Happy Niu Year...

This greeting is quite popular in China nowadays. Since according to the Chinese Zodiac, 2009 is the "niu" year, where "niu" is the ox, or bull, an animal which is strong, dependable, steady and ambitious!!

Challenge for China

See here.

The Pursuit of Happiness

Dan Gilbert, a Harvard Psychologist, presents research and data from his exploration of happiness -- sharing some surprising tests and experiments that you can also try on yourself.

Benefits and costs of intelligence

According to NewScientist, intelligent soldiers most likely to die in battle (see here and here).

How to do mathematical proofs?

Pay for performance - kids' version

Harvard economist, Roland Fryer, a coauthor of the well known freakonomist, Steven Levitt, talked with Stephen Colbert about how to improve the black childrens' school performance. It's simple, just pay them!

The Colbert ReportMon - Thurs 11:30pm / 10:30c

Roland Fryer

Colbert at Christmas
Colbert Christmas DVD

Green Screen
Bill O'Reilly Interview

What's Going On?

Contracts as reference points: evidence

In a previous post, I mentioned Oliver Hart and John Moore's recent paper, "Contracts As Reference Points", in which the authors found a new building block for incomplete contracts by incorporating behavioral elements, such as reference points, shade and retaliation. Although their earlier and more influential work - Grossman and Hart (1986), Hart and Moore (1990) and Hart (1995) - has laid down the foundation of incomplete contract theory, some critical assumptions of their model were challenged, like events that are observable but not verifiable and ex post efficiency. Hart finds that "the early debate a bit sterile". In this new paper, they bring back ex post inefficiency, which is caused by behavioral problems. Relational specific investment, a crucial element that leads to ex post renegotiation in their earlier model is assumed away. The theory becomes somewhat more "rigorous and testable".

In the latest NBER working paper series, Ernst Fehr, Oliver Hart and Christian Zehnder provide their first empirical test of the new incomplete contract theory (see here or here). Here is the abstract:

In a recent paper, Hart and Moore (2008) introduce new behavioral assumptions that can explain long-term contracts and important aspects of the employment relation. However, so far there exists no direct evidence that supports these assumptions and, in particular, Hart and Moore's notion that contracts provide reference points. In this paper, we examine experimentally the behavioral forces stipulated in their theory. The evidence confirms the model's prediction that there is a tradeoff between rigidity and flexibility in a trading environment with incomplete contracts and ex ante uncertainty about the state of nature. Flexible contracts - which would dominate rigid contracts under standard assumptions - cause a significant amount of shading on ex post performance, while under rigid contracts, much less shading occurs. Thus, although rigid contracts rule out trading in some states of the world, parties frequently implement them. While our results are broadly consistent with established behavioral concepts, they cannot easily be explained by existing theories. The experiment appears to reveal a new behavioral force: ex ante competition legitimizes the terms of a contract, and aggrievement and shading occur mainly about outcomes within the contract.

Cupid's Arrow...

In voting theory, one of the most important results is the so called "Arrow's Impossibility Theorem". For the uninitiated, here is the trick to memorize what the theorem is all about.

The theorem states that if a voting system satisfies:
Complete and transitive social preferences;
Universal domain, i.e., any individual preference ordering is allowed;
Pareto efficiency (or unanimity); and
Independence of irrelevant alternatives (IIA);

then there must exist a

Dictator. Well, don't forget that the theorem gots its own name, that is, ARROW's impossibility theorem.

So, just remember: Cupid's Arrow!!

HT to Uncle Marcus.

Who Am I? Arrogant? Impatient? Insensitive?

This is a site that analyzes blogs and also tells you what the bloggers' psychological profiles may look like.

Here is what it says about me:

INTP - The Thinkers

The logical and analytical type. They are especialy attuned to difficult creative and intellectual challenges and always look for something more complex to dig into. They are great at finding subtle connections between things and imagine far-reaching implications. They enjoy working with complex things using a lot of concepts and imaginative models of reality. Since they are not very good at seeing and understanding the needs of other people, they might come across as arrogant, impatient and insensitive to people that need some time to understand what they are talking about.

And this shows what parts of the brain that were dominant during writing:

HT to Mankiw.

US Auto Industry

GM, Ford and Chrysler, the Big Three US Automobile companies have lost tens of billions of dollars during the past few years, and they will shortly run out of cash. Recently, they asked the government for a bailout. Many Congressmen want to grant them at least $25 billion from the $700 billion Troubled Asset Relief Program on top of $25 billion in low-interest loans approved earlier this year. But the question is, should the government give them such a "free lunch"?

