Thursday, July 31, 2008

Go to College Where You Want To It Won't Impact Your Income

Where people go to college can make a big difference in starting pay, and that difference is largely sustained into midcareer, according to a large study of global compensation.

That is the opening line from this article on a new study on starting pay of college graduates. The study is missing causation and correlation. Previous work by Krueger and Dale (described here) found that once they controled for the student's pre-college ability that

"Students who attended more selective colleges do not earn more than other students who were accepted and rejected by comparable schools but attended less selective colleges"

Similar results, that ability not the education was impacting income, were found when comparing college majors by Daniel Hamermesh at the University of Texas.

So go to school where you want!

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Wednesday, July 30, 2008

Facebook and Development Economics

I finally joined Facebook. In about 24 hours I have increased my friend total from 0 to 64. In part I joined Facebook, because I thought everyone I know is on it, including my grandfather.

In my development economics class I use facebook as an example of technology adoption and the impacts it can have on an economy. The value of joining facebook is related to the number of people who have already joined. But the value is not linear in that if 50% of my friends are on it, it's probably more than twice as valuable and likely I’ll join than if 25% were on.

There is a similar relationship with technology adoption. The value of adopting a technology will depend on how many other people have adopted it. This is particularly true if the technology is used for communication. But, it is also true for other technologies in agriculture, since the more people who use it the easier it is to buy the technology and get help fixing or maintaining it. This means that typically technologies will be adopted by a small portion of the population (say under 10%) then its harder to get the next 10-20%, but once a critical mass is reached then almost everyone adopts the technology.

This can be seen in the graph linked here, which shows the numbers of internet users and GDP.
You can see the number of users ramps up with only small increases in GDP per capita.

The difficult thing in development economics is how to get enough people to start using a technology so that the benefits of the network take effect.

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Tuesday, July 29, 2008

Economics and Personal Finance

For some people personal finance can boiled down to the great Saturday Live skit “Don’t Buy Stuff”, shown below. But sometimes the questions are more subtle.

Where can economists shed light on personal finance decisions. So here are a few things I think intro to economics helps with personal finance.

1.If it sounds too good to be true it probably is. Imagine there was a business anyone can do where you could easily sell something and make lots of money. Then everyone would do it, but then prices would have to be lowered and profits would go to zero. So whatever great business idea you have, if someone else might have it won’t make as much money as you think.

2. Consumption Smoothing. Most of the time the more we have of something (money, beers, bananas, what have you) the next additional unit still makes us happier, but the increase is not as much as the last unit. This is called diminishing marginal utility. In terms of personal finance spending a $1,000 extra dollars when we make only $20,000 is better than spending $1,000 more when we make $100,000. Or as Milton Friedman told Steve Levitt “Don’t Save Too Much”

3. Risk Aversion. By the same token losing a $1,000 is a lot worse when you only make $20,000. So we should save to avoid the pain of severe loss of income. So Levitt and I ignore the advice, and probably “Save too much.”

4. People Respond to Incentives. If you give people money to do stuff, they are more likely to do it (most of the time). But how to get yourself to save more or think about personal finance is difficult. I like Tyler Cowen's take on when people will and won’t respond to incentives, in his book Discovering Your Inner Economist.

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Monday, July 28, 2008

T. Boone Pickens Plan

My brother, Dan, asked last week about a plan by former oil man T Boone Pickens plan to dramatically increase the electricity generated by wind farms. After hearing Pickens on NPR I thought more of the rich gun shooting Texan on the Simpsons (pictured right), than I did a leading clean technology entrepreneur.

The plan is twofold. First, build a lot of wind turbines to generate cheaper and cleaner electricity. Next switch our cars from gasoline to natural gas. The basic economic principle is that if natural gas is not purchased to use in power plants its cheaper as a fuels so it can be used in cars.
Will it work? Asking a similar question on my college’s discussion board, my wife who works in the clean technology field liked the idea of generating more electricity through wind. Both wind and solar are getting close to cost competitive or are there, in windy and sunny places.
There are some problems with converting our cars to natural gas. This list of ten things to know about natural gas cars, suggests the transition costs from gasoline to natural gas cars are high and the pollution reduction might not be that high.

