Dual price systems

The passing of the baton from Castro to Castro in Cuba is a good opportunity to study a little bit the Cuban economy. One aspect of it is that is essentially works in a dual mode: one economy with low prices denominated in pesos, essentially for locals, and another one in dollar with prices about twenty times higher. It is natural to blame the government for this situation, but it turns out this can also arise in a market economy in the absence of a government.

They key point here is information. Joseph Stiglitz already explained this in the case of a discriminating monopolist in 1977, he can charge different prices to different customers based on their characteristics by provided slightly different goods. One example would be the pricing of airline seats, where the same seat may have a different price depending on where, when and how it is bought. One particular way discrimination may happen is with the heterogoneity of information in the clientele. Who has not paid much more than usual (as measured by local customs) for a good while visiting a foreign country? Taxi drivers are particularly good at discriminating foreigners from locals.

Taking the taxi example, imagine a city where the taxi market is completely unregulated: free entry, market price. You are an uninformed customer dropped into this city and need a cab. Once in the cab, you are facing a monopolist, who quotes a price. You have no way of determining where the price is fair or usual. You will pay much more than the locals. Only government regulation would make this discrimination disappear.

In Cuba, the government is not regulating against this type of discrimination because it is benefiting from it: those discriminated against are foreigners, and the government is the monopolist. But a free market would probably lead to a similar price discrimination.

PS: In silly news, Ireland just guaranteed itself again a last rank finish at the Eurovision Song Contest.

Another example of patent abuse

I reported a few days ago about the patent abuse by SCO. The Wall Street Journal had yesterday an article on some strategies of the pharmaceutical industry that can also be labeled as patent abuse. Specifically, the article reports that:

Drug makers are trying to keep revenues afloat by raising prices ahead of many drug-patent expirations and the possibility of changing government regulations, part of the presidential candidates' agendas. But aggressive price increases could backfire politically, pushing policies toward greater government power over price negotiations.

In some instances, drug makers are raising prices on medications that are due to lose patent protection so that customers will switch to -- and continue to buy -- similar, newer products that enjoy market exclusivity well into the future.

It's a tactic that pharmaceutical companies use "to shift patients to next-generation drugs by making old ones so expensive," says Michael Krensavage, a drug-industry analyst with Raymond James & Associates. For example, Sanofi raised Ambien's price ahead of its loss of patent protection last year so that it was more expensive than Ambien CR, a new formulation, to encourage patients to switch to Ambien CR, which will be patent-protected for several more years.

So why exactly are we granting pharmaceuticals this monopoly? It is an industry why extremely (obscenely?) high returns that in no way seems to need this kind of protection. If it is capable of locking customers in (addicting them?), it should rather be imposed a sin tax.

PS: on a lighter note, there is a youtube clone dedicated to ... pizza and it features the United States Pizza Team.

Time to scrap agricultural subsidies

With demand at record levels for many agricultural goods, fed by demand for biofuels, high growth in East Asia and the corresponding lack of expansion in agricultural lands, prices are at record levels for many agricultural goods. Farmers can look ahead to several banner years. The moment is perfect for eliminating the subsidies they enjoy.

Most developed economies help their farmers in some way, either to protect the disappearance of some inefficient farming, to maintain a stock of stable and conservative population, or to satisfy some national security needs. But as the European Agricultural Policy shows, this is extremely costly. Also, as US policy shows, this can lead to absurd results like rice farming in the California desert. Finally, subsidized farming undercuts those countries that should be the best at it and that need it the most the ability to expand: developing economies.

Farmers in developed economies are doing mostly great now, and will do so in the foreseeable future. Time to cut their subsidies.

Update: Here is a great post explaining why a salad costs more that a BigMac: Federal agricultural subisides are heavily tilted towards meat and diary.

PS: On a lighter note: Improv Everywhere at Grand Central.

Pushing mass collaboration further: owning a soccer club

With the development of the Internet came a new phenomenon, mass collaboration. Some call it Web 2.0, but it was present even before that. By mass collaboration, we describe a phenomenon where a large number of participant collaborate towards the creation of a public good. Open source software, Wikipedia, or , closer to home, RePEc are examples. Now mass collaboration seems to have entered sports management.

