When Greenspan promotes his book, Phelps doubts the Fed

On Bloomberg, Greenspan Discusses His Book, Strike on Iran as `Difficult Choice';
However, on the next day, Nobel winning economist Phelps, Doubts Fed Can Prevent a Recession.

Can policy be implied by behavioral facts?

The Boston Federal Reserve Bank is aiming to become the regional Fed that emphasizes behavioral economics. Here is its proclamation:

Behavioral economics is motivated by a range of empirical facts that are at apparent odds with assumptions of standard economic theory. But while behavioral approaches are becoming common in academia, it is unclear how behavioral models should inform economic policymaking in general, and central banking in particular. This conference will discuss the implications of behavioral economics for macroeconomic policy, with special attention to the regulatory and monetary policy responsibilities of central banks.

Playing games with the planet

In the latest issue of the Economist, scholars claim that a version of the "prisoner's dilemma" may suggest ways to break through the Kyoto impasse.

Gerschenkron, Acemoglu and Clark Medal

Here is a great story (although a little bit old) on a prolific MIT economist Daron Acemoglu who is regarded by the author as a successor of Alexander Gerschenkron, a Russian-born, Austrian-trained Harvard economic historian.

"Anyone who hasn't read The Fly Swatter: How My Grandfather Made His Way in the World, Nicholas Dawidoff's account of the life of Alexander Gerschenkron, the great 20th-century scholar of economic development, is missing a good thing. Anyone who doesn't know about Daron Acemoglu is missing a good thing, too."

A recent article published in the Journal of Economic Perspectives has reviewed Daron Acemoglu's achievements from an academic perspective.

Another piece of short history provides a glance at the Clark Medalists' profile, but only covers the recipients from 1947 to 2003, i.e., from Samuelson to Levitt.

Papers on Contracts

Two papers on contract theory written by Columbia university economist W. Bentley MacLeod are superbly worthy of reading. One of them deals with the choice of formal or informal enforcement mechanisms when buyers hope to assure that the seller, who is to decide the quality of the good, would provide an efficient level of quality. Testable hypothses are also generated for further empirical studies. This paper has already been published in the latest issue of the Journal of Economic Literature. (Here for non-subscribers)

Another paper, which was actually presented at the AEA Annual Meeting this January, shows that established frameworks of contract theory can be used to provide a foundation for behavioral economics theories, like fairness and reciprocity. I've been thinking of incorporating behavioral elements into the ongoing framework of contract theory all the time, like Oliver Hart and John Moore's introduction of short-term commitment in justifying the desirability of ex post renegotiation of incomplete contracts and the concept of retaliation in their recent work of Contracts as Reference Points. So, indeed for me, professor Bentley MacLeod's paper is fresh and innovative. (Here for AER version.)

Ahmadinejad at Columbia University

Here is the event, including a complete video, columbia president Bollinger's introductory remark, and a full transcript of Iranian President Ahmadinejad's Remarks.

Some views and opinions afterwards.

Quotes of the day

We are probably familiar with former president Harry Truman's request of "One-handed economist". However, we might not hear of Ronald Reagan's comment on economists, and it turns out to be quite right...

"Economists are people who see something that works in practice and wonder if it would work in theory."

From the San Francisco Chronicle

A Pity...

One of the most interesting economics and finance blogs - Mahalonobis - has been very silent recently. While I am hoping for its back on track, here comes up the real reason.

Wish them both good luck, and a return to active blogging.

Nobel Predictions

The Royal Swedish Academy of Sciences will announce its choice on Monday, October 15, for the Nobel Memorial Prize in economics. (see here.) As the day approaches, some of the world's best minds are engaged in a highly inexact science: predicting the winner.

Thomson Scientific, which produces an annual list of front-runners based on how many peers cite an economist's work, forecasts three possible combinations for this year's crown:

Harvard's Elhanan Helpman and Princeton's Gene Grossman, "for their contributions to international trade and economic growth"; Robert B. Wilson and Paul R. Milgrom of Stanford, "for their work, both theoretical and practical, on the mechanism of auctions"; and Jean Tirole from IDEI, University of Social Sciences, Toulouse, France, "for his research on industrial organization and regulation".

From the public voting poll, Jean Tirole is a little bit ahead of the other two. But I still prefer the combination of Oliver Hart, Bengt Holmstrom and Oliver Williamson, which is a prediction last year.

