Managerial Econ

70% of the value of an education is value-added; the rest is signal

noreply@blogger.com (Luke Froeb) — Fri, 06 Nov 2026 14:29:36 +0000

High-productivity individuals (e.g., higher IQ) are more likely to invest in education, so education ``signals'' high productivity to employers. But education also increases productivity (value-added from, e.g., reading Managerial Economics: a Problem-solving Approach, 8th ed), which is also valuable to employers.

A new paper uses a clever natural experiment, compulsory education in Norway to separate the two. It finds that 70% of the return to eduction is value added.

BOTTOM LINE: read Managerial Economics (8th edition)

Why Californians keeps voting for Democrats

noreply@blogger.com (Luke Froeb) — Tue, 03 Nov 2026 18:01:06 +0000

Babylon Bee:

“We already sunk $126 billion into the high-speed rail project. We can’t stop now.”

~ Joe from Camino

Marshall Islands try Universal Basic Income

noreply@blogger.com (Luke Froeb) — Sat, 31 Oct 2026 20:31:59 +0000

Economist:

The US govt pays Marshall Islands for allowing military access.

This year, the Marshall Islands govt began distributing the money to every citizen, in a quarterly payment of about $200/month, about 10% of the average income.

Compared to income taxes, this kind of aid does not create an incentive to work less.

Lots of economists and countries are watching to see what happens.

Hospitals respond to revenue caps by treating fewer higher-cost patients

noreply@blogger.com (Luke Froeb) — Sat, 31 Oct 2026 16:02:46 +0000

From WSJ:

Hospital care is the largest category of medical expenditure. It accounts for 41% of the cost of health insurance—more than doctor visits and prescription drugs put together.

Policy makers confront two problems when trying to reduce medical expenditures by setting "Global Budgets" or revenue caps:

MORAL HAZARD: hospitals will treat fewer patients, and ...
ADVERSE SELECTION: ... avoid higher-cost ones.

WHAT HAPPENED IN MARYLAND?

The Obama administration .. required Maryland to limit total revenue at each hospital—in ... in return for ...receiving higher Medicare and Medicaid reimbursements...

...the 2014 reform substantially eliminated the incentive for Maryland hospitals to attract and treat additional patients. From 2008 to 2023, the state went from treating 7% more hospital-admitted patients per capita [moral hazard] than nationwide levels to 18% fewer. The relative volume of outpatient care has also fallen.

...Community hospitals have increasingly dumped costly patients [adverse selection] on the state’s academic medical centers, which haven’t been fully compensated for the additional load and which typically are short of beds. ... Between 2012 and 2023, kidney-transplant rates statewide declined from 161% to 60% of the national average. Between 2014 and 2023, emergency department wait times in Maryland rose from 137% to 153% of nationwide levels—much longer than in any other state.

Increasing wait times is a higher ''price'' paid by patients, so it rations care to those willing to wait. But this higher price does not benefit the hospitals, so it doesn't give them an incentive to increase capacity.

BOTTOM LINE: Better information about the effects of medical treatments can give decision makers more information which can allow them to design better incentives.

Housing prices up, affordability down, renting much cheaper than buying

noreply@blogger.com (Luke Froeb) — Thu, 29 Oct 2026 19:53:20 +0000

FROM CALCULATEDRISK

Inflation Adjusted Housing Prices are High

Prices + mortgage rates are decreasing affordability.

(Higher Affordability means less affordable)

5-year returns (red) from buying a house are negative if you buy at wrong time

And renting is less expensive than buying.

US GDP accelerates to 3.4% growth

noreply@blogger.com (Luke Froeb) — Thu, 29 Oct 2026 19:19:22 +0000

WSJ:

AI boost

Massive data-center spending has been fueling economic growth all year. Goldman Sachs recently projected that artificial-intelligence investment in the U.S. will hit a staggering 1.9% of GDP. While much of that money is spent on imported chips, the boom is also creating plenty of construction jobs in the U.S. as developers race to build server farms. The rise in construction spending has helped compensate for a decline in home-building.

Trade impact

Spending on imported goods surged by more than a quarter on an annualized basis, driven in part by semiconductor purchases from abroad. Overall net imports subtracted 3.3 percentage points from GDP growth.

GDP reflects the total of all spending. But since some of that spending is on imported products, rather than things made in the U.S., imports are considered a drag on GDP.

