
Monday, September 17, 2007
Quote of the Day
From Stephen Colbert, on the Colbert Report:
"As I said before, Al Gore's movie made money, and therefore global warming must be real. The market has spoken."
Obviously Colbert was being sarcastic, but there is something to be said for this. If I put on my pathological (to borrow a description of economists from Greg Mankiw) economist hat for a second, I start thinking about why global warming is problematic in the first place. (I admit that this is a different question than that of whether global warming exists scientifically.) On a basic level, global warming is problematic because it imparts a cost on people. But how much of a cost? If people are sufficiently rational, the cost of global warming can (theoretically) be estimated via the answer to one of the following questions:
-- How much would you be willing to pay to make global warming go away?
-- How much money would you have to be paid in order to be willing to sit back and let global warming take its course?
Unfortunately, there are a number of problems with this. First, people won't always "put their money where their mouths are" in line with their answers to hypothetical questions. Second, people typically don't even give the same estimates in response to the two questions above, even though they are objectively identical to a first approximation. Lastly, funding the problem of global warming has big potential for free-riding, so people may understate their willingness-to-pay under the assumption that others would pick up the slack.
All of that said, the fact that people are expending resources to at least learn more about global warming suggests that it's a materially real problem for a lot of people. Indeed, the market HAS spoken.
"As I said before, Al Gore's movie made money, and therefore global warming must be real. The market has spoken."
Obviously Colbert was being sarcastic, but there is something to be said for this. If I put on my pathological (to borrow a description of economists from Greg Mankiw) economist hat for a second, I start thinking about why global warming is problematic in the first place. (I admit that this is a different question than that of whether global warming exists scientifically.) On a basic level, global warming is problematic because it imparts a cost on people. But how much of a cost? If people are sufficiently rational, the cost of global warming can (theoretically) be estimated via the answer to one of the following questions:
-- How much would you be willing to pay to make global warming go away?
-- How much money would you have to be paid in order to be willing to sit back and let global warming take its course?
Unfortunately, there are a number of problems with this. First, people won't always "put their money where their mouths are" in line with their answers to hypothetical questions. Second, people typically don't even give the same estimates in response to the two questions above, even though they are objectively identical to a first approximation. Lastly, funding the problem of global warming has big potential for free-riding, so people may understate their willingness-to-pay under the assumption that others would pick up the slack.
All of that said, the fact that people are expending resources to at least learn more about global warming suggests that it's a materially real problem for a lot of people. Indeed, the market HAS spoken.
Friday, September 07, 2007
Price Discrimination, People...
For those of you that have ever taken economics, the following is merely a recap: Price discrimination occurs when the same product is sold by the same supplier to different people or groups of people at different prices. Now, economists go on to break this idea down into three categories, namely first, second and third-degree price discrimination. As a student, third-degree price discrimination is my favorite since it encompasses the idea of the student discount. With third-degree price discrimination, the idea is that when you can separate your customers into categories of "more price-sensitive" and "less price-sensitive", you (as a seller) can do better than uniform pricing by charging a higher price to the less price-sensitive group. However, this is usually framed as a lower price or a discount to the more price-sensitive group. Taken in the abstract, I doubt that people would get too much up in arms over the fairness of this type of policy.
In the United States, many forms of explicit price discrimination are illegal. However, there are ways to get around this by having the customers self-select into price points- anyone who has paid $800 for a plane ticket only to be sitting next to some guy who paid $200 6 months ago for his ticket knows what I am talking about. It seems as though Apple has taken advantage of this principle in a temporal sense, introducing its iPhone at a high price and then dropping the price by $200 two months later. As an economist, I say smart move, but apparently people are very upset (NYT). In fact, customers have made enough of a fuss that Steve Jobs has extended $100 store credits to the original iPhone owners. What irks me about the situation is that customers seem to be implying that Apple did something underhanded or shady, which is simply not the case. I have two immediate reactions to this:
1. If the iPhone were a high-fashion dress, no one would be batting an eyelash. It is commonly accepted practice in some other industries to pay a premium to get something first, when it is still new and hot rather than wait around until it is no longer new but on sale. If you were willing to pay $600 for a cool new toy, you were getting at least $600 of benefits from having the cool new toy. Get over it- you probably even got the $200 of benefits from people thinking you were cool because you had an iPhone first. Furthermore, Apple seemed to be selling plenty of iPhones at the beginning, so there probably would have been a shortage if it had been introduced at a lower price point. Someone should ask these upset consumers whether they would prefer a $600 iPhone or a waiting list.
2. I think this makes a point to those who think that behavioral economics describes phenomena that are on the fringe, as opposed to being central to "rational" decision-making. Clearly consumers' perceptions of fairness can and do have a big impact on market outcomes. (see Kahneman, Knetsch and Thaler's "Fairness as a Constraint on Profit Seeking: Entitlements in the Market") Behavioral economists would likely conjecture that customers would be less upset if they thought that Apple was reducing the price of the iPhone due to a sales slump.
Lastly, I have to point out my favorite part of the article:
"Ken Dulaney, a vice president at Gartner Research, said that in general starting high and dropping the price slowly was a smart strategy. By starting the price high, manufacturers can gauge early demand and reap greater profit from early adopters who are willing to pay any amount to be the first with a particular device. 'It’s probably a formula taught in business school,' Mr. Dulaney said."
You don't have to graduate from HBS to learn this stuff, all you need is a first-year microeconomics course! That said, I'm going to go ask my iPhone-owning MBA student friend how he views the situation.
Update: Apparently Tyler Cowen agrees with me here. Economists of the world unite!
In the United States, many forms of explicit price discrimination are illegal. However, there are ways to get around this by having the customers self-select into price points- anyone who has paid $800 for a plane ticket only to be sitting next to some guy who paid $200 6 months ago for his ticket knows what I am talking about. It seems as though Apple has taken advantage of this principle in a temporal sense, introducing its iPhone at a high price and then dropping the price by $200 two months later. As an economist, I say smart move, but apparently people are very upset (NYT). In fact, customers have made enough of a fuss that Steve Jobs has extended $100 store credits to the original iPhone owners. What irks me about the situation is that customers seem to be implying that Apple did something underhanded or shady, which is simply not the case. I have two immediate reactions to this:
1. If the iPhone were a high-fashion dress, no one would be batting an eyelash. It is commonly accepted practice in some other industries to pay a premium to get something first, when it is still new and hot rather than wait around until it is no longer new but on sale. If you were willing to pay $600 for a cool new toy, you were getting at least $600 of benefits from having the cool new toy. Get over it- you probably even got the $200 of benefits from people thinking you were cool because you had an iPhone first. Furthermore, Apple seemed to be selling plenty of iPhones at the beginning, so there probably would have been a shortage if it had been introduced at a lower price point. Someone should ask these upset consumers whether they would prefer a $600 iPhone or a waiting list.
