To the Map of the (financial) Market, it’s a thrill to add a new brilliant graphic, this map of the market for goods and services. (The latter loads faster, too.)
Archive for the ‘Economics’ Category
Economics graphics
Monday, May 5th, 2008Monetization
Tuesday, February 19th, 2008A weekend trip to Cornwall included an efficient stop at Land’s End… where we chose NOT to pay real money to get our picture taken with their signpost. The Brits are pretty impressive at monetization of their assets.
The Justice of Tax Progressivity
Monday, February 11th, 2008In all the voluminous academic and political debates about optimal taxation, I think one argument should get considerably more attention. People who have higher earnings derive greater benefits from government. Social stability, provided in the form of police, defense, and the legal system, preserves property rights and makes productive activity and wealth accumulation possible. For this, the high-income and high-wealth people who benefit most should pay most.
Before you all go back to talking about incentive effects of taxation, do recall that reference points may matter, and talking about fair benchmarks may help to set them justly.
A Missing Uproar at Oxford
Wednesday, January 2nd, 2008Statistics on undergraduate admission rates at the University of Oxford ought to be a scandal. First, examine Table 5. The racial groups designated White or White&Other represent 84.2+0.4+0.3+2.2 = 87.1% of applicants. Despite this overwhelming share (comparable to the share in the general population), the combined admissions rate for these groups substantially exceeds the admissions rate for the combined pool of non-white applicants.
Table 6 implies the even more astonishing fact that gender disparities are also exacerbated by the Oxford admissions process. Even though 2% more men apply than women, the overall acceptance rate for men exceeds the acceptance rate for women by 2.3%. In the sciences, where the applicant pool is nearly 3/5 male, the acceptance rate gap is even larger, 3.1%.
Likewise, only 5 out of the 30 colleges listed in Table 8a have higher three-year average admission rates than application rates from “maintained” high schools (ie, the equivalent of “public schools” in the US, which are maintained by the state).
I am not claiming that these statistics imply Oxford admissions officers practice discrimination. Despite the numbers, it could be the case that the marginal racial minority, female, and maintained school applicant is less distinguished than the marginal white, male, prep school applicant.
However, these numbers imply that disparities in applications expand during the Oxford admissions decision process, contrary to diversity’s recognized essentiality for education in a modern, interconnected world. Oxford should lead the way in extending opportunity to underrepresented groups, and consequently the Oxford admissions statistics should be a scandal. The central administration may only partially be to blame, since admissions decisions are made by individual colleges. Non-discrimination rules may be applied in the UK in the way that opponents of affirmative action would interpret the equal protection doctrine in the US. Nevertheless, I hope to see fast action to raise application rates of qualified members of underrepresented groups, and equally fast rises to statistical parity in acceptance rates.
Reporting on Fed Policy and Stock Indices
Friday, December 14th, 2007Usually press reports sound celebratory when increases in stock prices follow cuts in interest rates. However, there may be no reason for celebration: interest rate cuts may cause expansions in real output, but they also may increase inflation rates. Since stock prices and the indices computed from them are nominal, interest rate cuts could increase prices and indices even if the rate cuts have no expansionary effect on real output.
In fact, we shouldn’t be at all surprised if a rate cut increases market indices.
If the opposite happens, and a rate cut spurs a fall in market indices, we should probably be very worried. That scenario signals likely falls in nominal output, which imply even larger reductions in real output.
With these comments I don’t mean to question Fed policy, but rather to suggest what I perceive to be a misconception common in reporting about Fed policy.
Crazy Calculations
Thursday, November 15th, 2007The FDIC insures all our checking and savings accounts, but they apparently don’t understand interest. The Truth-in-Lending law they administer has been interpreted so that uniformly-reported “annual percentage rates” do not compound within each year. The key portion of the regulations specifies instead that periodic rates should be multiplied by the number of periods in a year to get the APR.
For most types of consumer credit, including credit cards, this makes little or no difference or other regulations fix the problem. One realm, however, where it leads to allowance of very misleading advertising, is the case of payday loans. The typical payday loan carries a finance charge of 18% for a two-week loan. The FDIC’s guidelines imply that this loan has an APR of 26*18% = 468%.
The more relevant calculation, which yields the true cost of this form of liquidity to consumers and is the right number for comparisons with most alternatives, is (1.18) to the 26th power minus 1, which yields a whopping 7295%.
Tell them they can prosper…
Monday, November 12th, 2007and, to an astonishingly large extent, they will. I can’t wait to see the whole paper.
Data for Personal Decision-Making
Sunday, November 11th, 2007We all make thousands of small decisions each day–whether to snooze a few extra minutes in the morning, how long a workout to have, whether to snack on carrots or cookies, whether to have decaf or regular coffee–that may affect our immediate and future well-being. We get some immediate feedback on some of those decisions (geez, those carrots were tasty), but detailed quantitative feedback on immediate and delayed effects is challenging.
