Monday, November 24, 2008

What Good is the Middleman? Super Broker Shuffle

If you like found video footage and terrible super bowl shuffle videos, I recommend the You Tube video linked below. The video is a promotional spot for the Southern Food Brokerage. It appears that including bad rapping, food brokers help get products into grocery stores from the video. I’m not sure on the accuracy of this write up of food brokerage, but it claims that food brokers can make 45-50 thousand dollars a year with only a high school education. It is a sales driven job, so those earning can vary a lot.

From an economic stand point why do we want middlemen. Their salaries must be paid so we can get our Ortega taco shells and A1 steak sauce in our grocery stores, but wouldn’t are groceries be cheaper without them (or we cut out the middleman.)

In econ 101 it is generally assumed there are no transaction costs, and everyone knows all the goods available and at what price. But in real life a grocery store must choose among 1000s of products, by paying a broker a grocery store may gain access to knowledge about these products.

However, over time we have cut out the middleman. This brief description of food brokers by Steve Hannaford shows the number of food brokers had decreased to 3 by 2003. Unfortnatly Southern Food Brokerage is no more, it was bought by Crossmart in 1991.

It lives on in the Super Broker Shuffle, watch and enjoy!

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Wednesday, November 19, 2008

When is it cheapest to purchase a turkey?

I've been quite excited about all the traffic generated from the link in Marginal Revolution (thanks Tyler). I've probably missed the big part of the wave, but if you found me through Marginal Revolution thanks for coming.

So if you liked cupzzas, here is more on economics and food. Thanksgiving is a little over a week away. But, my wife and I couldn't wait so last weekend we roasted a whole turkey for the two of us. We had a nice dinner, a few lunches of turkey leftovers, plus a pot pie, and a bunch of turkey to make stock.

Was this optimal? Like most Americans we will also eat turkey on thanksgiving (thanks Mom and Dad). We all know that turkey has diminishing returns at some point (anyone for curry-turkey hash?). But I think our turkey allocation was optimal, because now we have a week in between, and I could kind of go for some turkey right now.

So is it optimal that we all eat turkey at the same time? If we all want turkey at the same time, then this should lead to higher prices for turkey during thanksgiving. But farmers know this and expand turkey farm operations during the holiday. If prices reflect cost in perfect competition, then this indicates that there are economies of scale, that is the cost of average turkey production falls as more turkeys are made.

As the graph below shows this is the case that turkey prices have dropped during the holidays, while whole chicken prices have not. It’s not perfect evidence, but really who wants to not eat turkey on thanksgiving?

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Monday, November 17, 2008

Markets in Everything: Cupzzas (Pizza in the form of a cupcake)

What happens when you give $27 to group of students at Grinnell College (my undergrad) and get them to run a “business” for 10 days to raise money for charity?

Cupzzas, a pizza baked in cupcake form. Asa Wilder ’09 one of the founders is quoted in an article in Grinnell College's newspaper, the Scarlet and Black.

"We just really wanted to shatter the cupcake-pizza dichotomy. It's just existed for too long."

The Grinnellian entrepreneurs are also capital constrained, more from the article about how they made pupzzas, mini cupzzas.

"[A] lot of our ideas come from just not having the proper materials," Wilder said. "Like the pupzzas came from not being able to find the large tins."
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Mortgage and Retirement

Ian Ayres, the Yale Economist, is always coming up with ideas that make me think. In a recent Forbes article he proposed mortgaging your retirement. As he points out to purchase a house you typically put down anywhere from 5% -20%, and you buy the asset all at once. But in your retirement you only put down a little bit at a time. Typically you put more money in when you are older and less when you are younger. Ayres points out that this means that you are not spreading out your risk over time, you want to purchase more retirement funds when you are young and less when you are old.

He proposes that you purchase what is called a life cycle account. When you are in your twenties you buy on the margin, by basically buying a mortgage on stocks with 50% down. Gradually over time you reduce this 2/3 down by 40, until you start repaying your retirement mortgage in your 50s. Ayres tested this model using data for each age group going back to 1913 and found using past data that it outperformed the standard retirement plan (of buying stocks young and bonds old) and never returned less than 2.5%.

I have to say though I’m skeptical. For three reasons, first past performance does not indicate future returns as they say. I’m also curious about the general equilibrium case. If all young people start buying stocks on margin, will the cost of borrowing to purchase stock increase, could this wipe out the gains Ayres sees? Finally, I don’t fully understand the mechanics of it, it seems to me that a lot could go wrong, what if you start to earn less in your 50s, its harder to retire earlier or maybe not. What if you get disabled do you still owe your retirement debt?

