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Steve Verdon explains moral hazard

Steve Verdon explains moral hazard

Steve Verdon explains moral hazard at his blog Deinonychus antirrhopus. Here: "Moral Hazard, Adverse Selection and Insurance"

Why do corporate managers have

Why do corporate managers have an incentive to overinvest in good government gurus?

These agents are more risk-averse than their principals, the stockholders. Professor Bainbridge explains here: "The corporate governance racket".

The iterative prisoners' dilemma Lawrence

The iterative prisoners' dilemma

Lawrence Solum covers the iterative prisoner's dilemma at his Legal Theory Blog. On Sunday he posted an introduction to the iterated prisoners' dilemma for law students, here: "Legal Theory Lexicon: The Prisoner's Dilemma"

"One of the most useful tools in analyzing legal rules and the policy problems to which they apply is game theory. The basic idea of game theory is simple. Many human interactions can be modeled as games. To use game theory, we build simple models of real world situations as a game. Thus, we might model civil litigation as a game played by plaintiffs against defendants. Or we might model the confirmation of federal judges by the Senate as a game played by Democrats and Republicans. This week's installment of the Legal Theory Lexicon discusses one important example of game theory, the prisoner's dilemma. This introduction is very basic--aimed at a first year law student with an interest in legal theory...."

On Wednesday he posts a follow up, here: "More on Iterative Prisoner's Dilemmas: The Grim Trigger Solution".

Political economy Two posts by

Political economy

Two posts by Lynne Kiesling at her blog The Knowledge Problem link to public choice materials.

First, her post "TWO MORE INTERESTING ECONOMICS BITS" links to an article by James Buchanan ("Public Choice: Politics Without Romance" from Policy magazine, a journal of the Centre for Independent Studies) on the origins and significance of public choice theory. Buchanan was "present at the creation." He talks about the ideas that piqued his interest, the origins and significance of his book (co-authored with Gordon Tullock) The Calculus of Consent, the charge that public choice theory is ideologically motivated, the charge that public choice theory is immoral, and the contemporary significance of public choice theory. A lot of good stuff in six - non-technical - pages. Is public choice theory ideologically biased? An answer depends on an appreciation of

"...the prevailing mindset of social scientists and philosophers at the midpoint of the 20th century when public choice arose. The socialist ideology was pervasive, and was supported by the allegedly neutral research programme called 'theoretical welfare economics', which concentrated on identifying the failures of observed markets to meet idealised standards. In sum, this branch of inquiry offered theories of market failure. But failure in comparison with what? The implicit presumption was always that politicised corrections for market failures would work perfectly. In other words, market failures were set against an idealised politics.

"Public choice then came along and provided analyses of the behavior of persons acting politically, whether voters, politicians or bureaucrats. These analyses exposed the essentially false comparisons that were then informing so much of both scientific and public opinion. In a very real sense, public choice became a set of theories of governmental failures, as an offset to the theories of market failures that had previously emerged from theoretical welfare economics. Or, as I put it in the title of a lecture in Vienna in 1978, public choice may be summarised by the three-word description, 'politics without romance'.

"The public choice research programme is better seen as a correction of the scientific record than as the introduction of an anti-governmental ideology. Regardless of any ideological bias, exposure to public choice analysis necessarily brings a more critical attitude toward politicised nostrums to alleged socioeconomic problems. Public choice almost literally forces the critic to be pragmatic in comparing alternative constitutional arrangements, disallowing any presumption that bureaucratic corrections for market failures will accomplish the desired objectives..."

Buchanan treats rent seeking behavior in a couple of paragraphs midway through. When you've finished Buchanan's article, turn to the links in a second Kiesling post: "OTHER INTERESTING NEW BITS". Kiesling has linked to, and provided commentary on, several posts on rent seeking behavior: Robert Prather discussing rent seeking at the state level, Gordon Tullock on "The Fundamentals of Rent Seeking," commentary on Tullock's essay by Steve Verdon, and Kiesling herself applying Mancur Olson's group model applied to negotiations on the current energy bill. Tullock covers the evolution of rent seeking behavior from 1967 when he came up with the idea, to 1974 when Anne Kreuger coined the phrase. Where do good ideas come from? In Tullock's case:

"...The point of departure for my 1967 paper was the conventional welfare loss to monopoly associated with tariffs, monopoly and theft. In this short essay, I shall focus almost entirely on the monopoly example. Original contributions very often occur when a scholar looks at a well-established theory with his eyes open, and not closed as so many of us do for so much of our existence. Such was the nature of my 1967 insight. I simply shifted attention from the welfare triangle to the profit rectangle and asked what self-seeking entrepreneurs would do to access such a profit rectangle from the zero profit environment of a competitive market..."

Will we grow our way

Will we grow our way out of the Social Security/Medicare problem?

Arnold Kling thinks we might, and explains why in The American Enterprise Online: "Will Science Save Social Security?".

"...There is one important perspective that has not been brought to bear on the issue of the burden of future entitlements. That is the perspective of science, technology, and innovation. The deterioration of Social Security finances is expected to take place over the next 15 to 50 years. Over that same time span, technologists foresee remarkable progress in computer technology, nanotechnology, and biotechnology. If these pundits are correct, then the economic impact of innovation is likely to swamp the effects of policy changes on our ability to sustain entitlement programs..."