2. I think this makes a point to those who think that behavioral economics describes phenomena that are on the fringe, as opposed to being central to "rational" decision-making. Clearly consumers' perceptions of fairness can and do have a big impact on market outcomes. (see Kahneman, Knetsch and Thaler's "Fairness as a Constraint on Profit Seeking: Entitlements in the Market") Behavioral economists would likely conjecture that customers would be less upset if they thought that Apple was reducing the price of the iPhone due to a sales slump.
Lastly, I have to point out my favorite part of the article:
"Ken Dulaney, a vice president at Gartner Research, said that in general starting high and dropping the price slowly was a smart strategy. By starting the price high, manufacturers can gauge early demand and reap greater profit from early adopters who are willing to pay any amount to be the first with a particular device. 'It’s probably a formula taught in business school,' Mr. Dulaney said."
You don't have to graduate from HBS to learn this stuff, all you need is a first-year microeconomics course! That said, I'm going to go ask my iPhone-owning MBA student friend how he views the situation.
Update: Apparently Tyler Cowen agrees with me here. Economists of the world unite!
Tuesday, September 04, 2007
Who Needs Data Anyway?
This is disturbing (from the NYT):
"Just before the break, the House of Representatives passed a bill that would cut $23.6 million from the bureau’s 2008 budget for compiling the nation’s most important economic statistics. A cut of that size would result in the largest loss of source data since the government started keeping the statistics during the Great Depression, impairing the accuracy of figures on economic growth, consumer spending, corporate profits, labor productivity, inflation and other benchmark indicators."
Eh, I suppose I really wanted to be a theory person anyway. Sarcasm aside though, I find it very frustrating that, at a time where economics is becoming more popular (and people increasingly understand the importance of economic analysis) and students and researchers at all levels are learning advanced techniques to analyze economic data, one of the main providers of data is deciding that its collection is declining in priority. My guess is that the government will replace at least some of the cost by giving grants to other institutions to collect such information.
"Just before the break, the House of Representatives passed a bill that would cut $23.6 million from the bureau’s 2008 budget for compiling the nation’s most important economic statistics. A cut of that size would result in the largest loss of source data since the government started keeping the statistics during the Great Depression, impairing the accuracy of figures on economic growth, consumer spending, corporate profits, labor productivity, inflation and other benchmark indicators."
Eh, I suppose I really wanted to be a theory person anyway. Sarcasm aside though, I find it very frustrating that, at a time where economics is becoming more popular (and people increasingly understand the importance of economic analysis) and students and researchers at all levels are learning advanced techniques to analyze economic data, one of the main providers of data is deciding that its collection is declining in priority. My guess is that the government will replace at least some of the cost by giving grants to other institutions to collect such information.
Monday, August 20, 2007
Mad Money...
When I go to the gym in the evening (which I don't do nearly as often as I should), I somehow always end up at one of the elliptical trainers in front of the television showing CNBC. This means that I am reasonably familiar with Jim Cramer's show Mad Money. Stock picking isn't really my thing, but I find the show overall to be pretty entertaining. (Okay fine, I suppose I wouldn't mind taking over for Maria Bartiromo as the "Money Honey".) Apparently the show is also a topic of interest to behavioral finance people- Joey Engelberg, one of my fellow graduate students at Kellogg, recently presented a paper that shows a short-term spike in stock price and trading volume for those stocks recommended during Jim Cramer's "Lightning Round". Luckily, we have hedge funds to keep our markets efficient (mild sarcasm), and Engelberg and his co-authors find that the effect dissipates quickly. So Jim Cramer can drive the market, or at least he could before people caught on to this effect, but can he pick stocks?
Apparently Reuters has taken up the issue, and it's analysts show that Jim Cramer's picks haven't beaten the market over the last two years. Hmph...and here I thought I was being at least a little smart for not watching Friends reruns.
Apparently Reuters has taken up the issue, and it's analysts show that Jim Cramer's picks haven't beaten the market over the last two years. Hmph...and here I thought I was being at least a little smart for not watching Friends reruns.
Friday, August 17, 2007
More on College Rankings...
So some university officials are still up in arms about the U.S. News College Rankings, but most seem to still be playing along. There is another article in the NYT today. My guess is that there are some interesting questions to be answered by picking through the historical rankings data, but I'm going to have to think about that some more...
Thursday, August 16, 2007
The Best of Intentions?
So perhaps there really is no such thing as a free lunch. According to today's NYT, CARE is turning down in-kind funds for food aid. Why would they ever do this? Well, this is the lowdown, as I get my head around it:
1. The American government buys agricultural products from American farmers. However, the government pays above market prices to the farmers as a form of subsidy. (This creates allocative inefficiency in that too much of the agricultural products are being produced in the U.S.)
2. The government then ships said agricultural products to Africa using American shipping companies. This again creates inefficiency, since now not only are the farm products being produced where it's more expensive to produce, but resources are being spent to ship them almost halfway around the world when they could be grown in Africa.
3. The government gives these agricultural products to CARE, which sells the farm products to people in Africa and uses the proceeds to finance antipoverty programs.
My head is not around this yet, since as an economist I think my brain might explode as a result of reading the article. My problems with it, in order of descending ease of explanation: (Note that the problems don't even have to start with the fact that the gifts are making life more difficult for African farmers.)
1. Mental accounting issues aside, economists would argue that cash gifts are always better, since the giver in that case doesn't have to know anything about what the receiver needs or wants. Therefore, in order for this in-kind gift to be efficient, there must be some cost advantage to providing agricultural products rather than direct monetary funding. Looking, looking...nope, don't see a cost advantage. It is worth noting, however, that giving a subsidy of $100 is better in terms of U.S. surplus than just giving $100 to CARE directly, since domestic farmers and shippers do see a bump in surplus from the subsidy. The caveat is that the $100 subsidy to $100 cash gift is not the relevant comparison- $100 worth of U.S. agricultural products could be grown (and thus purchased) in Africa for much less than $100.
2. This plan seems like a sneaky way of making subsidies look good...how can people get mad about agricultural subsidies and business being thrown to the shipping companies when the output of this is going to feed poor people in Africa? Unfortunately, there is friction in this process, since $100 in subsidy for the farmer or shipper results in less than $100 of extra profit, or surplus, for them. The difference goes to cover marginal costs, obviously, so the government is subsidizing an entire value chain, the extent of which it may or may not be aware of. (Maybe subsidizing shovel manufacturers doesn't sound so bad, but what about the fuel that goes to power the ships?) Furthermore, the government is giving farmers a disincentive to find an industry where their labor and capital could be better used.
3. Giving the farm products to CARE essentially means that CARE's marginal cost of "production" is constant at zero, so it can sell the product at any positive price and be happy (or at least be sustainable). So CARE is basically the Wal-Mart of Africa, and has a difficult decision to make: does it charge low prices so that people can eat more cheaply, and undercut local production in the process? Even if it doesn't specifically undercut, one can visualize a supply and demand diagram to understand that the increased supply from the U.S. drives down market prices, which hurts African producers. This is where the article focuses, but it's not the whole story.