A better way to go might be the plug in hybrid. It seems the technology is getting closer where you could plug your car in some of the time and use gas other times. At least that was my impression after going to a Plug-in Hybrid conference in San Jose last week.
(Or the impression I got from the leading expert in my household, but since she does not have a blog so I guess my brother will have to take my word for it.)

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Thursday, July 24, 2008

5 Lessons from Econ Blogs on Oil Prices

Even with my summer bike commute and Prius, like many Americans I can’t help but notice the price of gas, which is hovering above $4.50 a gallon in Palo Alto

1. Justin Wolfers over at the Freakonomics blog finds that the best guess to predicting the future price of oil price is today’s prices.

2. With high prices consumers are changing their buying habitts. Greg Mankiw highlights 11 (and counting) examples of cross price elasticity (that is a measure of the impact of the price of one good (gas) on another)

3. Don’t believe the airline industry, oil speculation is not the problem. Refuting a letter from airline executives that speculation is the cause of the high price of oil, although not an economist a good summary of economists views (including me) can be found at Less Than A Shoestring.

4. A lot of the increase in oil prices can be blamed on the weak dollar. Although the causation may go the other way too. See Econobrowser

5. High oil prices may hurt women’s rights. Chris Blattman a few months back summarized an article by Michael Ross of UCLA that showed the lack of women’s rights is linked to size of oil exports.
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Wednesday, July 23, 2008

Disseminating Results: Power and Conditional Cash Transfers

In response to a post on the Freakonomics blog about how the President of Ireland would not likely be influenced by the latest work from a top researcher, Chris Blattman suggests that development economist should work harder to disseminate their results to the public and policy makers.

So with that in mind and some shameless self promotion. An article I co-authored was recently published in the World Bank Economic Review. The article examines a conditional cash transfer program in Nicaragua. The program paid money to families if they sent their children to school, took children in for regular health checkups, and mothers went to regular health seminars.

Another interesting twist of the program is that mothers received the cash payment, with the idea women were more likely than men to spend money on children’s health and schooling. Previous evaluations had shown the program was extremely effective at increasing schooling and spending on food.

In the paper I wrote I was concerned that even though the mothers physically received the cash payment, husbands might take away the money particularly if the women does not have much power in household decisions. This could result in the program not being as effective for households with dominant husbands, which are also the households where the children need the most help. However, by giving money to women it might help increase their power in the household and improve schooling and spending on food for children.

In short the results I found show the second story. That the program was infact more effective at increasing school enrollment and spending on food for household with less powerful women. So not only was the cash transfer program successful, it had the greatest impacts for those who needed it most.

I doubt that a major policy maker is reading this blog. However, if they do the Nicaraguan program which no longer exists was extremely effective. Luckily Brazil and Mexico have continued with similar programs on a national scale.

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Tuesday, July 22, 2008

The Perfect Storm for a BBQ: Economics of the Combo Meal

My friend Dan twittered the other day about an interesting bundle on if you purchased the book the Perfect Storm you could get the BBQ Bible along with it for a discount. Amazon does this with every book making an offer of an additional book at a discounted, although usually the two books are generally closer in themes.

So why bundle goods? A simple example with the Perfect Storm and the BBQ Bible (the numbers aren’t meant to be exact). Suppose people like Dan would pay $20 for the BBQ Bible and $5 for the Perfect Storm. Now suppose people like me would pay $20 for the Perfect Storm and $5 for the BBQ Bible. If Amazon sells either book for $20 they will sell only one of each copy and collect $40. If they sell each book for $5 we each buy both books and Amazon collects $20. But if Amazon offers us both books together for $25 we buy the bundle and Amazon gets $50. As long as it costs Amazon less than $5 to get a copy of either book they make more money selling books in bundles.