MyFootballClub, a collective with 28,000 members, has purchased Ebbsfleet United, a fifth division English football team. Some of the bigger English teams are traded on the Stock Exchange, so collective ownership is not new per se. The difference here is that this team will have no manager picking who plays. This would be a game-day decision by the collective, through vote.

It will be interesting to see how this works out. I have my doubts, but if you believe this could work, membership is £35 a year.

PS: And if you are more into amusements parks, here are a few odd ones.

Abusing patents

The purpose of patents is to create rents for inventors and innovators, so that they are rewarded for their efforts. But patents can also be abused, for example by patenting innovations of others, trivial innovations, and patenting innovations that have not happened yet and thus preempting competitors. One particular abuser is back in the news, SCO.

This small company used to provide an operating system based on Unix. It still does, but its main line of business currently is litigation. Specifically it sues companies that use Linux arguing that some unspecified code in Linux is based on SCO code. Which code has never been revealed, but the mere threat of litigation has been sufficient for some companies to pay up. Novell and IBM, however, have resisted and these court cases are not looking good for SCO.

Uniformly hated in the computer industry (except by Microsoft, which is one of its main funders), SCO has now hit a rough patch and had to file for bankruptcy protection. Last week, the company found people willing to cough up $100 million "to pusue its legal claims". So imagine: $100 million are being invested solely to litigate. Nothing is created here. In fact, there is still no evidence of ill-doing by the companies SCO is suing. Significant resources and entrepeurship is getting wasted on nothing. Without a patent system, this would not happen.

For a discussion on whether it is worth having a patent system, see Against Monopoly.

Hotelling in Cyprus

Cyprus is home to beautiful beaches and resorts. But this is not the topic of this post. Hotelling wrote a classic in industrial organization that is widely to political economy, and Cyprus just gave us a superb example of this theory at work with Sunday presidential elections.

Hotelling's model is typically explained using a linear beach where ice cream vendors choose to place their cart in a way to maximize clientele. Beach goers face some cost in coming back from the cart (the ice melts) and prefer to go to the closest one. Imagine there are two sellers, then both will choose to be located exactly next to each other in the middle of the beach. It would be more efficient for them to be placed at the first and second third, thus minimizing total travel for the beach goers, but competitive pressure pushed them to the middle.

In politics, imagine that voters are ranked according their right/left leanings on a line. A pair of political candidates, according to Hotelling, would then choose to hold essentially the same position in the middle of the spectrum. Of particular interest in this respect is the US primary system, where candidates are essentially similar within the party during the primary, and once nominated shift their positions to the middle for the presidential election.

How does this work out when there are three candidates? If you do not allow them to be on the same spot, then the equilibrium is unstable: they converge to the middle, and the one in the middle wants to outflank any one of the other two to gathers his half of the electorate. If you allow them to be on the same spot, they will all be in the middle, gathering exactly on third of the electorate. Now consider the results from Cyprus:

• Ioannis Kasoulides 33.51%
  
• Demetris Christofias 33.29%
  
• Tassos Papadopoulos 31.79%
  

That looks pretty much like a random draw to me...

PS: And for the lighter note: A Swedish song "dubbed" in English.

How Economics is lucky

The RePEc blog has a post about a ranking of worldwide repositories. RePEc touts its #2 ranking, and rightfully so. One thing we need to realize is how lucky we are in Economics to be so well organized.

Imagine: we have a well structured job markets for PhDs, with a central job lising and centralized interviews during the ASSA meetings. Some other sciences have nothing like that and graduates struggle to even know what jobs are out there. We have academic departments that take recruiting seriously and that do relatively little inbreeding (with the exception of Harvard-MIT cross-hires that often look suspicious). We have a publishing process that is ultra-competitive and uncompromising. And finally, we have an organized pre-prints culture that is unusually well organized, as the Webometrics rankings of world repositories highlights.

