Management R&D

Timeless wisdom from Uncle Milton

noreply@blogger.com (Luke Froeb) — Fri, 01 Apr 2011 15:55:00 +0000

Moving to ManagerialEcon.Blogspot.com

noreply@blogger.com (Luke Froeb) — Sun, 12 Jul 2009 21:53:00 +0000

In preparation for the 2009 September 15 release of the second edition of Managerial Economics: A problem-solving approach, (Amazon, Barnes & Noble, publisher)we are moving the blog to ManagerialEcon.Blogspot.com.

We will keep this site online until we have completed the move.

Unintended consequences

noreply@blogger.com (Luke Froeb) — Fri, 10 Jul 2009 15:53:00 +0000

John Makin blames the government:

But the housing bubble only burst after government subsidies pushed house prices up so fast that marginal buyers could no longer afford to chase prices even higher. A bubble created by rigged financial markets and a government-sponsored obsession with home ownership is not a result of market failure, but rather, a result of bad public policy. The belief that home ownership, per se, is such a benefit that no amount of government support could be too great and no pace at which home prices rise could be too fast is the root of the crisis.

What's the point?

noreply@blogger.com (Luke Froeb) — Thu, 09 Jul 2009 15:37:00 +0000

Without the cooperation of the poorer countries, reducing carbon consumption in rich countriies, e.g., by raising the price of carbon emissions, will simply move industry and production to poorer countries. This used to be derisively called "exporting pollution," but now it seems like offical government policy.

’AQUILA, Italy — The world’s biggest developing nations, led by China and India, refused Wednesday to commit to specific goals for slashing heat-trapping gases by 2050, undercutting the drive to build a global consensus by the end of this year to reverse the threat of climate change.

Peter Huber predicted as much:

By pouring money into anything-but-carbon fuels, we will lower demand for carbon, making it even cheaper for the rest of the world to buy and burn. The rest will use cheaper energy to accelerate their own economic growth. Jobs will go where energy is cheap, just as they go where labor is cheap. Manufacturing and heavy industry require a great deal of energy, and in a global economy, no competitor can survive while paying substantially more for an essential input. The carbon police acknowledge the problem and talk vaguely of using tariffs and such to address it. But carbon is far too deeply embedded in the global economy, and materials, goods, and services move and intermingle far too freely, for the customs agents to track.

But as these poor countries get richer, they will demand less pollution.

Voluntary transactions create wealth...

noreply@blogger.com (Luke Froeb) — Wed, 08 Jul 2009 21:10:00 +0000

and the new Financial Products Safety Commission will make them harder to consummate. Former colleague Todd Zywicki says that the proposed regulation is based on a flawed analogy:

An unsafe toaster is a hazard to anyone who buys it. That's not true for loans.

Virtually every credit product is valuable to some consumers. Low-documentation loans are a boon for homeowners with a lot of equity who want to refinance their mortgages (even as they are a dangerous thing to offer speculators).
And unlike toasters, borrowers have substantial say over whether their loan "explodes." Foreclosures have risen throughout the country, but an epidemic exists only in a handful of areas -- Las Vegas, Phoenix, Miami and the Inland Empire region of California are all places where foreclosure rates are five to 10 times higher than the national average. These areas saw price bubbles that have now popped, giving many homeowners who owe more than their house is worth strong incentives to walk away from their loans.

When the going gets tough, blame the speculators

noreply@blogger.com (Luke Froeb) — Wed, 08 Jul 2009 16:24:00 +0000

Telling hostility to markets

In Washington, the Commodity Futures Trading Commission, the main U.S. futures-market regulator, said it is considering tougher regulation of oil-futures markets. The proposed rules, which drew immediate criticism from traders, would seek to curb the influence of speculative investors such as hedge funds and investment banks by limiting how much money any single trader can bet on any one commodity at a time.

Max out your credit cards, then borrow from friends and family

noreply@blogger.com (Brian McCann) — Wed, 08 Jul 2009 13:57:00 +0000

The double whammy of tightening credit markets and falling housing values are making it more difficult for small business owners to finance their businesses. Venture capital investments aren't a realistic source of capital for the great majority of new businesses, so they often rely on debt financing. A fairly common source is equity tied up in real estate; however, drops in housing values mean less equity to draw upon.