This is the same reason when you go to McDonalds you can order a combo meal. How much each of us is willing to pay for burgers, fries, and cokes varies. But, McDonalds can get us to buy more if they offer it as a bundle.

However, we can’t bundle everything or every purchase would be like late night TV and come with a set of steak knives. Typically bundles are for similar goods like books and combo meals.

But, Dan was confused by this bundle, since they were both books but they share little in common.

I think I found the explanation. In some Amazon listing the DVD is listed as The Perfect Storm (with BBQ Book) (see here). That probably made the Amazon computers bundle the books. Although the listing does make sense.

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Wednesday, July 16, 2008

What if We Could Buy Lazyman’s Prosper Loan Endorsement? What Signal Would it Send?

Lazyman, a personal finance blogger, often blogs about an internet peer to peer lending site, Prosper. On the Prosper website potential borrowers write up their personal financial history and a loan request (here is an example). Prosper collects the borrower’s social security number, runs a credit check, and assigns a risk grade. Then potential investors can bid on an interest rate for part of loan. Loans average in the thousands of dollars and many investors put in only $50 (the minimum investment).

Now to Lazyman's post. He cites (netbanker) who points out that investor who have put in a bid on a loan can endorse a loan and leave a short description of why they endorsed the loan. Endorsements appear to help as

1. Single endorsed loans are performing 35% better than similar loans without that endorsement
2.Multiple endorsements bidding are performing 50% better performance

Lazyman, uses his economic intuition, to deduce that for borrowers it will be better to have an endorsement so why not sell your endorsement. In other words a borrower gives a potential investor $75, the investor keeps $25 and invests $50 in the loan and endorses the borrower.

I could see this having numerous potential impacts on the Prosper market and this subject would make an excellent theoretical economics paper.Let’s take one possibility.

Suppose two things
1. Selling an endorsement is legal and everyone knows endorsements can be sold.
2. That each borrower has a better knowledge of the probability that they will be able to repay the loan then the lender.

You might think these endorsements are worthless now, but they might not be. This set up could create a signaling equilibrium (see this Wikipedia article). In short high quality borrowers would be willing to pay the cost up front (of paid endorsements) for lower interest rates, while lower quality borrowers would not be willing to pay it since they know the gains in lower interest rates are smaller to them since they are less likely to repay. This should result in good borrowers buying more endorsements, which will help them be separated from bad borrowers.

I recall using a similar model in graduate school to explain why Michael Jordan might endorse Nikes. Jordan saying “Just do it!” isn’t really telling us anything more than a paid prosper endorsement. It does tell us Nike was willing to use money to show their product is good.

There are other possibilities, but I’ll leave those up to a non-lazy economist .Bookmark and Share

Tuesday, July 15, 2008

Why Major League Baseball Wants You to Use Stub Hub

My friend Andy in Chicago wanted to go to Cubs game on Friday, but tickets were sold out. Andy noticed on the Cubs website there was a link to StubHub a ticket reseller. Andy asked me why would the Cubs want to help ticket resellers?

First, the amount someone pays for a ticket will in part be determined if they can resell it. Most Cubs tickets were purchased months ago for anyone buying tickets there is always the possibility that something else could come up (sickness, visiting relatives) being able to resell the tickets makes them more valuable.

Second, purchasing tickets via other secondary sellers such as Craigslist and Ebay, there is always a possibility of a scam such as fake tickets. The Cubs or other baseball teams can verify that the seller does have season tickets and can transfer the ticket via e-mail to the second buyer. Eliminating the worry for a scam increases the value of the tickets and makes the tickets easier to resell.

Finally, StubHub is now the exclusive reseller of Major League baseball tickets after signing an agreement last year. Although the details are not disclosed. Stubhub makes about 20% for each ticket sold and is now paying some percentage of that fee to the baseball team. If you sell your ticket on Craigslist or Ebay the Cubs get nothing, but buy at StubHub they get something.