Taking the subsidy process as given, it is unclear why this free gift is automatically detrimental to the African people- how can a product that is useful and free be harmful? By definition, if you are endowed with something that provides positive marginal utility, you are better off than you were without the endowment. I hate to say it, since I know that CARE means well, but they really need to be smarter about their operations, at least in this case. Let's examine the situation economically to see what the organization could do:
In Africa, there are both poor producers and poor consumers to think about. The consumers are better off with the agricultural gifts, since they are getting more product at a lower market price. The African producers are worse off, since they are getting a lower price (because of the increased supply) and selling a lower quantity (since the gift is flooding the market and satisfying part of demand). CARE is better off, since it's collecting money to put back to the African people. In this way, the African producers and consumers are the ultimate beneficiaries of CARE's surplus. As long as the gains to African consumers and CARE are larger than the losses to producers (which they are, and I have the diagram to prove it!), one can devise a transfer system that ends in everyone being better off. This seems to be the piece that CARE is missing- if it compensated the producers for their losses, then everyone could be happy. Essentially, the African farmers could be getting the same profit that they were before, inclusive of the transfer from CARE, and not having to grow as much as before to get it. In fact, this is easier to implement than a transfer from consumers to producers, since CARE inherently has the coordinating mechanism to make it happen. (Counterintuitive as it may be, CARE could be doing good for Africa even if it just hands its revenue 100% back to the farmers, since the consumers still benefit from lower prices.)
Final note: it is important to think about these issues in a dynamic context, since the free farm products probably won't last forever. The above transfer would allow the African farmers to stay in business so that their societies wouldn't be left in the lurch when the aid goes away.
1. The American government buys agricultural products from American farmers. However, the government pays above market prices to the farmers as a form of subsidy. (This creates allocative inefficiency in that too much of the agricultural products are being produced in the U.S.)
2. The government then ships said agricultural products to Africa using American shipping companies. This again creates inefficiency, since now not only are the farm products being produced where it's more expensive to produce, but resources are being spent to ship them almost halfway around the world when they could be grown in Africa.
3. The government gives these agricultural products to CARE, which sells the farm products to people in Africa and uses the proceeds to finance antipoverty programs.
My head is not around this yet, since as an economist I think my brain might explode as a result of reading the article. My problems with it, in order of descending ease of explanation: (Note that the problems don't even have to start with the fact that the gifts are making life more difficult for African farmers.)
1. Mental accounting issues aside, economists would argue that cash gifts are always better, since the giver in that case doesn't have to know anything about what the receiver needs or wants. Therefore, in order for this in-kind gift to be efficient, there must be some cost advantage to providing agricultural products rather than direct monetary funding. Looking, looking...nope, don't see a cost advantage. It is worth noting, however, that giving a subsidy of $100 is better in terms of U.S. surplus than just giving $100 to CARE directly, since domestic farmers and shippers do see a bump in surplus from the subsidy. The caveat is that the $100 subsidy to $100 cash gift is not the relevant comparison- $100 worth of U.S. agricultural products could be grown (and thus purchased) in Africa for much less than $100.
2. This plan seems like a sneaky way of making subsidies look good...how can people get mad about agricultural subsidies and business being thrown to the shipping companies when the output of this is going to feed poor people in Africa? Unfortunately, there is friction in this process, since $100 in subsidy for the farmer or shipper results in less than $100 of extra profit, or surplus, for them. The difference goes to cover marginal costs, obviously, so the government is subsidizing an entire value chain, the extent of which it may or may not be aware of. (Maybe subsidizing shovel manufacturers doesn't sound so bad, but what about the fuel that goes to power the ships?) Furthermore, the government is giving farmers a disincentive to find an industry where their labor and capital could be better used.
3. Giving the farm products to CARE essentially means that CARE's marginal cost of "production" is constant at zero, so it can sell the product at any positive price and be happy (or at least be sustainable). So CARE is basically the Wal-Mart of Africa, and has a difficult decision to make: does it charge low prices so that people can eat more cheaply, and undercut local production in the process? Even if it doesn't specifically undercut, one can visualize a supply and demand diagram to understand that the increased supply from the U.S. drives down market prices, which hurts African producers. This is where the article focuses, but it's not the whole story.
Taking the subsidy process as given, it is unclear why this free gift is automatically detrimental to the African people- how can a product that is useful and free be harmful? By definition, if you are endowed with something that provides positive marginal utility, you are better off than you were without the endowment. I hate to say it, since I know that CARE means well, but they really need to be smarter about their operations, at least in this case. Let's examine the situation economically to see what the organization could do:
In Africa, there are both poor producers and poor consumers to think about. The consumers are better off with the agricultural gifts, since they are getting more product at a lower market price. The African producers are worse off, since they are getting a lower price (because of the increased supply) and selling a lower quantity (since the gift is flooding the market and satisfying part of demand). CARE is better off, since it's collecting money to put back to the African people. In this way, the African producers and consumers are the ultimate beneficiaries of CARE's surplus. As long as the gains to African consumers and CARE are larger than the losses to producers (which they are, and I have the diagram to prove it!), one can devise a transfer system that ends in everyone being better off. This seems to be the piece that CARE is missing- if it compensated the producers for their losses, then everyone could be happy. Essentially, the African farmers could be getting the same profit that they were before, inclusive of the transfer from CARE, and not having to grow as much as before to get it. In fact, this is easier to implement than a transfer from consumers to producers, since CARE inherently has the coordinating mechanism to make it happen. (Counterintuitive as it may be, CARE could be doing good for Africa even if it just hands its revenue 100% back to the farmers, since the consumers still benefit from lower prices.)
Final note: it is important to think about these issues in a dynamic context, since the free farm products probably won't last forever. The above transfer would allow the African farmers to stay in business so that their societies wouldn't be left in the lurch when the aid goes away.
Wednesday, August 15, 2007
Economics Really is Everywhere...
Okay, so I'm sitting here minding my own business and reading the NYT style section...I get to an article titled "Buy Low, Divorce High", and as anyone even mildly cynical about relationships would do, I begin reading. The general gist of the article is that the rising values of homes/condos for married couples is tending to lead to divorce, since the people involved recognize that they could live comfortably by themselves as a result of the large profit on their real estate. I can't help but think that it's a bit sad that financial insecurity is what keeps a lot of relationships together, but I digress. Anyway, I get to about the middle of the first page of the article only to find that the author starts referring to the work of Gary Becker. In the style section? Apparently Becker is trendy and I didn't know it.
To quote the article:
"Economists are familiar with this phenomenon. Even though divorce rates are declining over all, as far back as 1977 the economist Gary Becker showed that couples experiencing any unexpected, drastic rise in net worth are at risk of divorce. (The same holds true for a drastic decline in net worth.)