Ayres is a smart guy though, so I’ll be curious to follow this. If it’s a good idea some financial company will offer it (although if it is a bad idea that might happen too).

h/t Dan Rothschild for passing on the idea
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Friday, November 14, 2008

Ticket Resale and Obama Inauguration

I have scored some tough tickets before, like to last year’s Oyster Riot, ALCS tickets in 2006, Dodgers and Angeles on father’s day. I would love to get a ticket to president-elect Barak Obama’s inauguration, but my normal method for scoring tickets might be cut off. This method is buying tickets through craigslist and Ebay.

Ebay has banned the sale of inauguration ticket and there is talk in congress of banning second market sales (i.e. scalping) of inauguration speech ticket. If you are looking for tickets, it looks like e-mailing your Senator or Represenative is the only way at this point.

Economists are generally for free markets and allowing ticket resale is a type of free market. But, it is worth noting that tickets have not even been issued yet, and as the cost of tickets goes up so does the likelihood for fraud. My guess is that if you want an inauguration ticket and you strike out with your congress member, head down to the event and try to purchase a ticket a little bit after things start.
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Monday, November 10, 2008

Don’t Take Candy from Strangers, Especially Strange Economists

A lot of economics is actually based on trust. If I purchase something from you, I trust that you will not sell me something that you know to be bad. In the US there are mechanisms to sue or get retributions if you are knowingly or unknowingly sold a faulty good. In developing countries a lack of trust can hinder the ability to get business done. Dean Karlan at Yale has been one of the leaders in research on the role of trust and its impact on social capital. Karlan has used games across the world to help measure social capital.

Lately though Karlan’s work has turned to US politics. In a recent paper he wrote with a number of others, the trust of New Haven children was tested. The paper received a recent write up in Slate. The abstract describes the experiment below:

We conducted experiments during trick-or-treating at Halloween, four days prior to the 2008 presidential election. We decorated one side of a porch with Obama material and the other with McCain material. Some children are asked to choose a side to get an equal quantity of candy, whereas other children are offered more candy to go to the McCain side. At the candy table, each child chooses between a clear plastic bag and a brown paper bag, thus revealing their level of trust or comfort with ambiguity. We find that, in a predominantly liberal neighborhood, children choose the Obama table and continued to do so even upon the promise of more candy at the McCain table. We also find that Obama supporters, identified as those who choose the Obama table, are more likely than to take the brown bag of candy than the McCain supporters, identified as those who choose the McCain table.

These results mimic results from the General Social Survey in which supporters of Kerry over Bush in 2004 are more trusting.

I think the main lesson we can garner though is to not trust economists with candy.

h/t to Chris Blattman
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Thursday, November 6, 2008

When Supply and Demand Fail: Reports from the Tropics

Tropical Rot is a new blog which details the adventures of a friend of mine in Costa Rica. He’s been living there a while and I have been following his stories in other venues, but now you can and should follow his stories of the dysfunction and grim underbelly of what is actually one of the better off developing countries.

Yesterday’s post details his attempt to purchase high speed internet. Here’s the first paragraph

I have been waiting for high-speed internet at my house for a long time. Over
three years, to be exact. I have called the ICE, the government monopoly on
telecommunications, every few months and their response is always the same. A
bored voice on the other line says, “There are no ports available.” When will
they get some ports in? Again, the same answer every time, and quintessentially
Tico: “I wouldn’t know what to tell you.” (No sabría decirle).

I won’t do it justice, but the post goes on to detail long lines, indifference, and an unwillingness to exchange money for goods. They key economic reason here is that ICE is a monopoly. My guess is that the network may have a certain capacity and that government regulation may hold the price down. So in order to offer more people network ICE would have to expand the network, which could be too expensive.

I’m also considering another theory. Rot goes on to describe something even more puzzling. An US ex-pat living in Costa Rica writes into the local English paper:

When I first moved to Costa Rica in the mid-1970s, I bought canned mushrooms at
a local pulpería [small convenience store]. After a bit, the owner stopped
stocking them, and when I asked him why, he replied, “They sell so fast that I
can’t keep them in stock, so I don’t bother ordering them anymore.” I suggested
that he place a larger order, but it fell on deaf ears.

One place where typical economics fails is when one person's effort mainly benefits another person. ICE employees do not get paid based on how many people get internet, so why work hard. It’s possible that the pulpería is owned by someone else and the manager does not want to order more mushrooms, because it is more work. Similarly I wonder if the pulpería cannot raise prices too much on the mushrooms, since people might buy them someplace else. In this case if there is a fixed costed for each mushroom order, it might be worth it to not order a many mushrooms.