How much has US income inequality really grown?

noreply@blogger.com (Luke Froeb) — Thu, 29 Oct 2026 18:09:42 +0000

It depends on whose numbers you use. Piketty, Saez and Zucman find the top 1%’s after-tax share rose from 9% to 15% since 1960. Auten and Splinter, working from the same tax data, find it barely moved, from 8% to 9%. The two series only part ways after the 1986 tax reform changed how high earners reported income, which is why critics argue much of the “surge” is a measurement artifact.

HT: MarginalRevolution

Do state antitrust enforcers care about competition?

noreply@blogger.com (Luke Froeb) — Wed, 28 Oct 2026 20:32:16 +0000

Competition On the Merits examines the incentives of state antitrust enforcers.

PROBLEM: The states bring cases against mergers whose effects fall mostly outside their borders, and ask settlement terms that have little to do with competition.

What do the states get by challenging National mergers? Attorney fees, local jobs, donations to local firms, and DEI commitments. And don't forget free PR. Many state AG's are governors-in-waiting.

SOLUTION: What can be done to realign incentives?

National mergers should be reviewed nationally, not by states.
Make plaintiffs show that mergers actually harm competition (US courts do this) by repealing the Biden-era Merger Guidelines that ignore this requirement.

Halloween Candy Trading Guide

noreply@blogger.com (Michael Ward) — Mon, 26 Oct 2026 22:37:26 +0000

Eleven years old but still relevant for the trick-or-treaters this week.

Mondelēz and Marshall's Second Law of Demand

noreply@blogger.com (Michael Ward) — Fri, 23 Oct 2026 21:00:55 +0000

Soaring cocoa costs prompted Mondelēz, the maker of Cadbury and Milka chocolate, to raise European chocolate prices by roughly 30%. Management anticipated a decline in sales. But consumers proved more price-sensitive than expected. Historically, the company had observed demand elasticities of approximately −0.4 to −0.5. Following the increases, elasticity rose in magnitude to roughly −0.7 to −0.8. On its October 2025 earnings call, CEO Dirk Van de Put noted that some chocolate bars had crossed important price thresholds, prompting consumers to reconsider their purchases. Competitors' decisions not to fully match Mondelēz's price increases also contributed to the disappointing sales response.

Marshall's Second Law of Demand says that demand tends to become more elastic as price rises. At a higher prices, more products are viable alternatives. Consumers may barely notice a price increase when chocolate is relatively inexpensive. But as prices climb, more consumers begin substituting. They may choose cheaper brands, purchase smaller packages, or forego chocolate altogether. Managers should be cautious about extrapolating historical elasticity estimates. The response to a 30% price increase is likely "out-of-sample" from the historical context.

Campbell's Does the Elasticity Math

noreply@blogger.com (Michael Ward) — Fri, 23 Oct 2026 20:34:38 +0000

Faced with rising costs, Campbell's is raising prices on about half of its products by an average of 4–5%. But how much will sales fall as a result? On its recent earnings call, CFO Todd Cunfer explained that the company is using an assumed price elasticity of demand of −1.5 to forecast the impact. A 5% price increase would therefore be expected to reduce unit sales by approximately 7.5%. Revenue would actually decline, but profits could increase because the higher margin on remaining sales more than offsets the lost contribution from reduced volume. Campbell's expects the price increases to improve its bottom line despite their negative effect on sales.

The calculation is complicated by competitors' responses. Campbell's assumes that competing brands will not immediately match its price increases, making its products relatively more expensive. If competitors also raise prices, Campbell's could lose fewer customers than its forecast predicts. Cunfer acknowledged that the company is using different elasticity estimates across its product lines and has deliberately chosen conservative assumptions. That is, Campbells appears to be making relatively sophisticated use of elasticity concepts.

Starlink Holdup?

noreply@blogger.com (Michael Ward) — Wed, 21 Oct 2026 18:00:56 +0000

Ukraine's military has become heavily dependent on SpaceX's Starlink satellite network for battlefield communications and drone operations. They have invested relationship-specific sunk costs into SpaceX's satellite communications platform. According to a new Wall Street Journal report, Elon Musk ordered restrictions on a military version of the service last week, disrupting Ukrainian offensive and defensive drone operations. The restrictions reportedly followed disagreements over Ukraine's attacks on Russian oil facilities. Regardless of the motivations, the episode illustrates the risks of becoming dependent on a supplier whose services are difficult to replace.