Extrapolating from survey data, Dr. Becker concluded in The Journal of Political Economy that “a greater deviation between actual and expected earnings increases the probability” of divorce.
Although couples who see their incomes rise steadily generally stay together, those who make more money than they ever expected are vulnerable to divorce. They realize that they are less financially dependent on each other and that they might have chosen different spouses if they had more choices at the time, said Dr. Becker, who teaches at the University of Chicago.
Dr. Becker, who won the Nobel Prize in 1992, also explored in his divorce study the economic argument for what many people today call trading up, or finding a trophy spouse."
I try hard to respect people's preferences, but really?
To quote the article:
"Economists are familiar with this phenomenon. Even though divorce rates are declining over all, as far back as 1977 the economist Gary Becker showed that couples experiencing any unexpected, drastic rise in net worth are at risk of divorce. (The same holds true for a drastic decline in net worth.)
Extrapolating from survey data, Dr. Becker concluded in The Journal of Political Economy that “a greater deviation between actual and expected earnings increases the probability” of divorce.
Although couples who see their incomes rise steadily generally stay together, those who make more money than they ever expected are vulnerable to divorce. They realize that they are less financially dependent on each other and that they might have chosen different spouses if they had more choices at the time, said Dr. Becker, who teaches at the University of Chicago.
Dr. Becker, who won the Nobel Prize in 1992, also explored in his divorce study the economic argument for what many people today call trading up, or finding a trophy spouse."
I try hard to respect people's preferences, but really?
Monday, August 13, 2007
Even Ezra Gets Economics...Sort Of...
For those of you that don't live in the Boston area, Ezra Dyer is a humor colunmist in a popular free magazine called The Improper Bostonian. I read this magazine regularly to find out what is going on about town, and I was happy to see that even Ezra uses economics to explain real-life events. In a (mostly sarcastic) article about the dodgy reputations of Red Sox ticket scaplers, he concludes with the following paragraph:
"The problem isn't opportunistic scalpers or the Red Sox's popularity. The problem is that Fenway Park needs 20,000 more seats- maybe the Yankees will let us take some from their old stadium, which they have the good sense to abandon. When standing room goes for $100 a ticket, something's seriously wrong with the supply/demand relationship. I write this on a Monday, and tonight Kason Gabbard pitches against the mighty Kansas City Royals. Of course, the game is sold out. Dude, it's the Royals."
Now, I applaud the effort, and Ezra is certainly correct in that the high prices are caused by market forces. However, it is important to understand that prices are never determined by supply or demand alone! (In other words, if the Red Sox weren't so damn popular then the ticket prices would be much less of an issue, even taking the small stadium as given.) In fact, the ticket prices have to do with all three of the things he mentions- the park size restricts supply, the popularity leads to high demand, and the scalpers provide a resale market so that the artificially low prices set by the Red Sox organization (probably for image reasons) cannot be maintained.
I really do love being able to combine my interest in economics with my other main interests...go Sox. :)
"The problem isn't opportunistic scalpers or the Red Sox's popularity. The problem is that Fenway Park needs 20,000 more seats- maybe the Yankees will let us take some from their old stadium, which they have the good sense to abandon. When standing room goes for $100 a ticket, something's seriously wrong with the supply/demand relationship. I write this on a Monday, and tonight Kason Gabbard pitches against the mighty Kansas City Royals. Of course, the game is sold out. Dude, it's the Royals."
Now, I applaud the effort, and Ezra is certainly correct in that the high prices are caused by market forces. However, it is important to understand that prices are never determined by supply or demand alone! (In other words, if the Red Sox weren't so damn popular then the ticket prices would be much less of an issue, even taking the small stadium as given.) In fact, the ticket prices have to do with all three of the things he mentions- the park size restricts supply, the popularity leads to high demand, and the scalpers provide a resale market so that the artificially low prices set by the Red Sox organization (probably for image reasons) cannot be maintained.
I really do love being able to combine my interest in economics with my other main interests...go Sox. :)
Sunday, August 12, 2007
It's Been a Long Time Coming...
Finally, I get to combine two of my main interests: economics and fashion. :) I've wondered for a while now why clothing designs (and handbag designs and so on as well) don't enjoy intellectual property protection. Actually, I just figured that most intellectual property protection was a bit irrelevant for the fashion industry, since by the time a designer gets a patent or copyright on the books, she will have already moved on to the next (hopefully) hot design. If people have a short attention span for designer fashion items, then those that buy the real items right away and those that buy the knockoffs later (or at all, out of principle) would likely not be the same people. If this is true, then the knockoffs are not taking significant sales away from the original items, and may even be bringing positive attention to the designers.
I will acknowledge that the key to the above argument is the time lag between the introduction of the original designer items and the appearance of the knockoffs. As this time lag gets shorter, more substitution may occur. According to the Washington Post, legislators recognize this and are giving some attention to the issue. Bills have been introduced in the House and Senate that would give 3 years of copyright protection to clothing designs. (Why not patent protection, I wonder?) I am pleased to see this move, since I think the analogy to R&D that the article alludes to is a valid one. We understand this concept in the context of the pharmaceutical industry, for example- without legal protection, research and development of new compounds is a public good and thus is likely to be underproduced in a free market. Similarly, designers have less of an incentive to "invest" in developing novel clothing designs if they know that they are just going to get copied and the profits are going to be competed away.
On a random note, I am surprised how often the aricle refers to counterfeit logo goods, since designer trademarks are already protected under intellectual property law.
I will acknowledge that the key to the above argument is the time lag between the introduction of the original designer items and the appearance of the knockoffs. As this time lag gets shorter, more substitution may occur. According to the Washington Post, legislators recognize this and are giving some attention to the issue. Bills have been introduced in the House and Senate that would give 3 years of copyright protection to clothing designs. (Why not patent protection, I wonder?) I am pleased to see this move, since I think the analogy to R&D that the article alludes to is a valid one. We understand this concept in the context of the pharmaceutical industry, for example- without legal protection, research and development of new compounds is a public good and thus is likely to be underproduced in a free market. Similarly, designers have less of an incentive to "invest" in developing novel clothing designs if they know that they are just going to get copied and the profits are going to be competed away.
On a random note, I am surprised how often the aricle refers to counterfeit logo goods, since designer trademarks are already protected under intellectual property law.
Wednesday, August 08, 2007
They Start 'Em Young Nowadays...
An article in the NYT reports on the economics knowledge of high school students: "The nation’s high school seniors performed significantly better on the first nationwide economics test than they did on other recent national exams in history and science, and demonstrated a better understanding of basic market forces like supply and demand than officials expected."
