Thursday, July 16, 2015

Expiration Dates and Social Trust

I'm just back from a visit to Shanghai (more to blog about this later).

While I was there I spent some time at the super market buying groceries. Something that struck me: instead of printing an expiration date on foods - as is usually done in the U.S. - the packages have the date of production printed instead.

Seems like a pretty trivial difference, but it got my armchair economist going. What would explain this?

I think it has to do with differential levels of trust in strangers across societies. Americans are generally more trusting of their food suppliers and the freshness of their food. But suppose you thought that the grocery store might be run by scoundrels?

One advantage to printing the production date is that it's harder for the store to hide expired food. If you see a package with a "production" date that is later than today, you can easily tell that something is up. To know when the food expires, just add the appropriate number of months to the production date. Shoppers have to expend a little more mental energy but also get slightly more assurance that their food will be fresh.

This may sound a bit paranoid on the part of Chinese consumers, but given the recent scandal of frozen meat from the 1970s being seized, a cautious attitude seems well justified.

Thursday, June 18, 2015

Dissertation finished! Back to the blog

Awhile ago, I made a personal resolution to not do any serious writing until my dissertation was done. As of a week ago, it's now finished! I'm now job-searching as well as writing for a second edition of my social media marketing textbook, but I think I have enough time now to do some blogging on the side.

Anyway, here is the abstract to my dissertation (I plan to post more of the substance of it soon):

Corporate Networks and Social Scandals: Private and Regulatory Influences on Executive Behavior


Decisions by corporate executives are entangled in public regulation, private torts, and social influence. This dissertation takes an example of each to trace the effects of formal and informal policy changes on the behavior of corporate board members, integrating the study of corporate governance, law and economics, and social ties between businesses as they relate to regulatory policy. In my first chapter, I examine private lawsuits against directors and officers following the passage of the Sarbanes Oxley Act (2002). Sarbanes-Oxley created new responsibilities for corporate boards and expanded tort liability for corporate directors. I find that while the number of lawsuits increased after Sarbanes-Oxley, the probability of success and amount of payment decreased. This change influenced the deterrent effect of private torts. In the second chapter, using social network analysis I track changes in the structure of interlocking board networks following Sarbanes-Oxley. This Act required more outside directors to serve on corporate boards, hoping to increase accountability to shareholders. After Sarbanes-Oxley, I find that outside directors are relatively marginalized within the overall network of interlocking directorates, and that companies with less influential outside directors are less likely to have successful shareholder proposals which challenge management decisions. In the third chapter, I study the after-effects of a 2009 insider trading scandal which forced the resignation of several prominent corporate insiders. I find that firms associated with the scandal lose network connections, as do other companies with ties to the affected firms. These results suggest that companies make strategic decisions as to which interlocking directorates to maintain or dissolve. Further, I examine the effects of these network changes on market outcomes. 

Sunday, September 21, 2014

Police cameras: Blessing and Curse

The White House supports a proposal for police to wear cameras recording all interactions with civilians.

Civil libertarians seem to be in favor: it will hold police accountable and reduce incidents of brutality (although from the statistics, these are rare).

For a counterpoint: imagine this scenario in the year 2020. Police cameras are now ubiquitous; fiscal shortfalls have caused a budget crisis for local police departments. How do they raise funds?

Solution: assign a half-dozen officers to review all footage captured from street cops. This squad's job is to issue citations to "the ones who got away." Jaywalk in an officers peripheral vision? Get your ticket three months later. "California stop" at a sign? Maybe the cop nearby had more pressing business to attend to, but the squad in the office can send you a ticket at their leisure.

People already complain about speed traps in local towns being a cash cow. Just wait. Meter-maids of the future could be so much more efficient, just walk past rows of cars parked in town and then wait for the office crew to detect parking violations. A computer program can probably spot the violators.

Of course, getting a fine in the mail doesn't even compare to an unjust detention or a beating. But keep in mind, the big assumption of those in favor of police cameras is that many police officers will commit evil (due to racist, sexist, classist biases) unless they are monitored. But who monitors the people who review police camera footage?

If the police truly are biased, and they have thousands of hours of live footage to review and decide who to give tickets to, who do you think gets the most tickets?

Police discretion (e.g. a warning instead of an arrest) and prosecutorial discretion (who to charge, what crimes to prosecute, and who to send to jail) are a core of our legal system. Combine that with a wide, and often vague, spectrum of laws for proper conduct. The reality is that most of us rely on the decency of law enforcement to not throw the book at us for day-to-day activities.