This story has a happy ending. Andy found cheap tickets getting standing room only tickets released at the box office a few hours before the game then moving to seats in the 2nd inning and the Cubs Won 3-1.

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Monday, July 14, 2008

Sam Adams Brewer, Patriot, and America’s #1 Brewer

Inbev the Belgian/Brazilian brewing conglomerate finalized its purchase of Anheuser-Busch the U.S. #1 in terms of sales brewer (link). With both Coors and Miller being part of similar international conglomerates, Sam Adams is now America’s largest brewer followed by Yuengling and Sierra Nevada.

An interesting question though is what makes an American beer (besides a lot of water and little hops). If Budweiser, Coors, and Miller are all produced in the US, using American grain, with mainly American workers, but the company is owned by an international conglomerate is the American? What about Toyota and Honda, both Japanese companies, but if they produce their cars in the U.S. with American parts and workers are they American companies? What about Coca-Cola, which has local bottling plants around the world, which produce and distribute their product is Coca-Cola American if it is produced in Colombia or Angola?

Economists have different ways of measuring economic output depending on which definition you want to use. For the most part, I’m under the impression that it does not make a big difference. What is worth noting is with the U.S.’s large trade deficits we have to exchange something for all the imports we get. One way is to sell off businesses and other assets. Along with the growing economies of scale in a global market for beer and other products, I think we’ll see more of these types of buyouts.

I don’t know what’s next, but I wouldn’t be surprised if one of the big 3 automakers was purchased by a foreign conglomerate. Until then let’s be proud to call Sam Adams America’s #1 beer.
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Friday, July 11, 2008

I’m Speculating The Weak Dollar is The Problem: High Oil Prices and Airlines

The author of Less Than a Shoe String, a great budget travel blog, forwarded me an open letter from American airline CEOs. The letter described here basically points to speculation in the oil futures market as the cause of the sharp increase in oil prices over the last year or so. It urges everyone to contact their congressperson to stop oil futures trading to save the airline industry

I’m speculating here, but at the same time oil prices have been increasing the value of dollar compared to other currencies has been decreasing. As currencies depreciate (lose value) imports become more expensive.
If $1 is worth half of what it used to be, we can buy half as much oil.

Econobrowser, graphs oil prices in both US $ and Euros. I have included his graph below. You can see oil prices in Euros have increased but not as much as in $s.

So although speculation may be part of it (my guess is a small part), the really big force seems to be the weak US dollar.

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Thursday, July 10, 2008

In India Pay Toilet Pays You

In many major cities it is hard to find a public restroom. This article in Slate details the building of public pay toilets in the U.S.. In most cases pay toilets in the US bring in far less “sales” (25 cents per use) than maintenance cost. Cities make toilets profitable to companies by allowing advertising on the outside of the booth.

In many cases extra toilets are located in places where homeless people would congregate, losing the 25 cents fare might be a good trade off if it prevents public urination.

However, in some places free toilets might not be enough to encourage the use. The slate article discusses payments to villagers in India to use the public toilet in order to prevent human waste pollution. Another idea is to try to change the norm of public deffication and urination. A paper presented at a conference I attended recently by Dickinson and Pattanayak (linked here) highlights a program in India that successfully combined subsidies for latrine construction with social mobilization programs to encourage the use of latrines.

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Tuesday, July 8, 2008

Face It, You Want to Meet in Person

After discussing all the new/newish ways to keep in touch last night over beers, I’m thinking the newer technologies (e-mail, file sharing, video chat, twitter, facebook) actually increase the benefit of meeting in person at least for academics.For non-academics technological connections may improve the face to face interactions, if I'm keeping up our relationship through one of the above technologies.

For an academic, if I go to a conference I can see new research and maybe find someone new to write a paper with. But I have to travel, which has both a monetary and opportunity cost. Unlike, say 10 or 15 years ago it’s a lot easier to work with someone in another part of the country or the world. Yet, even though academics could probably all put their presentations on Youtube for much lower costs than travel we still go to meetings indicating that meeting in person is still superior to the technological alternative.