In the end though, sometime economic theories fail, people do things that are counterintuitive to an economist.
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Monday, November 3, 2008

Kiva Proposal: Request to my Readers

Dear Blog Readers,

I'm trying something new this semester in my Development Economics class. I had students write a request to fund a micro loan. The micro loan was requested through a website called Kiva. On the website potential borrowers request funds for a loan and people like you and me can provide a loan directly to borrowers in developing countries. To engage my students a little more I chose the top five proposals in the class. The proposal receiving the most votes will receive $150 to put toward the loan of their choice, 2nd place $50, and 3rd place $25.

I would like it if my blog readers, read their proposals and chose their favorite. To vote make a selection using the poll to the right of this post. If you only have time to read a few pick a couple of enteries at random and select one you like.

Fortunately, Kiva is becoming very popular and many of these loans have been funded. In that case I will allow the students to choose a new loan to fund. Thank you for your help, and I hope you enjoy my students' proposals.

Seth Gitter
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Maisara Abdusamadova in Tajikistan

This proposal requests for a loan of $800 to be provided to Maisara Abdusamadova, a single mother who wants to expand her small business in Tajikistan. A former Soviet Republic, Tajikistan is classified as a low income country with an estimated per capita GDP of $1,600 (CIA). A six year civil war that ended in 1997 severely damaged the economic infrastructure of the country and created a sharp decline in economic growth. Uneven implementation of structural reforms, flagrant corruption, high rates of unemployment, a weak government, limited resources, and an external debt of $1.56 billion, are all factors that contribute to the country’s current economic situation. Despite experiencing steady economic growth since 1997, 60% of the population in Tajikistan continues to live below the poverty line (CIA).

Maisara Abdusamadova is a widow who lives with her two children in the rural Isfara region of Tajikistan. She has a small cooking business, selling ‘sambusas’ (national dumplings) as a means of supporting her family. However, despite an increase in popularity and demand from her customers, she does not possess the means to expand her business. She is requesting a loan of $800 to be repaid in span of six months, in order to invest in cooking equipment and furniture for her customers. This will enable her to expand her business and cater to the demands of her customers more efficiently, through which she can generate even bigger profits.

Maisara is represented by the International Micro-Loan Fund, which is a microfinance organization that helps the most vulnerable groups of the population to improve their economic well being. The organization currently possesses a “5-Star” risk rating on KIVA, which demonstrates a high likelihood of repayment. Since Maisara already runs an established business that caters to regular customers, it adds to her credibility and ensures repayment. As the sole earner in her household, it is important for Maisara to obtain maximum profits from her business so she can provide support for her children and their education the future.

Priyanka Subba
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Akua Aboka in Togo

It was not an easy task to look for eligible entrepreneurs on KIVA due to the fact that I had to choose only one of them. After hours of browsing I decided to write this report on Akua Aboka and hopefully convince you to loan her money for her business.

Akua Aboka is a 42 year old married woman and mother of two. She is a merchant and owns a ready-to-wear clothing store in Kpalime, Togo. In order to address her customers demand, increase her clienteles, and prosper her business she requested a loan of $975 of which $775 has been raised so far. The amount of $200 is the only obstacle that is keeping her from buying demand brand names shoes and outfits for her clientele.

There is a myriad of reasons why I think Aboka should be the recipient of your loan. For one, like most entrepreneurs on KIVA, Akua Aboka is from a developing country which has very limited resources to offer a banking system that would allow entrepreneurs like her to request loans for their businesses.

Second, my candidate is from Togo, a very small country of about the size of West Virginia which is located in West Africa. Togo’s economy depend heavily on agriculture with about 65 % of the population employed either in commercial and subsistence agriculture. It is no surprise to see that cash crops such as cocoa, coffee, and cotton (40 % of export revenues) generate most government revenues. The only natural resources for this country consist of phosphates, limestone, marble, and some arable land; and Togo is the fourth largest exporter of phosphate in the world. Togo has a deficit of 159 million dollars, huge debts, and a GDP per capita of $900. It is safe to assume that with no degrees, my candidate would make very less than $900 therefore leaving her unable to provide for her family.

KIVA is a window of opportunity where generous people like you can help Akua Aboka improve her living conditions with very little money. I am asking you to consider my candidate, think about the joy you will bring to her and her family, and the satisfaction you will get knowing that you have helped someone in great need.