Will this have longer-term repercussions for SpaceX? When my coauthors failed to meet deadlines, I could recover from this disappointment, but I learned I could not trust them in the future. Right now, SpaceX is the only viable satellite based communications option. But there are five others either being deployed, or planning to be deployed, by 2030. Unless there are substantial switching costs, potential customers should consider these alternatives to be more trustworthy. Investors apparently recognized the value of reducing dependence on Starlink: following reports of the restrictions, shares of its European competitor Eutelsat jumped 23% in a single day.

When Your Health Insurance Raises Someone Else's Premium

noreply@blogger.com (Michael Ward) — Sun, 18 Oct 2026 22:12:27 +0000

Moral hazard can occur when insurance changes behavior. Patients who pay less out of pocket for medical care tend to consume more of it, increasing insurers' costs. But those costs can spill over to other customers. Writing in the Journal of Risk and Insurance, Ellis et al (2026) find that moral hazard can raise premiums for other consumers, potentially driving them out of the insurance market altogether.

The researchers examine Affordable Care Act insurance exchanges, where lower-income consumers receive subsidies that reduce their deductibles and copayments. These subsidies encourage greater healthcare utilization, raising costs that insurers spread across their customers through higher premiums. Unsubsidized customers consequently pay more, even though their own behavior hasn't changed. Some respond by dropping coverage, potentially raising average costs further. The surprising lesson is that moral hazard creates an externality: one customer's response to generous insurance can make coverage more expensive for everyone else.

CalculatedRisk Prediction: real housing prices will decline 25% over next 5-7 years

noreply@blogger.com (Luke Froeb) — Fri, 16 Oct 2026 23:03:25 +0000

HT: Bill

SOURCE: CalculatedRisk

HOUSING SUPPLY IS INCREASING:

Months of supply [measured as #listing/(sales rate)] is near a ten-year high (red line) and there are five months of supply (blue line) currently under construction, so it will get bigger.

HOUSING DEMAND IS FALLING AS MORTGAGE RATES RISE

due to rising mortgage rates (and immigration slowing?) mortage applications are down.

CALCULATEDRISK PREDICTION: 10%+ Nominal Price Declines, Real price declines of 25% over next 5-7 years.

Since national house prices increased very quickly during the pandemic - up over 40% - it seems likely that some of the usual “stickiness” will not apply. I think the most likely scenario now is nominal house prices declining 10% or more from the peak, and real house prices declining 25% or so over the next 5 to 7 years.

RESULT: Housing starts are falling.

When Tougher Return Policies Backfire

noreply@blogger.com (Michael Ward) — Wed, 14 Oct 2026 20:53:48 +0000

The knee-jerk response to high merchandise return rates is to make returns more difficult. Charge a restocking fee, shorten the return window, or require more documentation. But what if these restrictions drive away your best customers? According to a recent Wall Street Journal report, 68% of retailers now charge return fees at least some of the time, up from 43% five years ago. An increasing number of online reviews mention unclear return policies. Retailers have good reason to worry: an analysis by Riskified flagged nearly one-quarter of refund dollars in its sample as potentially abusive.

The problem is adverse selection. Customers who rarely return merchandise may value the assurance of an easy return if something goes wrong. Faced with new restrictions, they might shop elsewhere. Meanwhile, customers who frequently return merchandise may be more willing to tolerate the restrictions because they have learned how to navigate them. A recent survey by Loop found that 63% of respondents had abandoned a purchase or retailer because of its return policy. By making returns harder, a retailer could inadvertently drive away profitable customers while retaining a disproportionate share of costly ones. A potential solution may be to use purchase and return histories to wave restrictions for more reliable customers.

Columbus Day and the Risks of Exploration

noreply@blogger.com (Michael Ward) — Mon, 12 Oct 2026 16:58:21 +0000

Although Columbus is criticized for the exploitation, enslavement, and suffering associated with European colonization, his voyages offer an instructive example of the risks of investing in exploration. In 1492, Spain's monarchs financed an expedition to find a commercially valuable route to Asia, uncertain whether Columbus would succeed—or even return. But there was another risk: would he be able to claim the rewards of a successful voyage? The Capitulations of Santa Fe promised Columbus hereditary privileges, including the offices of Viceroy and Governor of the territories he discovered. Yet the Crown subsequently removed him from office, and after decades of litigation, his heirs lost their claims to those hereditary governorships. The Treaty of Tordesillas of 1494 sought to reduce another source of uncertainty by dividing overseas claims between Spain and Portugal, although other nations and Indigenous peoples were not parties to the agreement.