So if the police really are as monstrous as their worst detractors claim, and they're required to wear constant monitoring tools, I worry about one indignity being substituted for another. Cops could use their discretion (combined with increased monitoring tools) to target the same groups they've been claimed to victimize before.

On the other hand, if police are generally decent and use their discretion to avoid trivial charges, that discretion might be taken away entirely if a future budget crunch or policy change demands it.

There are certainly some bad cops out there (and bad doctors, and lawyers, and economists...). Body cameras are a technological solution to a fundamentally human problem, Advocates for recording police may be ignoring the unintended consequences.

If this legal change takes hold I would expect more polite encounters between citizens and law enforcement (which is good) but also more inflexible decisions following those encounters. Cameras point both ways.

Thursday, September 18, 2014

"Hey, can you watch my stuff?"

In preparation for job interviews, I've been brushing up a bit on communication theory. The classic Influence: Science and Practice by Robert Cialdini is my current leisure reading.

Cialdini reports on a study done in the '70s which I think is easily worth blogging about.

"Consider what happened when researchers staged thefts on a New York City beach to
see if onlookers would risk personal harm to halt the crime. In the study, an accomplice
of the researchers would put a beach blanket down five feet from the blanket of a
randomly chosen individual—the experimental subject. After several minutes of
relaxing on the blanket and listening to music from a portable radio, the accomplice
would stand up and leave the blanket to stroll down the beach. Soon thereafter, a
researcher, pretending to be a thief, would approach, grab the radio, and try to hurry
away with it. As you might guess, under normal conditions, subjects were very reluctant
to put themselves in harm's way by challenging the thief—only four people did so in the
20 times that the theft was staged. But when the same procedure was tried another 20
times with a slight twist, the results were drastically different. In these incidents, before 
leaving the blanket, the accomplice would simply ask the subject to please "watch my 
things," something everyone agreed to do. Now, propelled by the rule for consistency,
19 of the 20 subjects became virtual vigilantes, running after and stopping the thief,
demanding an explanation, often restraining the thief physically or snatching the radio
away (Moriarty, 1975)."

I have to wonder how this study would fare with the modern Institutional Review Board, but that aside, it's a pretty strong result, which also happens to coincide with personal experience -- I have both asked and been asked by others to watch their things, and always felt pretty safe in doing so.

The psychologists theorize this is a result of desire for consistency -- if I said I'd watch, my behavior becomes consistent with that of a guardian.

I'd suggest a rational choice explanation that is just as, or perhaps more persuasive.

If I ask someone to watch my things and then they get stolen, the person assigned to watch is either a witness to the theft or is themselves the thief/accomplice. Knowing that I know this, the watcher has an incentive to be vigilant to avoid being blamed if the item goes missing.

So which is correct, psychology or game theory? Probably a little of both. I'd like to see a follow-up on this study performed in different countries with varying levels of trust for strangers. Presumably in a low trust institutional setting, the "watch my stuff" request would be less likely to work -- unless the incentives provided by game theory are sufficiently strong.

In any case, it's nice to read a study that basically affirms the trustworthiness of perfect strangers!

Thursday, June 19, 2014

That Post-Housing Bubble Kinda Feelin'

No, I'm not writing an economics blues song... I just took a walk around Durham, NC.

I'm at Duke University right now to present at the ISNIE conference. It's a lovely campus and my hotel is just a mile away. To get a better feel for the neighborhood (and burn off some hor d'oeuvre calories) I went for a little jaunt around my hotel area.

Here's what I saw in the span of two miles:

  • Five luruxy housing developments with many dark windows
  • Past those and across the railroad tracks, a long string of auto parts stores and a lonely XXX-Entertainment shop
  • Two recently closed gas stations
  • A social gathering of young men parked by an unmarked food truck, who were the only people I saw having a good time
  • No restaurants or fast food anywhere.
The neighborhood didn't feel dangerous, just empty and underutilized.

I know nothing at all about the Durham, NC housing market but if you'll indulge me while I put on my Sherlock Holmes hat, here's what I think the chain of events was:
  1. The Auto Parts and XXX stores have been there forever because land is cheap near the railroad.
  2. In the mid-2000s, land developers get a good feeling. "Hey, there's lots of college kids nearby. They have to rent somewhere, right? Plus all those professors and administrative staff. We'll make a killing!"
  3. Luxury housing is built. Some other clever soul thinks "Hey, with all these people driving cars to school and work (there aren't many sidewalks, by the way) they'll love it if they can buy gas close to home. We can set up some pumps and make a killing!"
  4. The housing market collapses, and suddenly much of the local housing is vacant. A few years later, the gas stations go out of business. The Auto Parts stores remain happy with their cheap rent and occasional customers.
I'm familiar with the strip mall landscape from walking around Fairfax, VA and I'm familiar with rundown neighborhoods from living in Spokane, WA (both college towns, like Durham). It's odd and almost disconcerting to run into a combination of the two.