Here is the debate between two well known economists -- Jeffrey Sachs argues that a rescue of the Auto industry is essential, but Gary Becker, says this is not a good idea at all.

HT to Mankiw.

£arry $ummers's New Job

Not president of any Ivy-league university, not Treasury secretary, but the head of National Economic Council to the next President.

Here is a post in which Mankiw points out that in the future, NEC is likely to become a substitute rather than complement to the Council of Economic Advisors.

Dangerous Words: "Fair" and "Fairness"

...from Carpe Diem.

Richard Epstein on Happiness, Inequality and Envy

In last week's Econtalk, Richard Epstein of the University of Chicago talked about the relationship between happiness and wealth, inequality and happiness, and the economics of envy and altruism. He also applied the theory of evolution to explain some of the findings of the happiness literature.

Secrets of Success

In his new book, Outliers, Malcolm Gladwell tells us that in order to be successful, not only talent matters, but also timing, opportunity and not surprisingly, good old-fashioned hard work and discipline. However, what do surprise him most are the ordinary methods successful people use to achieve all they achieve.

In his words, "success is not a function of individual talent. It's the steady accumulation of advantages." Here are his five steps toward success:

1. Find meaning and inspiration in your work.
2. Work hard.
3. Discover the relationship between effort and reward.
4. Seek out complex work to avoid boredom and repetition.
5. Be autonomous and control your own destiny as much as possible.

Matrix Cookbook

If you are driven crazy again and again by those horrible matrix calculations in your econometrics class or in many other circumstances, here is (maybe) the best reference I can ever find. It just covers about every matrix and vector equality you will ever need.

Mankiw's advice

...to President-elect Obama, see here.

Job Market

Hat tip to Carpe Diem.

Cost and Benefit...

Gordon Tullock, cofounder of public-choice economics explains in this short PBS video why he does not vote.

Hat tip to Cafe Hayek.

The Lady Tasting Tea

Yesterday, a friend of mine recommended a book to me, The Lady Tasting Tea by David Salsburg, which is a book about the history of modern statistics and the role it played in the development of science and industry.

Here are some quotes from the publisher:

"At a summer tea party in Cambridge, England, a lady states that tea poured into milk tastes differently than that of milk poured into tea. Her notion is shouted down by the scientific minds of the group. But one guest, by the name Ronald Aylmer Fisher, proposes to scientifically test the lady's hypothesis. There was no better person to conduct such a test, for Fisher had brought to the field of statistics an emphasis on controlling the methods for obtaining data and the importance of interpretation. He knew that how the data was gathered and applied was as important as the data themselves. "

"In The Lady Tasting Tea, readers will encounter not only R.A. Fisher's theories (and their repercussions), but the ideas of dozens of men and women whose revolutionary work affects our everyday lives. Salsburg traces the rise and fall of Karl Pearson's theories, explores W. Edwards Deming's statistical methods of quality control (which rebuilt postwar Japan's economy), and relates the story of Stella Cunliffe's early work on the capacity of small beer casks at the Guinness brewing factory. The Lady Tasting Tea is not a book of dry facts and figures, but the history of great individuals who dared to look at the world in a new way. "

Must be interesting.

Dear Mr. President

Newsweek invites seven Nobel Prize winners in Economics to explain how they would advise the next president in fixing the economy.

Krugman and Zingales

From Bloomberg on the Economy.

Nobel Laureate Paul Krugman Sees a `Nasty' U.S. Recession.
Chicago professor Luigi Zingales Sees Debt-for-Equity Swap as Housing Crisis Solution.

Is Economics Dismal??

Not really...

Demand, Supply by educationalrap

Anna Schwartz says...

...in WSJ's Weekend Interview, that "I don't see that they've achieved what they should have been trying to achieve. So my verdict on this present Fed leadership is that they have not really done their job."

In the 1930s, as Ms. Schwartz and Mr. Friedman argued in "A Monetary History," the country and the Federal Reserve were faced with a liquidity crisis in the banking sector. As banks failed, depositors became alarmed that they'd lose their money if their bank, too, failed. So bank runs began, and these became self-reinforcing: "If the borrowers hadn't withdrawn cash, they [the banks] would have been in good shape. But the Fed just sat by and did nothing, so bank after bank failed. And that only motivated depositors to withdraw funds from banks that were not in distress," deepening the crisis and causing still more failures.