Just look at the field specific repositories that are ranked:

• #1 Physics and Mathematics
  
• #2 Economics (RePEc)
  
• #3 Library Science
  
• #16 Biology
  
• #18 Arts and Humanities
  
• #37 Economics, Law and Management (SSRN)
  
• #39 Information Science
  
• #43 Cognitive Science
  
• #54 Philosophy of Science
  
• #56 Economics (MPRA)
  
• #60 Earth Systems
  

I say this is very impressive.

PS: The light link of the day: the video sent to those admitted in the Harvard Economics program in 2006.

Time to ditch Calvo Pricing

Guillermo Calvo published in 1983 an influential paper that managed to take into account that not all firms adjust prices immediately and at the same time in response to shocks, in particular monetary shocks. This way of introducing price rigidities has now been used in countless models but it always struck me as incoherent and silly.

Let me be precise: Under Calvo Pricing, every firm has a probability of changing its prices. Thus, a firm that has just adapted its prices has the same probability of adapting prices again as a firm that has not changed for a long time. Furthermore, this probability is invariant in the inflation rate. There is no way in hell this makes sense. Why would firms randomize over when they change prices? Why would they stubbornly not change them when it is high time to do so? And then change them minutely in rapid succession? And why would this strategy not change of the inflation rate increases?

Mikhail Golosov and Robert E. Lucas, Jr. take this idea seriously and build a model where firms have heterogenous prices, and they can decide to adapt them conditional on some menu cost. And surprise, surprise, monetary shocks in such an economy produce no persistent effects on real or nominal agregates. In other words, if previous models got persistent effects, it was due to the Calvo Pricing assumption, which does not make sense in the first place. It could still be used if it gave a reduced form for a more complex behavior of firms. But clearly, it does a very poor job at that.

Thus, please stop using Calvo Pricing. And stop teaching it as well.

PS: For a lighter moment, here is the daily link: How the Japanese learn English

My latest Microsoft rant

No, it is not about the Yahoo takeover bid. Rather it is about Internet Explorer. I have been traveling quite a bit lately and on occasion had to use Internet Explorer. It just reminded me how poor a product this is.

Slow to start, it just would let me type in an address until it finished loading. Then navigation is excruciatingly slow. I do not think it is because pages load more slowly, it is because they are displayed only once the upload is completed. Default search is on MSNsearch, which is either poor or the browser cannot find it.

Looking at the readership of this blog, 23% use IE 7 and 14% IE 6, which is much less than more general statistics indicate. The readers of this blog are thus wiser than the general public. Let us drive down these IE numbers and enlighten the remaining ones to Firefox and Opera. Mac user are typically doing just fine with Safari. From the Wikipedia comparison of web browsers, Firefox and Opera have the advantage of having embedded spell checkers, incremental finding (no need to type whole words to search in a page), tabbed browsing and pop-up blocking already in early versions, and much fewer security issues. Despite all these features, Firefox and Opera are much leaner, which makes them work much faster. Also, they adhere to established standards (Microsoft has this tendency to create its own standards), which makes the life of webmasters much easier (no need to write special code just for IE). So make that little effort to install either of them, and you will not be looking back...

PS: And for the light moment, Minesweeper, the Movie.

Why should US presidents be US born?

Companies look for CEOs outside their current workforce, universities perform nation or worldwide search for higher administration. Why do US presidents need to be born in the United States? Why restrict choices?

If you want the best person for the job, why would you but an artificial limit? For example, what is wrong with having an immigrant as president? The last two governor-generals of Canada were immigrants, the current one being even a dual citizen. Why does it even need to be a US citizen? If somebody proved to be a great president in an other country, why not move up to the United States? This certainly happens in the corporate world. And it even happens in politics: both Robert F. Kennedy and Hillary Clinton had no previous ties with New York before becoming its senators.

One argument I hear is that presidents are trusted with state secrets. Why would just the fact that someone is born in the country matter? As long as people are willing to vote for this person, citizenship at birth, or citizenship at election for that matter, should be irrelevant. A few examples: Sonia Gandhi, Italian-born, declined the post of prime-minister of India in 2004, several Canadian prime-ministers were immigrants, and there may be others.