As home equity lines vanish, other avenues of small business financing are also running dry. More than 40% of small business owners polled in April by the National Small Business Association said the limits on their credit cards had been cut in the past year, and 63% said their interest rates went up. Bank lending is in freefall. Even with stimulus incentives, the SBA backed 30% fewer bank loans to small businesses last quarter than it did a year earlier. The agency's lending volume has dropped to less than half what it was before the recession set in at the end of 2007.

The other shoe

noreply@blogger.com (Luke Froeb) — Tue, 07 Jul 2009 21:01:00 +0000

Wait until next year:

Many economists fret about an unpleasant scenario in 2011, when the stream of stimulus money will ebb, reserves will have been drained and revenues will still be meagre. Medicaid enrolment may still be swollen by recession. Promises to retired workers, including pensions and health care, will weigh more heavily than they do now. This year was painful, but those to come may be even worse.

Once upon a time...

noreply@blogger.com (Luke Froeb) — Mon, 06 Jul 2009 19:29:00 +0000

Colleague Bob Driskill tells the story of the financial crisis without invoking bubbles. In particular, the relatively small subprime mortgage sector started a run on Investment Banks who were borrowing short (in commercial paper) and lending long (by buying Mortgage Backed Securities) because it exposed a flaw in the financial engineering. In particular, instead of re-working the defaulted mortgages, as would have been efficient, the lenders began fighting among themselves.

...higher-than-expected default rates led to "tranche warfare:" the mortgage servicers and the various tranche-holders had di¤erent incentives to preserve the overall value of the MBS in the face of higher-than-expected defaults. Furthermore, tax issues complicated any effort to get to Pareto improvements among the different tranche-holders. This seems a little like what happened with railroad bonds and bankruptcy in the late 1800’s: the early bond covenants seemed to be incomplete and poorly designed to stop liquidation of railroads that had value as an operating entity.

HELP WANTED: creative accountants

noreply@blogger.com (Luke Froeb) — Mon, 06 Jul 2009 19:25:00 +0000

The Montana Public Employees' Retirement Board and the Montana Teachers' Retirement System declare in a recent solicitation for actuarial services that

If the Primary Actuary or the Actuarial Firm supports [market valuation] for public pension plans, their proposal may be disqualified from further consideration.

Homer Economicus

noreply@blogger.com (Luke Froeb) — Mon, 06 Jul 2009 16:19:00 +0000

In the second edition of our textbook (available 2009 Sept. 15) we include material on asset bubbles and psychological pricing, departures from the classic rational actor paradigm. Richard Thaler writes about regulation for not-quite-rational humans:

...lenders could be required to offer some mortgages they call “plain vanilla,” with uniform terms. There might be one vanilla 30-year, fixed-rate mortgage and one five-year, adjustable-rate mortgage. The features of these plain mortgages would be uniform, much as in a standard lease used in most rental agreements.
Lenders would also be free to offer other exotic mortgages ... , but these offerings would receive more intense scrutiny from regulators. ...

But did all of those home buyers, who are now getting their mortgages re-set, really act irrationally?

Bubble in Higher Education?

noreply@blogger.com (Brian McCann) — Mon, 06 Jul 2009 13:55:00 +0000

Our friends over at Organizations and Markets are having an interesting discussion on whether we are in the midst of a higher education bubble that's going to burst sometime soon.

Got Milk?

noreply@blogger.com (Brian McCann) — Wed, 01 Jul 2009 12:38:00 +0000

Milk prices have been dramatically falling over the past year:

Through much of last year, the average milk price hovered around $17 per 100 pounds -- although consumers purchase milk by the gallon, the industry measures by pounds. The bottom fell out of the market when the economy tanked last fall. Prices now hover around $10, according to the California Department of Food and Agriculture. Farmers generally need at least $16, and often more, per 100 pounds to break even, depending on their debt, feed requirements and other factors.

What I haven't seen anywhere is a particularly good explanation for the volatility in prices.

Hulu vs. TV Advertising Rates

noreply@blogger.com (Brian McCann) — Mon, 29 Jun 2009 17:10:00 +0000

Looks like the marginal benefit of advertising during programs shown on Hulu must be higher than that of the same program shown on TV.

Marketers typically pay $20 to $40 per thousand viewers for a prime-time ad. On Hulu, which began offering shows to the public in March 2008, an ad on the animated series “The Simpsons” costs $60 per thousand viewers, Michael Nathanson, an analyst at Sanford C. Bernstein & Co. wrote in a June 18 report.