Five centuries later, companies exploring the ocean floor face similar uncertainties. ABC News reports that some companies hope to recover valuable nickel, cobalt, and other minerals from the deep ocean. But collecting minerals thousands of meters underwater is technically difficult and commercial profitability remains unproven. In August, NOAA announced that it had advanced its review of an application by The Metals Company to explore and commercially recover minerals from the Pacific seabed. Even if the technology works, property rights remain uncertain. The United States has its own permitting process, but the International Seabed Authority maintains that mining in international waters requires authorization under its international framework.

Both ventures illustrate two distinct risks of exploration: the technology may fail, and even if it succeeds, (perhaps because it succeeds) the claim to the rewards may fail. The expected return on investment depends on both probabilities. Property rights are valuable only to the extent that they can be enforced.

Immigration Policy and the Two Types of Errors

noreply@blogger.com (Michael Ward) — Sun, 11 Oct 2026 14:33:27 +0000

When screening applicants, there are two ways to make a mistake. A Type I error occurs when someone who should be rejected is admitted. A Type II error occurs when someone who should be admitted is rejected. Immigration policy faces this tradeoff. Tightening screening and admission requirements may reduce the first type of error, but it can also increase the second. The challenge is to balance the costs of admitting someone who should not enter against the costs of excluding someone who could benefit the country.

The stated Trump administration immigration policy has been to reduce Type I errors, reduce illegal immigration. Collateral damage is an increase in Type II errors, fewer legal immigrants. The Cato Institute reports that legal immigration fell substantially more than illegal immigration. Comparing monthly entry figures through February 2026 with those before Trump took office, Cato estimates that legal entries fell by approximately 145,000, while illegal entries fell by about 53,000. The restrictions affect people seeking admission through established legal channels, including employment, family reunification, and education. A full error cost analysis would require an estimate of the cost to society of typical illegal entrants and the lost benefit of typical legal entrants. It is open to debate, but evidence suggests that immigration is a net positive and that illegal immigrants to the US are not a cost.

One frequently hears that potential immigrants should simply follow the legal process. This offers little guidance if that too is unavailable.

The Razor-and-Blades Strategy Comes Full Circle

noreply@blogger.com (Michael Ward) — Sat, 10 Oct 2026 19:32:32 +0000

The Oura Ring looks like an ordinary piece of jewelry, but it contains sensors that continuously monitor heart rate, body temperature, sleep, activity, and other health indicators. Unlike a smartwatch, it has no screen, doesn't display messages, and doesn't make calls. Instead, it sends information to a smartphone app that analyzes sleep quality, recovery, stress, and overall health. The newest Oura Ring starts at around $399, comparable to many smartwatches with similar capabilities. But while most smartwatches include their core health-monitoring features in the purchase price, Oura charges an additional $5.99 per month or $69.99 annually for access to detailed health information and personalized insights.

This resembles the familiar razor-and-blades pricing strategy: sell customers a durable product, then earn recurring revenue from the complementary products or services needed to get its full value. Oura's recent IPO filing suggests the strategy is working. Approximately 94% of ring activations convert to paid memberships, and about 85% of paying members remain subscribed after 12 months. Subscriptions account for roughly 20% of revenue but earn gross margins approaching 90%. By separating the price of the device from the price of the information it produces, Oura turns a one-time hardware purchase into a continuing stream of high-margin revenue.

War Provides Arbitrage Opportunities

noreply@blogger.com (Michael Ward) — Fri, 09 Oct 2026 20:08:41 +0000

Arbitrageurs profit by buying where prices are low and selling where prices are high. But what happens when transporting the product is dangerous? According to The Wall Street Journal, oil producers in the Persian Gulf are paying $30–$40 million for tankers to make dangerous trips through the Strait of Hormuz. The tankers carry oil out of the Gulf and transfer it to other vessels for delivery to customers. Some sailors are being offered bonuses of up to $25,000 per trip. While buyers are reluctant to send their own tankers into the Gulf, producers are willing to pay extraordinary sums to get their oil to market.

The disruption has also affected oil shipments far from the Persian Gulf. Reuters reports that shipping two million barrels of U.S. crude from the Gulf of Mexico to China now costs approximately $80 million, or $40 per barrel, compared with just $8.60 per barrel before the war. The elaborate shuttle operations in the Persian Gulf have tied up tankers, reducing their availability elsewhere. Freight rates have risen so much that traders say the arbitrage opportunity for shipping U.S. oil to Asia has disappeared. Asian refiners are consequently considering alternative suppliers in the Middle East and Latin America.