Also sad because there are so many frustrated plans to be seen. Gas stations and luxury housing are both a Good Thing but they happened to be built in a place and time where they just weren't needed. Austrian economists would describe it as "mal-investment"; others might just call it poor planning.  The problem is not that developers were short-sighted, it's that events beyond the scope of their imaginations arrived to flout the vision they had constructed.

This isn't meant to be a dig at Durham in particular, by the way. I'm sure that similar scenes are found across much of America. If there's a moral to the story it's that the burst housing bubble had, and continues to have, effects a bit more subtle than the unfinished subdivisions in Las Vegas, NV. In some ways, the under-use of a "completed" neighborhood is just as tragic. 

Wednesday, May 7, 2014

Inferior Internet Goods

So, I'm writing this on.............

 a hotel network connection which is very,.........

very slow, at 768 kbps but it feels........

even slower. I can't even use gmail, or.....

Blogger with full functionality.

Of course, for a paltry fee of $12.95 I can have access to full 5mbps internet speed which rivals my home connection. I doubt it costs the hotel much, if anything, to allow me this access.

Part of the story is probably price discrimination, but done in a somewhat unique way - giving an inferior good to people who won't pay the extra.

The hotel wins in two ways. When they're advertising a price plus free internet I mentally subtract the $10 (or so) it would cost me to get acccess somewhere else, so I'm more likely to book there. Second, people who don't care about what it costs will happily pay the extra $12.95 regardless, and the hotel pulls in a bit more cash. Meanwhile, people who won't pay are unaffected, and just tolerate the hamster-in-a-wheel internet speed.

What's the difference between this business model and charging a flat fee to get on the internet, period? Better advertising, for one. There is also this interesting paper by Gabaix and Laibson which argues that non-transparent hotel fees are an industry equilibrium because sophisticated customers will take advantage of transparent hotels and mentally account for the additional costs of lodgings that obfuscate their "incidental" prices.

In that light, count me among the unsophisticated.

Not that I'm complaining. As a grad student with low income, I'm the perfect candidate for inferior goods. And I still managed to post this blog entry from slow internet. Plus, I didn't have to listen to the sounds a robot orgy from my modem before logging on, like I did as a teenager hoping for 56 kbps through the phone line. If websites still assumed visitors were on a glacially slow connection, 768k would be a bandwidth hog's heaven.

Friday, March 14, 2014

The eBay of Lodging: Is Airbnb sustainable?

I've been traveling to conferences more recently, so cheap short-term lodging has been on my mind frequently. As a serial procrastinator when it comes to planning trips, I've become quite a fan of Hotwire for finding discounted last-minute hotel rooms. But in a slightly smaller segment of the market, there is also Airbnb which specializes in connecting renters with amateur hoteliers who can rent out a room, a house, or a villa with minimal complications.

Airbnb has a number of advantages for both renters and hosts: it handles payments, so no credit card information needs to be exchanged; and it hosts a mutual rating system, so landlords and guests can review the treatment they received. In many ways, it's accurate to say that Airbnb is like the eBay of lodging.

eBay makes its money by connecting buyers and sellers who would otherwise never meet, and allowing each to build a reputation based on good service. This overcomes the transaction costs which might otherwise make small selling unprofitable, as well as the trust issues of dealing with strangers rather than established businesses.

Rumor is that Airbnb will be going public later this year, with an initial offering valued around $10 billion. Will this be successful, and can Airbnb make it as a public company? If eBay, valued $65 billion, is an accurate analogy, then Airbnb's investors should be laughing all the way to the bank.

But, how accurate is that analogy? In spite of surface similarities, renting out accommodations does invite some unique problems that shipping consumer goods does not. Interactions are more personal; I'll never meet my favorite eBay sellers but Airbnb hosts almost necessarily must come face-to-face with their guests. This makes each Airbnb experience less predictable because the human element is increased.

Perhaps more importantly, Airbnb has the potential to run afoul of local housing and zoning regulations. Depending on location, hosts might have to comply with laws regulating B&B's, motels, and hotels. Many hosts do not worry about these legal complexities, a risky practice that Airbnb's "simple and easy" interface tacitly encourages.