Why bother?

noreply@blogger.com (Luke Froeb) — Mon, 29 Jun 2009 04:17:00 +0000

Oh, yeah, to give us a reason to make political donations:

The cap-and-trade bill is a travesty. ... It gives emission permits away, and tells utilities to rebate the windfall to consumers, so their electricity bills do not go up. It creates a vastly complicated apparatus, a playground for special interests and rent-seekers, a minefield of unintended consequences – and the bottom line for all that is business as usual.

Insure this

noreply@blogger.com (Luke Froeb) — Fri, 26 Jun 2009 19:24:00 +0000

Where there is demand...:

...on the first play from scrimmage against LSU on Oct. 10, 1998, a gruesome knee injury ended Florida senior defensive tackle Ed Chester's career. Fortunately for Chester, he had bought an insurance policy from Gainesville agent Keith Lerner after deciding against entering the 1998 NFL draft. Lloyd's of London, the venerable firm that insured Bruce Springsteen's voice and Angie Dickinson's legs, underwrote the policy. Thirteen months later, Chester walked out of Lerner's office with a $1 million check. Chester never played in the NFL, but if he handled his finances correctly, he never had to worry about money again.

Management in Venezuela

noreply@blogger.com (Luke Froeb) — Fri, 26 Jun 2009 15:46:00 +0000

El Presidente (for life?) first grabbed the guns (suppressing dissent is easy if only your supporters have guns), and then paid off those who supported him:

... my friend from Venezuela manages a factory, and told me 8 years ago Chavez made a law that you cannot fire anyone who makes 3-times minimum wage or less. So he has some employees who literally do nothing, and he can't fire them. Another one had a night shift and caused a lot of problems, so they put him on the day shift so they could better supervise him; he went to the department of labor to complain, and now my friend has to hire a lawyer to deal with this.

Is this enough?

noreply@blogger.com (Luke Froeb) — Wed, 24 Jun 2009 14:24:00 +0000

College Bound Sisters pays $1/day to 12-to-18-year-old girls to reward them for not getting pregnant.

Some recent graduates earned more than $2,000 and are an inspiration to those still in the program."I might want to be a teacher for a few years and then be a lawyer," said 12-year-old Chelsey Davis. "I might want to be an actor or singer," another girl in the program, Amanda Davis, added. Program director Laurie Smith said those aspirations are more achievable because of the incentives the program provides and the friendships it helps create.Smith said nearly 100 percent of the girls who finish the program have gone on to graduate college.

However, if a girl drops out or gets pregnant, her money is divided among the other girls still in the program.

Coinstar Economics

noreply@blogger.com (Brian McCann) — Wed, 24 Jun 2009 12:25:00 +0000

Coinstar offers kiosks in retail locations (grocery stores and similar outlets) that count your loose change. Dump your change in and get a voucher to redeem for cash at the store checkout. Coinstar charges a fee of 8.9 cents per dollar counted.

The company also offers a couple of other redemption options that allow you to avoid the fee. Coin counting is free when you exchange the coins for a gift card from a variety of leading merchants (Amazon, CVS, iTunes, JCPenney, Lowes, Starbucks, etc.). Also, if you donate your change to a non-profit (option available from the machine), there’s no charge, and the machine prints a tax deduction receipt for you.

A couple of questions occur to me: why take the cash option (I wonder how many people do)? Even if you calculate the time it takes to redeem the gift card and the probability that you won’t spend it, I can’t see that costing more that 9%. Second, I guess Coinstar must have some deal on the gift cards such that they don’t pay full price. Otherwise, where does the margin come from? I wonder how much of a discount they are getting, and how it compares to the 9% they make on the cash option.

Did the CRA contribute to the financial crisis?

noreply@blogger.com (Luke Froeb) — Tue, 23 Jun 2009 18:43:00 +0000

One man's solution is another one's problem:

Defenders of the CRA have tried to maintain that the law didn't require lenders to adopt lax lending standards that characterized the boom years.
Unfortunately, that's just not true. The CRA led directly to lending practices that included extremely low to nonexistent down payments, outrageous loan to value ratios and other "innovations" that later became some of the best predictors of defaults and foreclosures.

It's the Incentives, Stupid, III

noreply@blogger.com (Luke Froeb) — Mon, 22 Jun 2009 16:13:00 +0000

All we are saying is "give bankruptcy a chance."