New Review Paper on Firm Boundary and Vertical Integration

Francine Lafontaine and Margaret Slade's superb review paper on vertical integration, "Vertical Integration and Firm Boundaries: The Evidence," appears in the current issue of the Journal of Economic Literature (Non-gated version here). In this paper, Lafontaine and Slade consider a broad range of factors potentially affecting vertical integration such as risk, agent effort, firm size, monitoring costs, and repeated interaction as well as the usual transaction-cost variables (asset specificity and uncertainty). They also look closely, following Whinston (2003), at distinctions between the transaction-cost (Williamson) and property-rights (Grossman-Hart-Moore) approaches. Here's the abstract:

Since Ronald H. Coase's (1937) seminal paper, a rich set of theories has been developed that deal with firm boundaries in vertical or input–output structures. In the last twenty-five years, empirical evidence that can shed light on those theories also has been accumulating. We review the findings of empirical studies that have addressed two main interrelated questions: First, what types of transactions are best brought within the firm and, second, what are the consequences of vertical integration decisions for economic outcomes such as prices, quantities, investment, and profits. Throughout, we highlight areas of potential cross-fertilization and promising areas for future work.

Originally posted by Organizations and Markets blogger Peter Klein

Greenspan's bonanza and Stewart's genius

According to WSJ Real Time Economics blog, former Federal Reserve Chairman Alan Greenspan's memoir, "The Age of Turbulence: Adventures in a New World," has sold 129,000 copies in its first week on book shelves, according to Nielsen BookScan, which tracks an estimated 75% of retail book sales in the U.S. This morning the book, published Sept. 17, ranks No. 1 on Amazon.com's list of best-sellers. And Pearson PLC's Penguin Press paid Mr. Greenspan an advance of more than $8 million, some of which the publisher earlier recouped by selling rights to foreign countries. Those fancy numbers do prove that people have a high "interest rate" on Greenspan and his book.

Last week, Emmy winning talk show host Jon Stewart interviewed Mr. Greenspan and asked him an surprisingly excellent question: Why do we have a Fed? Why do we have someone adjusting the rates if we're a free-market society? This fundamental question instantaneously reminded me of a question raised by Ronald Coase 70 years ago: Why do we have firms if the free market price mechanism is perfect? By far, the economics profession does not have good answers to both of them. I agree with Mankiw that Stewart is a genius!

BTW, mankiw didn't think Greenspan's answer to Stewart's question was satisfying and he believed the real answer has something to do with the benefits of a fiat money system and the possibility of short-run monetary nonneutrality.

A video clip can be reached by following this link.

Michael Scott's Business RULES

Michael Scott has TEN rules in business for his employees to learn. However, only four out of ten have been delivered to Ryan Howard in The Office. (Season 2, episode 4, The Fire.)

Rule #1 You have to play to win, and you also have to win, to play.
Rule #2 Adapt, react, re-adapt, act.
Rule #4 In business, image is everything.
Rule #5 Safety first, i.e. don't burn the building down.

Sociology and Property Rights

Although it is a nice piece, the paper "The Sociology of Property Rights" is debatable how much of it is sociology per se. In actuality, most of the paper, which given the journal (research annual) that it is published one would expect to survey sociology contributions, turns out to be a survey of — economics. Specifically, the contributions of Coase, Demsetz, Barzel, and even Hart and Moore are highlighted and summarized. The authors themselves acknowledge that sociology "neglects" property rights. Others have made similar observations (e.g., Richard Swedberg).

According to Nicolai Foss, a blogger from the Organizations and Markets, this neglect of property rights is bizarre; after all, property rights, in a sort of proto-Hartian understanding, were central in Marx' thought. Durkheim and Veblen also didn't neglect property rights. Intuitively, one would think of property rights as a preeminent sociological theme, as it involves power, social stratification, inequality, and other sociology favorites. So, what accounts for the neglect?

Feldstein Stepped Down as President of NBER

Marking the end of an era, Martin Feldstein said he plans to step down as president of the National Bureau of Economic Research after 30 years. Under his tenure the NBER was revitalized to become probably the country's most important research network for academic economists. It also became the official arbiter of U.S. recessions and expansions. From WSJ's Economics Blog, I excerpt Dr. Feldstein's resignation letter:

Dear NBER Colleagues:

I am writing to tell you that this will be my last year as president of the NBER. I am doing this to have more time for writing, research, teaching, and other things. I will of course remain an active NBER Research Associate..