But "that's not what's going on in the market now," Ms. Schwartz says. Today, the banks have a problem on the asset side of their ledgers -- "all these exotic securities that the market does not know how to value." "The Fed," she argues, "has gone about as if the problem is a shortage of liquidity. That is not the basic problem. The basic problem for the markets is that [uncertainty] that the balance sheets of financial firms are credible."

This [The new proposal] is the dirty little secret that led Secretary Paulson to shift from buying bank assets to recapitalizing them directly, as the Treasury did this week. But in doing so, he's shifted from trying to save the banking system to trying to save banks. These are not, Ms. Schwartz argues, the same thing. In fact, by keeping otherwise insolvent banks afloat, the Federal Reserve and the Treasury have actually prolonged the crisis. "They should not be recapitalizing firms that should be shut down."

A Must read.

A Mathematical Pattern is the Theory of Everything?

Garrett Lisi, a theoretical physicist with no single academic affiliations proposed to the world a unified field theory combining the grand unification theory of particle physics with Albert Einstein's general relativistic theory of gravitation, using the largest simple exceptional Lie algebra, E8. Here is his original paper, and here is a summary of his work from NewScientist.

Although his theory is "simple" in some sense, it is never trivial. I admit I am ignorant in modern physics, but I believe this man has touched something serious or maybe fundamental. By watching the following two video clips (or watch it here and here), you can judge it yourself.

Best Investment Strategy

If you had purchased $1,000 of Delta Air Lines stock one year ago, you would have $49 left...

With Fannie Mae, you would have $2.50 left of the original $1,000...

With AIG, you would have less than $15 left...But,

If you had purchased $1,000 worth of beer one year ago, drunk all of the beer, then turned in the cans for the aluminum recycling REFUND, you would have $214 cash!!!

Based on the above, the best current investment advice is to drink heavily and recycle.

Hat tip to CARPE DIEM.

Sorted Links...

From the Economist.

Management Guru: Peter Drucker.
A Strong Economic Stylist Wins the Nobel Prize.
Echoes of Depression: 1929 and all That.
The Business of Sports.

Why we vote the way we do?

Three NYU scientists describe their research into the neuroscience of voting.

Hat tip to Science & the City.

NBER Working Group on Organizational Economics

See here.

Krugman on Krugman

...about "How I Work". Here are some excerpts:

"...when I left graduate school I was, in my own mind at least, somewhat directionless. I was not sure what to work on; I was not even sure whether I really liked research. "

"We just don't see what we can't formalize...So there, right at hand, was my mission: to look at things from a slightly different angle, and in so doing to reveal the obvious, things that had been right under our noses all the time."

"I am a strong believer in the importance of models, which are to our minds what spear-throwers were to stone age arms: they greatly extend the power and range of our insight...economic models are metaphors, not truth...But always remember that you may have gotten the metaphor wrong, and that someone else with a different metaphor may be seeing something that you are missing."

"What I began to realize was that in economics we are always making silly assumptions; it's just that some of them have been made so often that they come to seem natural. And so one should not reject a model as silly until one sees where its assumptions lead...[And] the reason for making these assumptions is not that they are reasonable but that they seem to help us produce models that are helpful metaphors for things that we think happen in the real world...If a new set of assumptions seems to yield a valuable set of insights, then never mind if they seem strange. "

"...there is a strategy that both helps you keep control of your own insights, and makes those insights accessible to others. The strategy is: always try to express your ideas in the simplest possible model."

BUT, REMEMBER HIS LAST WORDS, "what works for one economist may not work for another." So, make your own judgement and make it right.

China Bailout America?

See this commentary on FT.