I am happy about this for a number of reasons, but not entirely surprised- even teenagers buy stuff and have jobs of various sorts nowadays, so it stands to reason that they would have an intuitive understanding of market forces. But I digress...back to why I am happy: First, I am obviously happy that high school students have at least a basic understanding of economics, since this knowledge is necessary to participate effectively in a capitalist society, understand public policy (how can people vote intelligently if they don't understand policy consequences?), and so on. Second, I am happy they they are, at least in some cases, having it taught to them rather than having to figure it out on their own or wait until college. If I remember correctly, only something around 50 percent of college-age Americans are graduating from 4-year colleges/universities, so a lot of people get left out if economics is not addressed at a lower level. The article states that about one-third of states require economics for graduation, which is actually higher than what I would have guessed. (As a sidenote, a particular Harvard professor said once that it would be hard to teach good economics at the high school level since the average high school teacher barely scored 1000 on the SAT. This statement did not make me happy of course, but unfortunately isn't entirely factually inaccurate- according to the data I found, the mean SAT score for high school teachers is somewhere between 1000 and 1100...disappointing!) Third, I am happy that the effects of teaching economics is being studied, since it's hard to learn what is effective without a feedback mechanism. Apparently educators have a lot of work to do on the curriculum side: "The test scores of students who had taken economics courses were not necessarily higher than those who had not. On average, students who had taken Advanced Placement, International Baccalaureate or honors courses in economics scored marginally higher than students who had taken no economics at all. But students who had taken 'consumer economics' or business courses tended to score lower."
Based on the questions that the student could and could not answer, I hazard a guess that, like me, they are much better at micro than macro. :)
I am happy about this for a number of reasons, but not entirely surprised- even teenagers buy stuff and have jobs of various sorts nowadays, so it stands to reason that they would have an intuitive understanding of market forces. But I digress...back to why I am happy: First, I am obviously happy that high school students have at least a basic understanding of economics, since this knowledge is necessary to participate effectively in a capitalist society, understand public policy (how can people vote intelligently if they don't understand policy consequences?), and so on. Second, I am happy they they are, at least in some cases, having it taught to them rather than having to figure it out on their own or wait until college. If I remember correctly, only something around 50 percent of college-age Americans are graduating from 4-year colleges/universities, so a lot of people get left out if economics is not addressed at a lower level. The article states that about one-third of states require economics for graduation, which is actually higher than what I would have guessed. (As a sidenote, a particular Harvard professor said once that it would be hard to teach good economics at the high school level since the average high school teacher barely scored 1000 on the SAT. This statement did not make me happy of course, but unfortunately isn't entirely factually inaccurate- according to the data I found, the mean SAT score for high school teachers is somewhere between 1000 and 1100...disappointing!) Third, I am happy that the effects of teaching economics is being studied, since it's hard to learn what is effective without a feedback mechanism. Apparently educators have a lot of work to do on the curriculum side: "The test scores of students who had taken economics courses were not necessarily higher than those who had not. On average, students who had taken Advanced Placement, International Baccalaureate or honors courses in economics scored marginally higher than students who had taken no economics at all. But students who had taken 'consumer economics' or business courses tended to score lower."
Based on the questions that the student could and could not answer, I hazard a guess that, like me, they are much better at micro than macro. :)
Wednesday, July 11, 2007
A nerdy econ joke, by Me
Q: Why did the chicken cross the road?
A: Because it had the proper incentives.
*rimshot*
A: Because it had the proper incentives.
*rimshot*
Monday, July 09, 2007
Lesson of the day...
Professors who teach classes on incentives and pay-for-performance almost univerally point out that incentive systems usually work *exactly* as set up. Unfortunately, this doesn't mean that the system will reach the intended goal, since the mechanics of the incentives may or nay not be in line with the overall objective or they may be off in terms of the strength of the carrot on the stick. (Those of you computer programmers that insist that "the computer isn't doing what it's told" have a good idea of what I'm talking about here...like it or not, the computer is doing exactly as it was told- it can't help it if the instructions were erroneous!)
I illustrate via a personal example. When I was in kindergarten (full disclosure: I was probably a difficult child), my teacher tried to reward students for good work with a cute hand stamp of some sort. Now, I really don't like hand stamps- even now, I get very annoyed when I go to a club or a concert and the bouncer insists on the hand stmp policy...I think the skin on my hands is abnormally porous, and the stamps are a pain to wash off. Anyway, my mother had been very careful to teach me that when someone is violating my person in a way that makes me uncomfortable, I am to say "no" in my sternest voice possible. So of course I chose this moment to actually do what I was told. The other kids thought about my behavior for a bit and figured that there must be a reason that I didn't want the hand stamp, and a mutiny began. Now, my mother was not pleased when my teacher explained this to her, so she offered me a quarter for each time I came home with a hand stamp. Apparently I liked money more than I disliked hand stamps, since my response was to find a friend that had a stamp and make sure that she stamped my hand before I went home each day. I'm pretty sure my mom eventually caught on, but I think it illustrates my point nicely.
This cartoon also gets the point across...a picture really is worth a thousand words. Thanks to Jeff for the link. :)
I illustrate via a personal example. When I was in kindergarten (full disclosure: I was probably a difficult child), my teacher tried to reward students for good work with a cute hand stamp of some sort. Now, I really don't like hand stamps- even now, I get very annoyed when I go to a club or a concert and the bouncer insists on the hand stmp policy...I think the skin on my hands is abnormally porous, and the stamps are a pain to wash off. Anyway, my mother had been very careful to teach me that when someone is violating my person in a way that makes me uncomfortable, I am to say "no" in my sternest voice possible. So of course I chose this moment to actually do what I was told. The other kids thought about my behavior for a bit and figured that there must be a reason that I didn't want the hand stamp, and a mutiny began. Now, my mother was not pleased when my teacher explained this to her, so she offered me a quarter for each time I came home with a hand stamp. Apparently I liked money more than I disliked hand stamps, since my response was to find a friend that had a stamp and make sure that she stamped my hand before I went home each day. I'm pretty sure my mom eventually caught on, but I think it illustrates my point nicely.
This cartoon also gets the point across...a picture really is worth a thousand words. Thanks to Jeff for the link. :)
Sunday, July 08, 2007
Let's not make this a popularity contest...
In a previous post, I talked about how a number of liberal arts colleges were threatening to stop participating in the U.S. News rankings of colleges and universities. I am happy to see that they seem to be against the explicit ranking rather than the provision of (hopefully) useful information.
In an article from the July 4th NYT, a number of higher education officials say that there are plans in the works to provide comprehensive school information via a collective web site. To quote the article:
"Katherine Will, the president of Gettysburg College and chairwoman of the Annapolis Group, said, “Our sense is, we’re educators — if you feel that there is not enough information out there, well, by golly, we’ll give it to you.”
“I think the key thing that institutions are saying is, compare schools, don’t rank them,” Dr. Will added."
I appreciate the sentiment, I really do. However, I have a feeling that this system may not be as useful to prospective students and their families. Why? People suffer from the curse of bounded rationality and also limited time. In other words, who is going to sort through a two-page summary for every school in the country and then try to make sense of it all? Fair or not, the rankings provide a heuristic for at least giving a student a starting place for considering schools. Furthermore, people tend to suffer from confirmation bias, whereby they seek out and interpret information that supports their previously held beliefs.