Granted sometimes as I’m sure a co-author of mine will attest there are benefits to say a conference in Hawaii

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Monday, July 7, 2008

Chili Cook Off: How to Deal with Imperfect Information

So I spent my Fourth of July at the Palo Alto chili cook off. I arrived about an hour into the chili eating. So here is how the tasting worked there were 22 chili stands each staffed by a local community organization that had prepared their own version of chili. For $5 I purchased a tasting packet, which included 5 tickets. Each ticket could be exchanged for one serving (a few ounces) of chili. So I could sample 5 of the 22 booths. Additionally the lines for the booths varied greatly from getting served in a minute to 15 minutes. So the question arises which booth should I choose?

I could assume that no one knows anything about the booths and go to the shortest line. But the cook off had been going on for about 1 hour so I assume some information about the best chili had been passed. So perhaps the longest lines have the best chili. However, I don’t like to wait in line. But waiting in line is more enjoyable if you are currently eating chili.

So solution. Assume other people have similar taste to you in terms of chili and get one less preferred chilli from a short line, while venturing into a longer line.
Further experimentation proved that beer and chili are complements.

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Wednesday, July 2, 2008

Most of You Like Weak Coffee or Starbucks is Wrong

Starbucks recently released a new line of coffee Pike Place roast. As this Wall Street journal article describes the new line is weak and is upsetting many loyal customers who wanted bold strong coffee.

This article made me think of a Malcolm Gladwell TED talk. In the talk which you can watch below he describes a great breakthrough in the canned spaghetti sauce industry. When a food scientist was hired to create the perfect spaghetti sauce he found when he tested three varieties which differed on thickness that about 1/3 of people preferred each type. His great revelation was, why not make 3 different types of spaghetti sauces? The new line of differing spaghetti sauces increased sales and customer satisfaction.

Relating back to Starbucks, Gladwell also talks at the very end briefly about how the same division can be made for coffee. By offering different types of coffee, Gladwell citing the same food sciencetist says that satisfaction for coffee can greatly increase. So why not follow Gladwell’s example and serve a couple of types of coffee one weak and one bold. Actually Starbucks does this for part of the day brewing a dark roast and Pike Place roast during the morning. But, in the afternoon they serve only the weak Pike Place roast. There must not be enough bold coffee drinkers, or bold coffee drinkers like weak coffee more than weak coffee drinkers like bold coffee.

Starbucks seems to be bucking the trend toward increasing choice discussed by Gladwell. This must mean that offering more variety of coffee increases costs, likely resulting from unused brewed coffee. So either Starbucks is wrong about most people’s preference for weak coffee or decreasing variety and sales might lead to more profits by lowering the cost of offering variety.

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Tuesday, July 1, 2008

Find a Penny Pick It Up? Depends on Who You Are

Boston Gal, a personal finance blogger, has a nice little story about Russell Sage (link). Sage was a late 19th century wealthy financier. One day he received an advertisement in the mail for a play, which included a check for 4 cents and a note.

“Assuming that your income is $15,000 a year, and that you appreciate the fact that time is money, we enclose check for 4 cents in payment of two minutes of your time at that rate, to be employed in carefully reading a brief and honest statement of the novel, applause-winning features in our new musical farce"

Boston Gal estimates Sage’s income in the 5-10 million dollar range, meaning a minute of Sage’s time was worth $12, but Sage signed and cashed the check anyway. This is a common example, see Brad Templeton’s discussion of the value of Bill Gate’s time, which was estimated at $31 a second at one point.

These type of estimates are good for a first pass of if something worth your time. However, in some sense they are also an over estimate. If Sage or Gates worked a minute more they are likely to make less than their average wage per minute and in fact might not increase their income any. Same thing if you try to work a minute or few hours extra.

But, perhaps there is also something great about finding money. Never underestimate the fact that people like getting free (opportunity cost not included) money and services. If you don’t believe me just watch what people do for free t-shirts at a baseball game.

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