If hotel regulations are violated and no one complains, there is no problem. However, Airbnb is increasingly butting heads with its prime competitors, which are small, locally owned lodging houses and B&B's. These businesses do have to comply with often costly local mandates, and resent being undercut by small-time Airbnb hosts. This gives lots of incentive to complain. The link above is about Spokane, WA where hundreds of complaints were filed by one local B&B against all the competing Airbnb operators. What happens now?

If Airbnb goes public and its business continues to grow, expect these strategic complaints to become more frequent. If Airbnb hosts start having to comply with all of the regulations currently followed by hotels and B&Bs then their cost advantage over these establishments might quickly disappear. There are also free competitors, like which can nibble away at the niche occupied by Airbnb.

In short, Airbnb's business model relies on its operators not being regulated the same way as established lodging business. But, when Airbnb goes public and if its users continue to flout local zoning laws, it might become a victim of its own success.

Monday, February 10, 2014

Have Interlocking Directorates Changed Over Time?

As an offshoot of my thesis research, I've produced some graphs showing which influential corporations have interlocking directorates (two companies with the same director on both of their boards). The images are still rough but rather interesting.

Each line represents an interlocking directorate.

No deep analysis conducted yet, but just at a glance it seems like our major corporations have become much more connected than they were ten years ago.

Friday, February 7, 2014

Minimum Wages and Capital Intensity

This Atlantic article, reporting on a study done by Aaronson, French and Sorkin, has been making the Internet rounds lately. The big finding: increases in the minimum wage have relatively little effect on employment levels in the fast food industry, but they do induce entry and exit by businesses. McDonalds are replaced by 5 Guys, Chipotle, etc.

Proponents of the minimum wage are probably happy to hear this because it cuts against one of the main conservative arguments against minimum wages: the loss of job opportunities for low-skilled workers. Apparently, the people laid off from a McDonald's are hired again a few months later by a 5 Guys but at a slightly higher (minimum) wage, so what's the harm?

From a business-owner's perspective, what does it mean when one type of restaurant is closed in favor of another? Perhaps different styles of restaurants work best with a certain mix of labor and capital. When the relative price of the two inputs changes, a restaurant that previously had an optimal formula suddenly becomes outdated, and it closes.

Following this chain of reasoning, it implies that a McDonald's is less capital intensive than a 5 Guys, or in other words, it benefits less from adding more capital relative to labor. From anecdotal observation I'm not sure why this would be true, but I think it's a likely implication of the Aaronson-French-Sorkin study.

What I particularly like about the paper is that it also points out a substantial economic loss associated with minimum wage increases which I had never heard about before: the cost to firms from entering and exiting the market. Bankruptcy expenses, tearing down old signs, reprinting menus, and so on are pure losses for the economy, which destroy resources without making us better off. It's not the most sympathetic or easy to sell argument against minimum wage increases, but it is some clever economics.

Friday, December 6, 2013

Rule-based Ethics are Uneconomic, and Therefore Impossible

Or: Why Objectivists are Wrong, and should try empathy instead.

After an exchange with Prof. Dan D'Amico on Twitter earlier today about the duty to care for others I realized my own ethical viewpoints are a bit eccentric, especially when expressed in a 140 character format. This post is to explain why I think the morally absolute arguments espoused by libertarians, objectivists, and small-government conservatives are lacking, the implication of that lack in spreading the libertarian cause, and finally some ideas of how a reformulation of libertarian ethics through empathy might lead to interesting places.

What are rule-based ethics? With this phrase I'm referring to deontological or Kantian claims, which say we should base our behavior off of universal rules. According to this logic, I should only act on a principle if I would want it to be universally enforced. Lying in general is bad, so I personally should never lie or else I break the rule against lying. I would not want to be stolen from, so I should never endorse theft being imposed on others.

Rule-based ethics have the advantage of clarity and they avoid contradictions, which is philosophically appealing. The downside is that nobody lives up to the standard of consistency and clarity that philosophers crave because the cost of doing so is too high. I'll explain why I think this is true below.

Rule-based ethics are uneconomic

In economic parlance, a universal obligation against stealing means that the demand to prevent stealing should be infinite: regardless of the price of doing so, the prohibition against stealing should never change. Otherwise it ceases to be a universal rule.

Ethical compliance can be seen as an economic good, and if so, why should it be beyond pricing? The only justification for an infinite price is that if some violations of the rule are allowed, then the rule as a whole will break down. A common libertarian argument is that if we allow government theft to support some good cause, then we lose the authority to stop government theft in general.