The issues that I mention generally center around the problem of overchoice, and could be mitigated through a clever navigation system on this new hypothetical web site. You know how on Amazon and Netflix they have a box that says something along the lines of "if you liked product X, you are likely to also like products Y and Z"? The college site could do the same thing- "if you are considering Williams, you might also be interested in Swarthmore and Amherst". (Hypothetical example only of course- I have no idea whether this would hold in practice.) This way students wouldn't only take the time to look at schools that they were already curious about and could be introduced to new options, just as she probably was when looking at the U.S. News rankings. Unfortunately, these features are also easier said than done- I foresee the same arguments over any sort of potential "relatedness" algorithm that schools are currently having with the rankings! I think they'd better be careful, lest we revert back to a system of children either going to the parents' alma mater or the school that they happened to hear about when they were little. I'm sure schools like Washington University in St. Louis, currently ranked 12th in national colleges, would have a lot to say about that. I really don't think that schools need any more of an incentive to invest in brand equity.
In an article from the July 4th NYT, a number of higher education officials say that there are plans in the works to provide comprehensive school information via a collective web site. To quote the article:
"Katherine Will, the president of Gettysburg College and chairwoman of the Annapolis Group, said, “Our sense is, we’re educators — if you feel that there is not enough information out there, well, by golly, we’ll give it to you.”
“I think the key thing that institutions are saying is, compare schools, don’t rank them,” Dr. Will added."
I appreciate the sentiment, I really do. However, I have a feeling that this system may not be as useful to prospective students and their families. Why? People suffer from the curse of bounded rationality and also limited time. In other words, who is going to sort through a two-page summary for every school in the country and then try to make sense of it all? Fair or not, the rankings provide a heuristic for at least giving a student a starting place for considering schools. Furthermore, people tend to suffer from confirmation bias, whereby they seek out and interpret information that supports their previously held beliefs.
The issues that I mention generally center around the problem of overchoice, and could be mitigated through a clever navigation system on this new hypothetical web site. You know how on Amazon and Netflix they have a box that says something along the lines of "if you liked product X, you are likely to also like products Y and Z"? The college site could do the same thing- "if you are considering Williams, you might also be interested in Swarthmore and Amherst". (Hypothetical example only of course- I have no idea whether this would hold in practice.) This way students wouldn't only take the time to look at schools that they were already curious about and could be introduced to new options, just as she probably was when looking at the U.S. News rankings. Unfortunately, these features are also easier said than done- I foresee the same arguments over any sort of potential "relatedness" algorithm that schools are currently having with the rankings! I think they'd better be careful, lest we revert back to a system of children either going to the parents' alma mater or the school that they happened to hear about when they were little. I'm sure schools like Washington University in St. Louis, currently ranked 12th in national colleges, would have a lot to say about that. I really don't think that schools need any more of an incentive to invest in brand equity.
Friday, July 06, 2007
Shame on Us Impatient Youngsters...??
Here's another one for the incentives brainstorm...
Some quotes from a WSJ article entitled "New Grads Are Impatient for Promotions (originally from June 20, and available for 7 days):
"Twentysomethings are accustomed to meeting short-term goals in schools with quarter and semester systems. They expect to see results on the job just as quickly and when they don't, impatience sets in. The disgruntled say that they don't necessarily want more money, they want stimulating assignments that give meaning to their lives."
"Ryan Paugh, 23, is already concerned that he's wasting his life at his first full-time job. In January, the Flemington, N.J., resident started working as a contractor, with no benefits, in the communications department of a Fortune 500 company. Frequently, he finishes a day's work in three hours, he says. "You feel really useless." Up until recently, Mr. Paugh asked for more work from his boss every other day. "Once in a while they hand something off," he says. Now he doesn't ask so much."
"Nikhil Thakur was impatient after two years in his first job out of college, at a technology company. Three raises didn't dent his malaise. "The first one briefly made me turn a blind eye to other shortcomings," he says, "but each subsequent one did nothing to increase my job satisfaction." "
Are we in the midst of fundamental change in desires from new workers, or have companies been getting it wrong for a long time? How can companies provide incentives to these workers, given that increasing their responsibility doesn't seem to be an option? Are efficiency wages purely a monetary concept or could they be more broadly defined? The system must be somehow inefficient if at the same time there are companies wringing their hands trying to motivate workers to be productive and workers wishing that they could be given more to do.
Some quotes from a WSJ article entitled "New Grads Are Impatient for Promotions (originally from June 20, and available for 7 days):
"Twentysomethings are accustomed to meeting short-term goals in schools with quarter and semester systems. They expect to see results on the job just as quickly and when they don't, impatience sets in. The disgruntled say that they don't necessarily want more money, they want stimulating assignments that give meaning to their lives."
"Ryan Paugh, 23, is already concerned that he's wasting his life at his first full-time job. In January, the Flemington, N.J., resident started working as a contractor, with no benefits, in the communications department of a Fortune 500 company. Frequently, he finishes a day's work in three hours, he says. "You feel really useless." Up until recently, Mr. Paugh asked for more work from his boss every other day. "Once in a while they hand something off," he says. Now he doesn't ask so much."
"Nikhil Thakur was impatient after two years in his first job out of college, at a technology company. Three raises didn't dent his malaise. "The first one briefly made me turn a blind eye to other shortcomings," he says, "but each subsequent one did nothing to increase my job satisfaction." "
Are we in the midst of fundamental change in desires from new workers, or have companies been getting it wrong for a long time? How can companies provide incentives to these workers, given that increasing their responsibility doesn't seem to be an option? Are efficiency wages purely a monetary concept or could they be more broadly defined? The system must be somehow inefficient if at the same time there are companies wringing their hands trying to motivate workers to be productive and workers wishing that they could be given more to do.
Thursday, July 05, 2007
More on Merit Pay for Teachers...
I have to admit that I'm getting a little tired of articles like this that posit that "higher test scores may not be the best way to judge teacher effectiveness". My knee-jerk response? No @#!$. I am well aware of the fact that productivity gets distorted when a job involves more than one dimension and only one of these dimensions is explicitly rewarded. (See this page for more detail and examples.) As such, researchers also point out that in some cases it MAY be better to not pay for performance at all in these scenarios. I think the *may* aspect of this conclusions goes largely ignored, and the educational system is in a state of "well, the plan we have may not be globally optimal, so we're just going to do nothing instead". I get the concerns about teaching to a test, I really do, but it seems as though there are a couple of straightforward solutions:
1. Oversee educators' lesson plans to make sure that, at least in the planning phase, real content isn't being sacrificed for test scores.
2. Even better, make the standardized tests more comprehensive in terms of what students are supposed to be learning. Advanced Placement tests do this quite well, and in fact it makes a lot of sense in this context to "teach to the test". My suspicion is that the underlying problem is that the education community has little idea of exactly what it is that non-AP students should be learning!