The pros and cons of

The pros and cons of taxing sin

Jim Leitzel, at the blog Vice Squad, looks at the pros and cons of legalizing and taxing vices such as drugs and prostitution. There are two related postings. This one, on discussions over potential legalization of prostitution, "Legal Prostitution for Las Vegas? Thailand?" is the basis for the second, which gives an economic analysis of the pros and cons of legalizing and taxing this and other vices: "Tax Revenues as a Benefit of Vice Legalization".

A good prediction In early

A good prediction

In early September Max Zawicky (at the blog MaxSpeak, You Listen!) predicted:

"...We will soon be hearing that to help manufacturing, we must ease the tax burden on corporations...

"As we speak, Republicans in Congress are writing up more tax cuts, this time for corporations. They will sail under the flag of "fixing" the foreign sales corporations (FSC) loophole that has been found to be illegal by the World Trade Organization...

"...A small problem is that the FSC can't be fixed in a way that will be WTO-legal because the fault is in the basic structure of the corporate income tax. This dispute has been festering for decades. But not to worry, attached to the FSC fix will be all sorts of peripheral tax breaks that will survive, even as the FSC component remains in ever-lasting international legal limbo."

See "AND NOW FOR SOMETHING COMPLETELY SIMILAR". I noted it here: "What will the Bush Administration do to promote manufactures?", and I've been waiting to see what happened.

Friday's New York Times reports:

"The proposals are in the latest draft of a bill to replace a tax break for American exporters that the World Trade Organization has declared an illegal trade subsidy. The European Union has threatened to retaliate with up to $4 billion a year in tariffs on American products if the United States fails to repeal the old break...

"...In an attempt to placate as many groups as possible, the House proposal would repeal the original export tax break for what is known as extraterritorial income and replace it with a broader array of corporate tax breaks worth more than twice as much.

"Repealing the old tax break would bring the Treasury about $50 billion over 10 years, and the bill would raise nearly $30 billion more by blocking a variety of tax shelters and loopholes. But the new tax breaks would be worth about $142 billion over 10 years, leaving the net cost to the government at about $60 billion over the next decade."

See "House Leaders Are Pushing to Cut Corporate Taxes". I'm assuming the "illegal trade subsidy" in the Times story is Zawicky's "FSC."

P.S. 10-26-03 Steven Pearlstein had a column in the Washington Post on this corporate tax cut bill on Oct 22: " 'Reforming' The Corporate Income Tax".

"...Now Congress, under the guise of doing something to "save jobs" and "level the playing field" for the beleaguered manufacturing sector, is about to make things even worse [than they already are - just how bad is explained in preceding paragraphs - Ben]. You don't have to bother with the details of the various proposals. All you have to know is that we finally have a set of tax cuts so ill-conceived that even the Bush administration is against them..."

I learned about Pearlstein's column from Tyler Cowen at the Marginal Revolution blog: "Reforming the corporate income tax".

Garrett Hardin Edward Lotterman discusses

Garrett Hardin

Edward Lotterman discusses the influence of the late ecologist Garrett Hardin, here, in the Twin Cities Pioneer Press: "Real World Economics: Common property systems have uncommon results".

"Sometimes a bad idea, eloquently expressed, has enormous influence. Garrett Hardin's famous essay, "The Tragedy of the Commons," demonstrates that truth..."

Let me also draw your attention to the web site of the Garrett Hardin Society: "The Garrett Hardin Society". The site has transcripts of interviews with Hardin, including an exhaustive UCSB Oral History project interview covering his entire life and work. In Section 7 of the transcript he describes the genesis of his most influential paper, "The Tragedy of the Commons." This was an unusually hard paper for him to write.

"Why did I have so much trouble writing this paper? Well, I think it's because I didn't like my own conclusions. I found them deeply disturbing. I kept trying to escape from them, and I just couldn't..."

Do girls cause divorce? David

Do girls cause divorce?

David Leonhardt describes recent economics research suggesting that:

"In every decade since the 1940's, couples with girls indeed divorced more often than those with boys, United States Census Bureau data showed. The effect was not huge - just a few percentage points - but it was unmistakable. It happened in every region of the country. It happened among whites more than blacks and among people with only high school diplomas more than those with college degrees.

"Over the last 60 years, parents with an only child that was a girl were 6 percent more likely to split up than parents of a single boy. The gap rose to 8 percent for parents of two girls versus those of two boys, 10 percent for families with three children of the same sex and 13 percent for four. Every year, more than 10,000 American divorces appear to stem partly from the number of girls in the family..."

See "It's a Girl! (Will the Economy Suffer?)" in today's New York Times (Oct 26) for the full article. This article will probably only be available on line for a short time.

These research results have been covered elsewhere. I can think of two columns by Steven Landsburg in Slate, "Oh, No: It's a Girl! Do daughters cause divorce?" on October 2, and "Maybe Parents Don't Like Boys Better. A follow-up to the recent column about whether daughters cause divorce." on October 14.

The "Baltic dry" index is

The "Baltic dry" index is up. What does that mean for you?

Daniel Gross explains what the "Baltic dry" leading economic indicator is, where its been going recently, and what it might mean, in this Slate column: "The Shipping News. The best economic indicator you've never heard of.".