Many such decisions have immediate, identifiable, bioelectrical and biochemical signatures. Imagine a device that automatically tracked and uploaded this information, standard metrics of body function (e.g., pulse, breathing rate, temperature, bp), and manually-inputted subjective measures of well-being (e.g., headache, euphoria, anxiety, zone) and productivity. Imagine using all this information and a decent stats package to make inferences about the effects–specific to oneself–of many of life’s small decisions. Many of the inferences would be obvious and well-known: sleeping very little makes you sluggish; eating carrots makes you feel virtuous; talking with dear old friends makes you elegiac, reflective, and happy.
For a device that would track lots of bio-indicators automatically and make it easy to track food intake, exercise info, and subjective variables on the fly, I doubt I’d blink about paying $10,000. Such a device would give me far better tools for enhancing my own productivity and well-being. Maybe my dear old friends also profoundly believe in me, motivating me to do more good; those carrots can give me spates of indigestion, making them less virtuous; and blogging occasionally loosens the chains and accelerates my other writing. I’d like to run the stats, controlling for daylight hours, age, the weather, the number of seminars I’ve been attending, and my overall workload, see the results, and adjust accordingly. Explicit experimentation could come soon after. Just a 1% increase in productivity would make the gadget pay well within my lifetime.
Intergenerational Inequality Transmission
Thursday, November 1st, 2007Certain groups have short shrift. In part this may be because they face hostile social circumstances; in part it may be because they continue to suffer the consequences of hostile historical circumstances.
Hostile historical circumstances are likely to affect some groups more than others. Specifically, groups that match and reproduce internally (for whatever reason) are likely to experience more persistence than groups that mix. This innocuous observation has an important implication: because (in the West, at least) the sex ratio is close to 1, inequality between men and women can be wiped out in a single generation. If, at some remarkable point in time, everyone in the population switches from believing in gender discrimination to believing in gender non-discrimination, the next generation to be born will be composed of sons and daughters whose parents choose to treat them equally.
This implication contrasts with the observation’s implications for racial inequality, for example. Reproductive matching within racial groups perpetuates disparity.
Obfuscating Contracts
Monday, October 8th, 2007In the UK, prices for broadband contracts are generally quoted in terms of an introductory rate and a post-introductory rate. For example, the twelve-month version of BT’s “Option 1” costs 12.99 for the first three months and 17.99 thereafter. This structure is notable because it pertains to FIXED TERM CONTRACTS. Most of the economics literature on behavioral contract theory, stemming from the brilliant paper of Stefano Dellavigna and Ulrike Malmendier, has focussed on cases where consumers have post-adoption choices about service use. For example, credit card adopters can decide how much to borrow; cell phone adopters can decide how many minutes to talk; gym members can decided how often to work out. In the UK broadband case, subsequent prices are unconditional on use: They are merely the way the firms partition the annual contract price into installments.
BT is not unusual in quoting its contracts in these terms. AOL UK, Tiscali, and Virgin are included in its company (though not TalkTalk and Orange). The quotes generally have a few features:
- The introductory period tends to be 3 months for 12 month contracts and 6 months for 18 month contracts.
- The introductory monthly rate is 20-50% less than the post-introductory monthly rate.
- Firms generally require that early termination results in responsibility for payment of all the contract’s remaining installments.
As I see it, there are two main reasons firms may offer contracts structured this way. First, consumers may be more liquidity constrained at the time of adoption than later during the contract term. However, it seems implausible that differences of a few pounds from month to month, within a given year, would make a difference for the typical consumer.
The second reason strikes me as the correct one: firms want to confuse consumers about the true price of the offered contracts. Firms often advertise the introductory rate, and many of the price-comparison websites report this rate despite its irrelevance.
Two questions come to mind. First, given the way (boundedly rational) consumers make decisions about contracts, how should monopolists and competitive firms design their installments? For example, why is it that we don’t see offers like “FIRST MONTH FREE! Next three months only 4.99! Last 69 weeks 39.21.” Maybe then termination rates would rise, and enough consumers would get irritated to decrease brand karma. Also, too much complexity could cause consumers to throw up their hands and turn to a competitor. (Some consumers might also notice a rip-off when confronted with one.)
The second question I find interesting is how regulators should act in these markets. For example, should there be limits on how long a non-renegotiable contract consumers can sign to? Should firms be required to quote their contract offers’ total annual costs? (Certainly, extended agreements shouldn’t be prohibited entirely, because firms face fixed costs of signing up new customers, which must be recouped over time.)
My feeling on the second question is that regulators should require the most prominent advertised price to be the total price for the duration of the contract. If the firm wants to offer financing (an installment loan), I suppose it’s fine to let them arrange that offer however they wish– though I would probably end up advising everyone to pay up-front if possible, since installment credit is usually very expensive. Alternatively, (and almost equivalently) regulators could prohibit contracts that ex ante specify varying payments for materially identical services, forcing the broadband providers to advertise only the weighted averages of their streams of monthly prices.