Pulcherie Konan M'Bra
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Mena Abdulaziz in Afghanistan

While overcoming poverty is difficult under any circumstances, overcoming poverty in a war zone is even harder. The economic structures (and therefore, opportunities for economic progress) are severely limited, if not completely destroyed, in countries at war. Micro-loans are critical to providing opportunities for economic livelihood in such situations. Providing a loan for Mena Abdulaziz will not only allow her to support her family by expanding her husband’s business, but it will provide her a greater ability to express artistic ability through pottery.

Afghanistan has experienced international and civil wars resulting in the destruction and creation of various governments over the past three decades. This has undoubtedly hindered its economic development, as the state has an unemployment rate of 40% and per capita GDP of $1,000 (CIA World Factbook, 2008). Providing a loan to Mena will allow her and her husband to improve their standard of living, along with that of their three children. Although any investment is a risk, Mena has a good track record and you can expect to be paid back. Her first loan provided funds to start her husband's store and improve her pottery business. This loan will allow her expand her pottery business even more and improve the stock in her husband's store. While financing retail businesses are relatively common, it is less often that you have the chance to support the spread of artwork. Life in a war-ravaged country can be difficult and discouraging and work that displays beauty and creativity amidst the rubble of war should be encouraged. While one may not think that something as simple as a handmade and decorated bowl can have an effect on others, a small work of art may provide a little encouragement in an otherwise chaotic life. Supporting a loan to Mena and her family will allow them to further their economic progress while increasing the number of people who can enjoy Mena’s creativity through pottery.

Lindsay Roberts
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Rosemary Maziku in Tanzania

(see above)
Imagine a country with a diverse landscape, composed of wild animals running free, the tallest mountain in Africa and several landmark lakes. Think about what it would be like if you were able to live in a country where nature is more prominent than technology. Although many Americans would call this a vacation, there are millions in Africa living in such a place. Welcome to Tanzania, the dream getaway spot, where the GDP per capita is $1,300.00 and the life expectancy is 51 years old (Tanzania, 2008)! Sounds like paradise, right?

While life, in general, in Tanzania is difficult, women especially have a hard time. According to, the customs of the Tanzanian society make it hard for women to own property. This, in turn, leaves them without the necessary credit to borrow from financial institutions. Rosemary Maziku is one woman trying to run a business in Mwanza, Tanzania. She is a thirty-seven year-old widow with three young children, simply trying to raise enough profit to keep her family alive. She is requesting a loan for $400.00 that she will use to purchase cloth and shoes to sell. Currently working twelve hours a day, six days a week, Rosemary operates a tailoring business and sells soaps and perfumes for extra income. She turns a small profit of about $120.00 a month. Many Americans spend more than that on food each week. The field partner affiliated with loans in Tanzania is SELFINA. They greatly cater to the needs of poor women, even allowing them to use equipment as collateral for future loans. The loan is near risk-free, with a 0% reported default rate and 0% delinquency rate (RosemaryMaziku, 2008).

Knowing that Rosemary needs only $400.00 to completely better her own life and the lives of her children, how can you not feel a desire to help?

--Lindsey McCurdy
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Heng Sophea in Cambodia

(see above)
This proposal is for a Mrs. Heng Sophea, who is 41 years old who lives in the Andoung Samrith Village in Takeo Province of Cambodia. Mrs. Sophea supports her husband and four children with a rice crop that she is currently unable to harvest because she needs someone to help plow the field. Her husband assists her with her crop, while her oldest child drives a car to produce a supplemental income. Two of her children are currently attending a local school. She is asking for a small loan of $500 to hire a worker that will help her plow her rice crop. The money would be used to pay for the worker; while the remaining money would be used to buy fertilizer and pesticides to aid in the resilience of the crop.

To loan money to this women would benefit her whole family. She will be able to provide more for her family by yielding a crop that they can live off and sell to make profit. This small investment can give a family a chance to gain a higher income and become a larger contributor to the economy of Cambodia. Even though crops are very temperamental and depend on the climate, the addition of fertilizer and pesticides will greatly reduce the risk of crop loss. Cambodia has a GDP per Capita of $1,900 (CIA World Fact Book), where 31% of total GDP is in the agricultural sector, comprising of 75% of the labor force. This shows that agriculture is a way that most people try to make their incomes from. However, it may not produce a large enough income. Micro loans make it possible to loan small amounts to families that otherwise would be too risky, but with the help of these small loans, that have a high success rate, they can achieve the dreams that banks tell them that it is impossible. The borrowers from Kiva have been screened and have the assistance of groups of other borrowers that give support to each other.

Borrowers also learn the ability to save money for those unfortunate incidents. It is very important to lend just a few dollars to these people, who have nowhere else to turn to make their dreams come true.

--Jessica Maurer

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