Some of these consequences might have ensued, but the risk of widespread ripple-effect collapses--also known as contagion effects or systemic risk--was almost certainly overstated. The creditors of Bear Stearns would have suffered losses, and the shareholders would have been wiped out. But this hard medicine would have sent a very clear message to the managers, creditors, and shareholders: Better watch what the company is doing, or you could get burned. In more technical terms, a Bear Stearns bankruptcy would have eliminated moral hazard--the tendency not to take precautions if you'll be spared the consequences of bad outcomes.

Let the sick banks die so they can be replaced with healthy stubstitutes

noreply@blogger.com (Luke Froeb) — Mon, 22 Jun 2009 16:04:00 +0000

Former student John Tamny scores a rhetorical bulls eye:

As [President Obama] sees it, "one of the most significant contributors to our economic downturn was an unraveling of our major financial institutions." No doubt that's the conventional wisdom of late, but it's hard to see how it could be completely true.
Indeed, finance as we know it is nothing if not a very broad concept. While Ford Motor Co. can trace its beginnings to car manufacturing, Quicken to tax software and E*TRADE Financial to low-cost stock trading, all are presently significant players in the business of lending. More broadly, retail behemoth Wal-Mart would have been in banking years ago if it weren't for regulations meant to keep it out, while leveraged-buyout giants of the Blackstone Group variety are dying to pick up insolvent financial institutions on the cheap.
In that sense, the true contributor to our economic downturn wasn't so much the failure of banks, but instead a bipartisan failure within Washington to let market forces prevail whereby finance substitutes would have entered a marketplace badly served by various dead banks walking. Put more simply, the unraveling of major financial institutions is not what presently ails us, but an unwillingness to allow them to die so that they could be replaced by healthy substitutes is.

These Dollars are Still Strong

noreply@blogger.com (Brian McCann) — Mon, 22 Jun 2009 13:05:00 +0000

Retailers Dollar Tree, Family Dollar, and Dollar General all show strong recent performance:

At Dollar Tree, Inc. (3,667 stores), earnings were up nearly 38 percent in the most recent quarter. In its most recent quarter, Family Dollar Stores (6,654 stores) said same-store sales were up 6.2 percent. Both companies' stocks are higher than they were when the market peaked in October 2007. But Dollar General (8,400 stores, $10.5 billion in 2008 sales) is performing even better. KKR says the value of its stake in the company is up 30.8 percent since July 2007, when KKR and several other partners completed the $7.3 billion acquisition, just as the fat lady was singing her final leveraged aria.

Goodlettsville, TN-based Dollar General is doing particularly well:

After rising 9 percent in fiscal 2008, same-store sales grew by 13.3 percent in the first quarter, better than smaller rivals or Wal-Mart. Most significantly, profits aren't being driven by heavy discounts. In the most recent quarter, gross profits were 30.8 percent of sales, compared with 25.8 percent in fiscal 2006.

Iceland's amazing boom then bust, III

noreply@blogger.com (Luke Froeb) — Fri, 19 Jun 2009 20:35:00 +0000

Former student Olafur Arnarson who wrote a book on Iceland's amazing boom then bust, and who helped us write a new chapter on bubbles for the second edition of our textbook, is going to be talking about the Icelandic bubble tonight on 20/20.

For centuries, Iceland was a simple fishing society, largely shut off from mainland Europe. The people survived off the sheep in the meadows and the fish in the sea. For cultural sustenance they had elaborate sagas -- intricate tales of fairies and goblins, heroes and ghosts -- that would inspire J.R.R. Tolkien and other fantasy writers.
Then a modern saga began to unfold -- that of a nation of fishermen who became millionaires, only to lose it all and return to the seas.
Watch the full story Friday on "20/20" at 10 p.m. ET
In the early 21st century, Iceland experienced one of the most spectacular cycles of boom and bust in history.

iPhone vs. Pre

noreply@blogger.com (Luke Froeb) — Thu, 18 Jun 2009 21:48:00 +0000

Is Apple abusing its dominant position in iTunes to promote its iPhone over Pre?

"Apple does not provide support for, or test for compatibility with, non-Apple digital media players and, because software changes over time, newer versions of Apple's iTunes software may no longer provide syncing functionality with non-Apple digital media players."

If Apple should re-design its iTunes software to make it incompatible with Pre, I would wager that some antitrust authority will start to investigate.