That said, I have a secondary issue with the teachers' protests that isn't getting nearly as much attention in the press. Consider the following excerpt from the article:
Deborah Torres-Gore, who teaches second- and third-graders in Fontana, Calif., said other factors must be considered when judging the effectiveness of teachers. "When I look into the eyes of a student who I have taught in the past — or I stand at the door in the morning and my students say Mrs. Gore, 'I love you,' or Mrs. Gore, 'You're such a good teacher' — am I effective or not? I think I'm effective," she said.
Apparently what others perceive as "effective" I perceive as "getting one's ego stroked". These people want to be considered as professional adults, and, as such, need to realize that being effective and being popular are not the same thing, and are often at odds with each other. Even here at Harvard, I've had to weigh the costs and benefits of disciplining students for things like cheating, knowing that these students would likely be upset and give me poor ratings as a result. (This logic held empirically some, but not all of the time, and I decided that the cost was worth it.) Furthermore, it is rumored that a particular instructor used to get good ratings because he did almost the exact exam problems in his review session the night before. (He is actually a very good teacher, so I'm hoping it's just a rumor.) My point comes back again to the idea of devision of labor- how much of a teacher's job is instruction and how much is that of a social worker, therapist or even life coach?
I fully realize that I am not representative, but in looking back I can say without doubt that Josh Angrist was by far the most effective undergraduate professor I had. How is this relevant? There are a number of reasons- first, for those of you that have never interacted with Prof. Angrist, he may as well be Ben Stein's drier and more sarcastic cousin (and even bears a striking resemblance to the actor). Not exactly the friendliest of guys, at least not to undergraduates! Furthermore, I can reasonably conclude that this guy has no idea who I am, for we have never had a face-to-face conversation. (Well, there was that time when I showed up late and he stopped class and forced me to make my way to the seat directly in front of him, but my guess is that wasn't the first or last time that has happened.) These tidbits don't exactly add up to the "I love you" sentiment of the teacher quoted above, but I learned more in Prof. Angrist's econometrics class than anywhere else. More importantly, even though I may not have realized it at the time, in retrospect I am very appreciative to have had this experience, and am likely better off than I would have been with an instructor who focused more on being popular. Think about it- an easy way to be popular is to not be challenging, since students then feel very good about themselves and their abilities. While self-esteem is clearly important, it is not ultimately helpful to the student that thinks he is going great and then fails his standardized test and is "left behind".
1. Oversee educators' lesson plans to make sure that, at least in the planning phase, real content isn't being sacrificed for test scores.
2. Even better, make the standardized tests more comprehensive in terms of what students are supposed to be learning. Advanced Placement tests do this quite well, and in fact it makes a lot of sense in this context to "teach to the test". My suspicion is that the underlying problem is that the education community has little idea of exactly what it is that non-AP students should be learning!
That said, I have a secondary issue with the teachers' protests that isn't getting nearly as much attention in the press. Consider the following excerpt from the article:
Deborah Torres-Gore, who teaches second- and third-graders in Fontana, Calif., said other factors must be considered when judging the effectiveness of teachers. "When I look into the eyes of a student who I have taught in the past — or I stand at the door in the morning and my students say Mrs. Gore, 'I love you,' or Mrs. Gore, 'You're such a good teacher' — am I effective or not? I think I'm effective," she said.
Apparently what others perceive as "effective" I perceive as "getting one's ego stroked". These people want to be considered as professional adults, and, as such, need to realize that being effective and being popular are not the same thing, and are often at odds with each other. Even here at Harvard, I've had to weigh the costs and benefits of disciplining students for things like cheating, knowing that these students would likely be upset and give me poor ratings as a result. (This logic held empirically some, but not all of the time, and I decided that the cost was worth it.) Furthermore, it is rumored that a particular instructor used to get good ratings because he did almost the exact exam problems in his review session the night before. (He is actually a very good teacher, so I'm hoping it's just a rumor.) My point comes back again to the idea of devision of labor- how much of a teacher's job is instruction and how much is that of a social worker, therapist or even life coach?
I fully realize that I am not representative, but in looking back I can say without doubt that Josh Angrist was by far the most effective undergraduate professor I had. How is this relevant? There are a number of reasons- first, for those of you that have never interacted with Prof. Angrist, he may as well be Ben Stein's drier and more sarcastic cousin (and even bears a striking resemblance to the actor). Not exactly the friendliest of guys, at least not to undergraduates! Furthermore, I can reasonably conclude that this guy has no idea who I am, for we have never had a face-to-face conversation. (Well, there was that time when I showed up late and he stopped class and forced me to make my way to the seat directly in front of him, but my guess is that wasn't the first or last time that has happened.) These tidbits don't exactly add up to the "I love you" sentiment of the teacher quoted above, but I learned more in Prof. Angrist's econometrics class than anywhere else. More importantly, even though I may not have realized it at the time, in retrospect I am very appreciative to have had this experience, and am likely better off than I would have been with an instructor who focused more on being popular. Think about it- an easy way to be popular is to not be challenging, since students then feel very good about themselves and their abilities. While self-esteem is clearly important, it is not ultimately helpful to the student that thinks he is going great and then fails his standardized test and is "left behind".
Monday, July 02, 2007
You know you're an econ geek if...
Okay, so the lease was up on my car and thus I had to get a new one. (Okay, technically the "had to" part is questionable, since I live in Cambridge, but whatever.) I am a very loyal Volkswagen consumer, so I was very happy to see that they had a new model that I was interested in:
(If you are curious, it is a VW Eos, and it's AWESOME. This should also partially pacify those of you that emailed me to point out that my picture isn't showing up- I'm glad you focus on the important things. =P The photo is hosted on the HBS server, which is currently experiencing some downtime.)
Enough about the car, since that isn't really the point. The point is that I saw the following poster in the sales office and I really really want a copy to put in my office.
Maybe if I locate a copy I can get George Akerlof to sign it.
(If you are curious, it is a VW Eos, and it's AWESOME. This should also partially pacify those of you that emailed me to point out that my picture isn't showing up- I'm glad you focus on the important things. =P The photo is hosted on the HBS server, which is currently experiencing some downtime.)
Enough about the car, since that isn't really the point. The point is that I saw the following poster in the sales office and I really really want a copy to put in my office.
Maybe if I locate a copy I can get George Akerlof to sign it.