Serving as NBER president has been an intellectually and personally gratifying experience. There is nothing in my professional life that has given me greater satisfaction.

I will continue in my current position until June 2008. That will give the NBER Board ample time to identify my successor and for us to manage the transition together.

I am grateful to all of those who have worked with me during my years as president: the research associates and faculty research fellows, the directors of programs and working groups, the project leaders, and the small but highly effective staff at the NBER.

Sincerely
Marty Feldstein

Do Boys Ruin School for Girls?

Some new research on gender and education, via Tim Harford:

A new working paper from economists Victor Lavy of Hebrew University and Analía Schlosser of Princeton attempts to unpick the peer effects associated with gender, using data on nearly half a million students passing through Israel's school system in the 1990s. They compared consecutive year groups passing through the same school, figuring that if one year's group was 55 percent boys and the next year's was 55 percent girls, that difference was very likely to be random and thus susceptible to meaningful number crunching. Their answer chimes perfectly with the conventional wisdom: Boys benefit from being in a classroom with girls, but girls do not benefit from being in a classroom with boys.

From Greg Mankiw's Blog

Mandelbrot Set with Lyrics

See the video on the Mandelbot set at YouTube. Very fun. But I think this innovation is much more artistic than scientific, in that it generates fun pictures, and can explain a lot ex post, but is pretty useless ex ante.

Here is the lyrics:

Mandelbrot Set by Jonathan Coulton

Pathological monsters! cried the terrified mathematician
Every one of them is a splinter in my eye
I hate the Peano Space and the Koch Curve
I fear the Cantor Ternary Set And the Sierpinski Gasket makes me want to cry
And a million miles away a butterfly flapped its wings
On a cold November day a man named Benoit Mandelbrot was born

His disdain for pure mathematics and his unique geometrical insights
Left him well equipped to face those demons down
He saw that infinite complexity could be described by simple rules
He used his giant brain to turn the game around
And he looked below the storm and saw a vision in his head
A bulbous pointy form
He picked his pencil up and he wrote his secret down

Take a point called Z in the complex plane
Let Z1 be Z squared plus C
And Z2 is Z1 squared plus C
And Z3 is Z2 squared plus C and so on
If the series of Z's should always stay
Close to Z and never trend away
That point is in the Mandelbrot Set

Mandelbrot Set you're a Rorschach Test on fire
You're a day-glo pterodactyl
You're a heart-shaped box of springs and wire
You're one badass fucking fractal
And you're just in time to save the day
Sweeping all our fears away
You can change the world in a tiny way
Mandelbrot's in heaven, at least he will be when he's dead
Right now he's still alive and teaching math at Yale
He gave us order out of chaos, he gave us hope where there was none
And his geometry succeeds where others fail
If you ever lose your way, a butterfly will flap its wings
From a million miles away, a little miracle will come to take you home

Just take a point called Z in the complex plane
Let Z1 be Z squared plus C
And Z2 is Z1 squared plus C
And Z3 is Z2 squared plus C and so on
If the series of Z's should always stay Close to Z and never trend away
That point is in the Mandelbrot Set
Mandelbrot Set you're a Rorschach Test on fire
You're a day-glo pterodactyl
You're a heart-shaped box of springs and wire
You're one badass fucking fractal
And you're just in time to save the day
Sweeping all our fears away
You can change the world in a tiny way
And you're just in time to save the day
Sweeping all our fears away
You can change the world in a tiny way
Go on change the world in a tiny way
Come on change the world in a tiny way

Sensible solutions to the lending mess

Harvard economist Edward Glaeser has put forward his prescription on solving the mortgage problem.

Mankiw: UC Davis should be ashamed of itself

Here is a story:

After a group of UC Davis women faculty began circulating a petition, UC regents rescinded an invitation to Larry Summers, the controversial former president of Harvard University, to speak at a board dinner Wednesday night in Sacramento.

Greg Mankiw pointed out, "If there is any place that should be open to a wide range of views, it is a university. To bar a scholar as prominent as Larry from talking simply because you disagree with him is despicable."