The arbitrage cost is comparable in magnitude to the increase in Brent crude prices since the war began. The ability to exploit this form of arbitrage essentially put a cap on how much the price rose between between the well and the refinery.

Diminishing Marginal Utility of Yodeling

noreply@blogger.com (Michael Ward) — Fri, 09 Oct 2026 19:27:00 +0000

One reason demand curves slope downward is that people tend to tire of repetition. This is what Mark Twain discovered hiking in Swiss Alps

The jodling (pronounced yodling,—emphasis on the o,) continued, and was very pleasant and inspiring to hear. Now the jodler appeared,—a shepherd boy of sixteen,—and in our gladness and gratitude we gave him a franc to jodel some more. So he jodled, and we listened. We moved on, presently, and he generously jodled us out of sight. After about fifteen minutes we came across another shepherd boy who was jodling, and gave him half a franc to keep it up. After that, we found another jodler every ten minutes; we gave the first eight cents, the second one six cents, the third one four, the fifth one a penny, contribution nothing to Nos. 5, 6, and 7, and during the remainder of the day hired the rest of the jodlers, at a franc apiece, not to jodel any more. There is somewhat too much of this jodling in the Alps.

[Mark Twain, A Tramp Abroad: Following the Equator, Other Travels, edited by Roy Blount Jr. (New York: Library of America, 2010), p. 187]

Why Buyers Hate Auctions

noreply@blogger.com (Michael Ward) — Sat, 03 Oct 2026 22:41:28 +0000

When Salad and Go filed for bankruptcy in August, it already had a buyer. Dutch Bros had agreed to pay $105 million for as many as 65 of the failed chain’s drive-through locations. But rival 7 Brew was also interested in the properties and objected to the private deal. Should the bankruptcy court switch to negotiations with 7 Brew? Instead it approved an auction between Dutch Bros and 7 Brew. On August 31, 2026, Dutch Bros announced that it would not raise its offer, and 7 Brew emerged as the winner. After adjustments to the number of leases included in the transaction, the court approved a sale of 63 locations to 7 Brew for about $123.5 million—roughly $18.5 million more than the original Dutch Bros deal.

Sellers should prefer auctions to simply negotiating with a willing buyer. In bilateral bargaining, Dutch Bros has every reason to convince Salad and Go that $105 million is about as high as it will go. But the arrival of another bidder changes the negotiation. Instead of the seller having to determine how much each buyer is willing to pay, the buyers reveal information about their valuations by competing against one another. Indeed, Dutch Bros ultimately chose not to increase its offer, effectively revealing where further bidding stopped making sense for it. Buyers naturally prefer to negotiate without a competitor standing beside them. Sellers prefer exactly the opposite.

Does Surgery Work?

noreply@blogger.com (Luke Froeb) — Tue, 29 Sep 2026 20:54:44 +0000

The Economist: Many surgical interventions are little better than placebo

The results are upending the field. Removing an inflamed appendix, an operation that around 5-10% of people have had at some point in their life, has turned out to be no better for most patients than a course of antibiotics. Trials comparing different surgical techniques have also revealed that cheaper and less complex operations can be more effective. Most striking, the data show that some widely used surgical procedures, such as spinal fusions and rotator-cuff repairs, have effects indistinguishable from placebo or non-surgical care such as physiotherapy.

Worse, some types of surgery may do more harm than good. A trial in Britain found that prostate-cancer surgery had no effect on patient mortality 15 years on, but worsened sexual and urological problems. A Finnish trial of a common knee procedure, meanwhile, concluded that patients who had real surgery had more problems in the affected knee ten years on than those who had had sham surgery (anaesthesia followed by a superficial incision). David Ring, an orthopaedic surgeon at the University of Texas at Austin, reckons that most operations in his field may be unnecessary. Surgery itself, it would seem, could use a major intervention.

WWA (World Weather Attribution) cashing in using flawed methodology

noreply@blogger.com (Luke Froeb) — Tue, 29 Sep 2026 18:12:45 +0000

From The Free Press:

On August 26, a wall of rock and ice broke away from Langtang Lirung in the Himalayas, resulting in a massive flood and mudflow that killed thousands of people along the border of Nepal and Tibet. Less than a month later, on September 17, an influential organization called World Weather Attribution (WWA), housed at Imperial College London, published a report on the catastrophe along with a press release touting its alarming findings.