The difficulty with this argument is that it implies a public goods problem; if I personally refrain from supporting theft, it does not stop others from doing so. Put in another context, imagine Hardin's classic problem of the commons: I can graze my sheep in the pasture (support government redistribution for a "good cause") but if my neighbors all graze their sheep as well, the pasture is depleted (the state organizes massive theft for causes most people don't agree with). Even if everyone agrees that it would be best to let the pasture recover (theft should be universally reviled), breaking that rule brings me private benefit (ethical satisfaction) that I do not bear the full cost of.

These commons problems can be resolved in some settings, between individuals who know each other, can bargain, and have the benefit of a legal system to enforce those bargains. None of those conditions are met when trying to oppose ethical demands for government to redistribute.

Libertarians are optimistic that people can bargain intelligently to solve collective action problems, but when the good being bargained over is an absolute principle which by definition cannot be compromised, then how is it even possible for a bargain to be struck? Philosophers tackle these conflicting ethic problems (duty to protect vs. duty to non-aggression, etc.) and maybe come up with some answers, but the process of doing so is difficult. In other words, the transaction costs are very high. This is another reason to doubt that the collective action problem of enforcing a universal ethic will ever be solved.

Rule-based ethics are functionally impossible. Even if everyone agrees in the general principle, they will prefer to be able to violate it occasionally. If everyone can violate it occasionally, it is useless as a general principle.

So how do people make ethical decisions? 

My own view: people act ethically toward others because they feel empathy towards them. If I feel I can relate to or understand another person's suffering I want to help alleviate it, because it could be me suffering in their place. Moral principles are then chosen after-the-fact to justify the decision we have already arrived at through empathy.

Mental adherence to Kantian ethics makes us lie to ourselves so we can think our decision to help (or ignore) someone in need is purely rational, when in fact it is based almost exclusively on feeling. Justification is made easy by the plasticity of moral principles; given many conflicting rules to follow and with the idiosyncrasies of each still generating publications in top philosophy journals, it is easy for me to pick and choose which moral rule will apply best to get to the conclusion that I want.

Empathy easily explains the conflict between libertarians/conservatives and progressives over the welfare state. Conservatives empathize more with hard-working taxpayers than they do with the poor who made bad decisions to get where they are. Progressives empathize more with the downtrodden workers than they do with exploitative businesses who rob them of their labor surplus. Even if both sides agree that avoiding theft and helping the needy are moral obligations, differences in empathy lead to opposite conclusions. Saying "but my moral principle is stronger!" is justification after-the-fact by both sides and has no chance of being persuasive.

Empathy for others brings their well-being into my own economic calculus, so that my happiness is somewhat dependent upon theirs. This, in my view, is the best foundation for ethical action because it does not require subverting my own self-interest or reconciling complex philosophical problems. Instead, I offer help when I feel the need to do so and the cost to me is such that I find it worthwhile.

Many progressives would agree with the above paragraph, and then say that empathy necessitates even more government redistribution to help the poor. This is a misreading of empathy, however. If a progressive feels that some group is receiving an insufficient share to satisfy their feelings of empathy, they are welcome to personally give more. Saying "I don't have enough resources to do that, so society should pick up the slack" displays a lack of respect for others in deciding how their own resources are spent. It also circles back to the same imposition of universal rule-based morality which I criticize above. How can you treat others with empathy if you assume their moral judgments and autonomy are less valid than your own?

People can have different degrees of empathy for different groups, not everyone will feel the same way, and that is not a problem if charity is voluntary. Echoing Bryan Caplan's argument about the deserving poor, I feel a great deal more empathy toward people in less-developed countries who are never given the chance to become affluent than I do for Americans who had the great opportunity of being born here and then squandered it. By guaranteeing income to everyone living in America it may undercut the support for letting in foreigners who could benefit from being here even more (hat tip to Zac Gochenour, who is studying the political economy of immigration related to this idea).

Where does this leave libertarian activism? 

Saying "taxation is theft, abolish the welfare state" is pretty much a dead end strategy in my view. In spite of what I say above, neither I nor most people would feel good about the results if all social assistance were suddenly cut (whether it could be improved or reformed in many ways is an open possibility, however). The poor will always draw more empathy than the people who are taxed, and that is unlikely to change anytime soon.

There are plenty of other areas where the costs of government policy are easy to see: the 174,000 pages of federal regulation that cost the economy $1.8 trillion last year;  lives wasted through imprisonment in a failed war on drugs; poor health and environmental damage from sugar and corn production subsidized through our agricultural policy, and so on.

The sooner that libertarians can get away from abstract and abstruse moral claims and toward the lived reality of individuals, the better. Jettisoning the rhetoric of rule-based morality is a first step in that direction. If that means leaving some strident objectivists outside the tent, well, I'll admit that's one area my empathy is lacking.