I totally concur with Dr. Mankiw's argument, and by the way, I am a great admirer of Dr. Lawrence Summers. Although being controversial and high-profile, his brilliancy in the profession of economics has always spurred the young scholars and students.

How to Give a Guest Lecture in Business School

In the popular Mockumentary series The Office, manager Michael Scott (Starring Steve Carrell) showed how this was done. Seeing him tear an economics textbook is classic.

Richard Epstein on Property Rights

In this week's Econtalk, Richard Epstein, of the University of Chicago and Stanford's Hoover Institution, makes the case that many current zoning restrictions are essentially "takings" and property owners should receive compensation for the last value of their land. He also discusses with the host Russ Roberts the Kelo case and the political economy of the regulation of land.

Dani Rodrik: why we use math in economics

Here is a short excerpt from Dr. Rodrik's recent post:

"..if you are smart enough to be a Nobel-prize winning economist maybe you can do without the math, but the rest of us mere mortals cannot. We need the math to make sure that we think straight--to ensure that our conclusions follow from our premises and that we haven't left loose ends hanging in our argument.

In other words, we use math not because we are smart, but because we are not smart enough.

We are just smart enough to recognize that we are not smart enough. And this recognition, I tell our students, will set them apart from a lot of people out there with very strong opinions about what to do about poverty and underdevelopment. "

Do We Overvalue Expert Advice？

We are just a year away from the US presidential elections, and a question that keeps coming up during broadcast debates with the candidates is "are you experienced?"

Obviously, it's a valid question to ask. After all, we expect candidates to have a long history of political involvement and the expertise required to make the right decisions in sticky situations.But a new study appearing in the journal Interfaces suggests that experience may be overrated anyway. It shows that people without any expertise in foreign policy can make snap predictions about the outcome of major conflicts almost as well as experts.

Researchers from the University in Australia and the University of Pennsylvania asked policy experts and undergraduates to assess slightly disguised versions of real conflict situations. These included a 1970s border dispute between Iraq and Syria, a nurses' strike, and an unfolding dispute between football players and their management.The researchers received 106 responses from policy experts and 169 from undergraduates. The experts accurately predicted the outcome of conflicts in 32% of the cases, only slightly better than the 29% score achieved by the students. Chance guesses would have given a score of 28% on the test. Experts with less than five years of experience also achieved a 36% accuracy rate – outdoing more senior people in their profession who were 29% accurate.

In conclusion, experts do use their judgement to predict what will happen. However, their forecasts are of little value in terms of accuracy. Sometimes, they lead people into false confidence.

from New Scientist Short Sharp Science blog by Roxanne Khamsi

Market Intermediary: Angel or Devil?

Ever wander around a store and wonder why it's so hard to find what you're looking for? Don't worry, it might not be you. A new research conducted by HBS professor Andrei Hagiu and colleague Bruno Jullien shows that retailers—and malls, magazines, brokers, familiar search engines, and Internet shopping sites—can sometimes have an economic incentive to purposefully complicate things for consumers. Here is the abstract：

“We propose a model for analyzing an intermediary's incentives to increase the search costs incurred by consumers looking for sellers (stores). First, we show that the quality of the search service offered to consumers is more likely to be degraded (i.e. the probability that consumers find their favorite store in the first round of search is less than 1) when the intermediary derives higher revenues from consumers shopping at the lesser-known store relative to revenues from consumers shopping at the more popular store. Second, the intermediary may have an incentive to degrade the quality of search even further when its design decision influences the prices charged by stores. By altering the composition of demand faced by stores, the intermediary can force the latter to price lower and thereby increase total consumer traffic.”

Some Truth about the Housing Market

The sub-prime mortgage crisis and the credit crunch that has followed in its aftermath are taking their toll on the housing market. On August 28, the S&P Case-Shiller U.S. National Home Price Index fell 3.2% in the second quarter. According to the National Association of Realtors, the inventory of unsold homes is at a record high. As sales have fallen, many home builders have seen their stock prices drop by more than 60% during the past year. How serious is this situation? Is there light at the end of the tunnel?
Joseph Gyourko, director of Wharton's Samuel Zell and Robert Lurie Real Estate Center, and Todd Sinai, a professor of real estate, spoke to Knowledge@Wharton about these questions and more.