What the WWA does:

Motivated Reasoning:
WWA has not been shy about the fact that it produces its studies to influence the public and to promote climate advocacy. Authors of one of the WWA’s foundational papers openly acknowledged that a primary reason for creating their methods is political: by “increasing the ‘immediacy’ of climate change, thereby increasing support for mitigation.”
Detection by Correlation and Attribution by Assumption
...WWA treats “climate change,” measured as a smoothed record of global temperature, as the only possible cause of any localized trend in rainfall, heat, flooding, or other types of extreme weather.
People are fooled
The WWA’s advocacy campaign has worked brilliantly, of course; 50 percent of Americans now believe policies addressing climate change would reduce the number or severity of the extreme weather events that they individually, or their communities, will experience.

Who funds these idiots?
WWA’s funders are philanthropists: the Grantham Foundation, the European Climate Foundation, and the Bezos Earth Fund, three of the largest backers of climate advocacy in the world.

What the methodology should do (IPCC, Intergovernmental Panel on Climate Change):

The first step is detection: whether the long-term statistics associated with a particular type of extreme weather change—a century of hurricane landfalls, say, or peak river flows—can’t be explained by the normal fluctuations in weather over years and decades, called internal climate variability. [COMMENT: this is extraordinarily difficult given the long run cycles in climate data]

The second step is attribution: The IPCC starts with a detected change and assesses the possible causes underlying that change—greenhouse gases, aerosols, volcanoes, land use, modes of climate variability, etc.—using sophisticated computer models of the earth’s climate system. [COMMENT: ruling out alternative explanations from non-experimental data is also extraordinarily difficult].

IPCC Findings:
The scientific reality—long understood in mainstream climate science—is that any emissions policy a government adopts today will not noticeably reduce the frequency and intensity of extreme weather, through the lifetimes of children or their children’s children.

If lack of knowledge were the problem, I would send WWA a copy of Chapter 17: Making Decisions with Uncertainty

How to Sell Meta Glasses (and Car Stereos)

noreply@blogger.com (Michael Ward) — Tue, 29 Sep 2026 13:18:50 +0000

Best Buy is moving in two seemingly opposite directions with in-store product demonstrations. In June, it announced that Meta Labs will open in more than 50 Best Buy stores. The 900-square-foot spaces let customers try Meta’s AI glasses and VR headsets, use interactive displays and smart mirrors, receive personalized fittings, and talk with dedicated Meta specialists. Yet just weeks later, Best Buy reportedly began removing many of its traditional car-audio demonstration displays, some of which had missing products or simply did not work. Demonstrations aren’t disappearing altogether: car-audio manufacturers including Sony, Pioneer, Kenwood, JVC, and Kicker have been paying for their own branded displays, now found in about 300 Best Buy stores.

The contrast highlights retailer actions boosting manufacturer demand. Helping a customer experience a pair of smart glasses may increase demand for Meta’s product, but Best Buy bears much of the cost of providing the service. Worse, customers can learn about a product at Best Buy and then buy it elsewhere—the classic retail-services free-rider problem. Meta’s solution is to become more deeply involved in the retail experience, helping provide dedicated specialists and an elaborate branded demonstration space. Car-audio manufacturers are responding more modestly by financing their own displays as Best Buy retreats from providing them. In both cases, manufacturers that benefit from demonstrations are taking on more of their cost, better aligning the incentives of manufacturers and retailers to provide services that help sell the product.

When Winning Is a Budget Risk: Hedging Coaching Bonuses

noreply@blogger.com (Luke Froeb) — Tue, 22 Sep 2026 17:02:07 +0000

Prediction-market trades have turned up whose payouts nearly match college football coaches' playoff bonuses. Five line up almost exactly with Lane Kiffin's bonuses at LSU. The schools didn't place them, but third parties acting for them plausibly did.

Why would a school bet on its own success? Coaching contracts promise big bonuses for making the playoffs, advancing and winning a title. A deep playoff run can leave the athletic department owing millions it didn't budget for. A contract that pays off when the team wins covers that bill when it comes due. Like a farmer locking in a crop price, the school gives up some upside in exchange for a predictable budget.

Why go through a third party? NCAA rules forbid athletic staff from betting on games, and prediction markets count. So a school can instead pay an insurer a premium, and the insurer buys the contracts itself.

Takeaways:

A performance bonus is a bill that only comes due when things go well.
If people are betting on whether that success happens, you can buy a bet that pays for the bill.
As budgets tighten and these betting markets grow, expect more of this.

Source: Josh Hendrickson, Insuring Against Success?, Economic Forces