Thursday, June 28, 2007
Incentives and Mental Accounting
As part of my current research, I am thinking about how firms could utilize what behavioral economists have learned in order to design better incentive systems. The following passage is often at the forefront of my mind for some reason:
"Another violation of fungibility introduced by the budgeting system occurs because some budgets are intentionally set 'too low' in order to help deal with particularly insidious self-control problems. For example, consider the dilemma of a couple who enjoy drinking a bottle of wine with dinner. The might decide that they can afford to spend only $10 a night on wine and so limit their purchases to wines that cost $10 a bottle on average, with no bottle costing more than $20. This policy might not be optimal in the sense that an occasional $30 bottle of champagne would be worth more than $30 to them, but they don't trust themselves to resist the temptation to increase their wine budget unreasonably if they break the $20 barrier. An implication is that this couple would greatly enjoy gifts of wine that are above their usual budget constraint. This analysis is precisely the opposite of the usual economic advice (which says that a gift in kind can be at best as good as a gift of cash, and then only if it were something that the recipient would have bought anyway). Instead the mental accounting analysis suggests that the best gifts are somewhat more luxurious than the recipient normally buys, consistent with the conentional advice (of non-economists), which is to buy people something they wouldn't buy for themselves.
The idea that luxurious gifts can be better than cash is well known to those who design sales compensation schemes. When sales contests are run, the prize is usually a trip or luxury durable rather than cash. Perhaps the most vivid example of this practice is the experience of the National Football League in getting players to show up at the annual Pro Bowl. This all-star game is held the week after the Super Bowl and for years the league had trouble getting all of the superstar players to come. Monetary incentives were little inducement to players with seven-figure salaries. This problem was largely solved by moving the game to Hawaii and and including two frst-class tickets (one for the player's wife or girlfriend) and accommodations for all the players."
--Richard Thaler, "Mental Accounting Matters"
The Pro Bowl example really is one of my favorites, but I wonder how it could be translated into a more commonplace setting- after all, I don't think that professional football players count as the representative employee. Rather than give every employee a large reward, the sales managers have usually taken the tactic of giving a single large reward to the winner of a sales competition. While I agree that this can be a stronger incentive than giving a cash prize to the winner, I am not convinced that this sort of a compensation scheme is motivating for everyone. In order for this system to work as (likely) intended, everyone would have to believe throughout the entire touranment period that they have a chance of winning if they try hard enough. I find it more realistic that the lower-performing people don't even try to win at all, or that the lower-ranked employees stop trying after they realize that they are out of contention. My hypothesis is even more unfortunate if the goal of the competition in the first place is to get the low performers' rear ends in gear.
Now that I've thought about what probably is less than optimal, I need to spend some time thinking about what could be better...and then of course try to establish empirically that my option is better. My thinking leads me to a paper by Karla Hoff and Priyanka Pandey that shows that individuals' reponses to incentives depend on their beliefs about themselves and others, and also that this performance can be affected by introducing a random component in reward payoff. (This point about the random draw is not the main focus of the paper, but it is what got my attention for future work. The paper itself is very interesting and has implications for other issues, such as forced integration of schools, which the Supreme Court made a hot button issue in the last few days.)
My hypothesis is that the following incentive scheme would dominate the alternatives discussed: the ultimate reward for the tournament will be a non-cash luxury gift that could be (reasonably) easily traded for cash if one so desired. However, the workers will receive a piece rate in the form of raffle tickets for the reward. Obviously, this runs into problems if workers are overly risk-averse, but I think the benefits of the scheme would outweigh the risk-aversion drawback. Why do I believe this? My simple answer is to look at how well state lotteries do in terms of revenue, all for an outcome with a negative expected value and roughly 50% tax rate.
"Another violation of fungibility introduced by the budgeting system occurs because some budgets are intentionally set 'too low' in order to help deal with particularly insidious self-control problems. For example, consider the dilemma of a couple who enjoy drinking a bottle of wine with dinner. The might decide that they can afford to spend only $10 a night on wine and so limit their purchases to wines that cost $10 a bottle on average, with no bottle costing more than $20. This policy might not be optimal in the sense that an occasional $30 bottle of champagne would be worth more than $30 to them, but they don't trust themselves to resist the temptation to increase their wine budget unreasonably if they break the $20 barrier. An implication is that this couple would greatly enjoy gifts of wine that are above their usual budget constraint. This analysis is precisely the opposite of the usual economic advice (which says that a gift in kind can be at best as good as a gift of cash, and then only if it were something that the recipient would have bought anyway). Instead the mental accounting analysis suggests that the best gifts are somewhat more luxurious than the recipient normally buys, consistent with the conentional advice (of non-economists), which is to buy people something they wouldn't buy for themselves.
The idea that luxurious gifts can be better than cash is well known to those who design sales compensation schemes. When sales contests are run, the prize is usually a trip or luxury durable rather than cash. Perhaps the most vivid example of this practice is the experience of the National Football League in getting players to show up at the annual Pro Bowl. This all-star game is held the week after the Super Bowl and for years the league had trouble getting all of the superstar players to come. Monetary incentives were little inducement to players with seven-figure salaries. This problem was largely solved by moving the game to Hawaii and and including two frst-class tickets (one for the player's wife or girlfriend) and accommodations for all the players."
--Richard Thaler, "Mental Accounting Matters"
The Pro Bowl example really is one of my favorites, but I wonder how it could be translated into a more commonplace setting- after all, I don't think that professional football players count as the representative employee. Rather than give every employee a large reward, the sales managers have usually taken the tactic of giving a single large reward to the winner of a sales competition. While I agree that this can be a stronger incentive than giving a cash prize to the winner, I am not convinced that this sort of a compensation scheme is motivating for everyone. In order for this system to work as (likely) intended, everyone would have to believe throughout the entire touranment period that they have a chance of winning if they try hard enough. I find it more realistic that the lower-performing people don't even try to win at all, or that the lower-ranked employees stop trying after they realize that they are out of contention. My hypothesis is even more unfortunate if the goal of the competition in the first place is to get the low performers' rear ends in gear.
Now that I've thought about what probably is less than optimal, I need to spend some time thinking about what could be better...and then of course try to establish empirically that my option is better. My thinking leads me to a paper by Karla Hoff and Priyanka Pandey that shows that individuals' reponses to incentives depend on their beliefs about themselves and others, and also that this performance can be affected by introducing a random component in reward payoff. (This point about the random draw is not the main focus of the paper, but it is what got my attention for future work. The paper itself is very interesting and has implications for other issues, such as forced integration of schools, which the Supreme Court made a hot button issue in the last few days.)
My hypothesis is that the following incentive scheme would dominate the alternatives discussed: the ultimate reward for the tournament will be a non-cash luxury gift that could be (reasonably) easily traded for cash if one so desired. However, the workers will receive a piece rate in the form of raffle tickets for the reward. Obviously, this runs into problems if workers are overly risk-averse, but I think the benefits of the scheme would outweigh the risk-aversion drawback. Why do I believe this? My simple answer is to look at how well state lotteries do in terms of revenue, all for an outcome with a negative expected value and roughly 50% tax rate.
I couldn't resist...
I know all about the sterotype of the acedemic holed away in the ivory tower, but I thought for a long time that academics at professional schools did not fit this model. I am no longer convinced of this (no judgment), so I found the following cartoon in the WSJ pretty amusing:
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