And no, this post is not about Arnold Schwarzenegger in particular. I just fail to see the logic of this constraint.

PS: As this blog is apparently for a genious, here is something to lighten up the mood: How some Chinese children learn English.

The long term effect of slavery on Africa

Not long ago, there was discussion in the United States whether descendants of slaves should be compensated. One argument against this was that these descendants most probably had a better life in the US than they would have in Africa. Some recent research comes to the conclusion that it is rather the descendants in the regions where the slaves came from that should be compensated.

This is not exactly true. I come to this conclusion reading the analysis of Nathan Nunn. Using shipping logs from the slave trade, he constructs a dataset on the ethnic origin of slaves. After matching ethnicities to current countries, he finds that those where more slaves were taken fare worse nowadays. It is fascinating, and disturbing, that the slave trade can still have a significant impact so long after it ended. Why would this be? Maybe from the disruption in the social and government structures that the slave trade induced, which were not unlike civil war as ethnicities chased each other, and even traded their own.

Thus, even if the United States was not a colonizing power in Africa, it carries a special responsibility in aiding those countries that suffered the most from the slave trade. Let us not put all the blame on the colonizers.

Is this blog really for geniuses?

I subjected this blog to the Blog readability test. And here is the result:



Are my posts really that obscure? I was not able to find anything about the criteria used. I tried various other blogs, but none qualified for this Genius status...

Every Breath Bernanke Takes

This is an oldie, but a goodie, and surprisingly current. This video is a spoof of Police's "Every Breath You Take", sung by Glenn Hubbard, Dean of the Columbia Business School, for the CBS Spring 2006 Follies.



I am also watching Bernanke, but without making a song of it, it does not look nice. A central banker is supposed to be independent, and not follow order from the president. Both Bush and Bernanke are panicking.

Use LaTeX, not Scientific Word

After my rant against Microsoft Word, let me vent against another abomination of the text editing world, Scientific Word.

Published by Mackichan Software, it is supposed to provide the best tool for scientific writing, in particular for writing mathematical equations. It is true that Microsoft Word is absolutely horrendous in this regard, so Scientific Word is an improvement. But a costly improvement, listed at US$630 for commercial use and US$525 for academic use. Students still pay US$180.

I could vent about the price, but the real problem is that there is a price. It turns out that Scientific Word is just a collection of pull down menus with a LaTeX engine in the back. Note that LaTeX is absolutely free, very powerful, very well maintained, backwards compatible, in other words, perfect. With one drawback, it may take a day to learn to use it, as it is not WYSIWIG (what you see is what you get), you need to compile the text before viewing it. Scientific Word with its pull down menus removes the tremendous flexibility LaTeX has. And people pay for that.

Worse, one may argue that having a nice interface must be worth something. Wrong, LyX also provides such an interface, for free. I cannot understand how educated people can be scamed so openly by MacKichan Software.

Please stop with this silly stimulus package

In a previous post, I already detailed how (possibly) little impact on consumption a stimulus package may have. Economists tend to agree that the stimulus package is not the best idea out there, to give you an understatement, but politicians do not seem to listen to economists. That is their prerogative, but let me add a few arguments that they should be listening to, including some repeats.

1. A fiscal stimulus package has only a limited impact if people believe that tax will go back up, and the current situation is certain fertile for such beliefs
   
2. Imports are likely to absorb a portion of the (small) increase in consumption. China will be grateful.
   
3. Is the situation really so dire? Most indicators are still robust. There is no reason to panic. Obviously, if journalists react to a tiny 17,000 unit reduction in payrolls by claiming "Employment drops in a pink slip blizzard," it does not help.
   
4. Never have politicians managed to spend $150,000,000,000 with so little scrutiny, discussion and consultation of experts. Well, maybe with the Iraq war, but that is a different story.
   
5. Lack of consumption is certainly not the problem in the US, it is rather the lack of savings, with currently a negative aggregate savings rate. One should penalize consumption, not encourage it!