2009 ASSA Preliminary Program

See here. The following sessions sound attractive to me:

Beliefs and Disagreement in Organizations
Presiding: ROLAND BENABOU, Princeton University

ERIC VAN DEN STEEN, Massachusetts Institute of Technology--"Authority versus Persuasion",

AUGUSTIN LANDIER, New York University, DAVID THESMAR, HEC, Paris, and DAVID SRAER, University of California--Berkeley, "Optimal Dissent and Risk Management within Organizations"

ROLAND BENABOU, Princeton University, and JEAN TIROLE, Université de Toulouse--"Over My Dead Body: Bargaining and the Price of Dignity”

The Dynamics of Economic Institutions
Presiding: AVNER GREIF, Stanford University

MASAHIKO AOKI, Stanford University—"On the Mechanism of Institution-Belief Co-evolution"
SAMUEL BOWLES, Santa Fe Institute and University of Siena—"Institutional Dynamics: Persistence and Innovation"

GÉRARD ROLAND, University of California-Berkeley—"Institutions and Growth: The Chinese Puzzle"

ERIC BROUSSEAU, EconomiX, University of Paris X, and EMMANUEL RAYNAUD, INRA, SADAPT, University of Paris & Centre ATOM at University of Paris I —"Climbing the Hierarchical Ladders of Rules: The Dynamics of Institutional Framework"

Exploring the Sources of Innovation: Recent Developments
Presiding: TIMOTHY BRESNAHAN, Stanford University

PHILIPPE AGHION, Harvard University, MATHIAS DEWATRIPONT, Université libre de Bruxelles, JULIAN KOLEV, Harvard University, FIONA MURRAY, Massachusetts Institute of Technology, and SCOTT STERN, Northwestern University--"On Mice and Growth: The Effect of Openness on Follow-On Research"

NICHOLAS BLOOM, Stanford University, MARK SCHANKERMAN, University of Arizona and London School of Economics, and JOHN VAN REENEN, London School of Economics--"Identifying Technology Spillovers and Product Market Rivalry"

KEVIN BOUDREAU, HEC-Paris, NICOLA LACETERA, Case Western Reserve University, and KARIM LAKHANI, Harvard Business School--"Incentives versus Diversity: Re-Examining the Competition-Innovation Link"

TIMOTHY BRESNAHAN, Stanford University, SHANE GREENSTEIN, Northwestern University, and REBECCA HENDERSON, Massachusetts Institute of Technology--"Diseconomies of Scope between Existing Businesses and Growth Opportunities: Evidence from the History of Computing"

A funny thing

...happened to Paul Krugman this morning.

The Prize Goes to...

Paul Krugman, "for his analysis of trade patterns and location of economic activity". Now he becomes the first person outside the field of literature to win both the Nobel and Pulitzer Prizes, the acme of achievement in BOTH academics and journalism!

His contributions and the scientific background of his work can be found here and here.

Here is another short but superb biography of Krugman.

I have already posted three other topics on him or his work:
Income gap: widened or not?
Krugman @ Authors@Google (on his book, The Conscience of a Liberal)
and
Michael Moore in Economics Profession

Congratulations, Mr. Krugman!

More Nobel Odds...

From Ladbrokes:

Eugene Fama 3.00
Kenneth R. French 5.00
Robert Barro 7.00
Christopher Sims, Lars P. Hansen, Thomas J. Sargent 8.00
Martin S. Feldstein 9.00
Avinash Dixit, Jagdish N. Bhagwati 10.00
Paul Krugman 11.00
Elhanan Helpman, Gene M Grossman 15.00
Oliver Hart, Oliver Williamson 17.00
Chris Pissarides, Dale T. Mortensen, Paul Romer 21.00
Nordhaus, Weitzman 26.00
Bengt Holmstrom, Peter A Diamond 34.00
Dale Jorgensen, Jean Tirole, Nancy Stokey, Paul Milgrom, Robert B. Wilson, William Baumol 41.00

I am a little bit confused of Fama and French's odds. They did exactly the same work (loosely speaking, although Fama is more influential, agree?), then either they would win the title together or ONLY one of them would win. If it is the former case, then the odds should be the same; if not, one odd should be much larger than the other. Because Fama is more influential, French's odds might be much lower (around 40? Just guessing...) .

Interestingly, if Fama eventually wins "for his pioneering work in Efficient Market Hypothesis", then this would simply suggest that "markets" are predictable...mixed feeling?

The Art of Strategy

Avinash Dixit and Barry Nalebuff have a new book, The Art of Strategy, in which they updated their ideas in their best seller and classic, Thinking Strategically (1991) with new stories and examples, like the Safer Duel and Shakespear's King Henry V, although the structure are more or less the same. Indeed, the theme keeps changing. Strictly selfish rationality has given way to a much broader perspective on human motives when considering the impact of psychological effects and the choice of information the decision makers use.

Today, Tom Keene of Bloomberg on the Economy has an interview with Prof. Dixit in which they discussed the evolved ideas in the new book, and their implications on our daily life and also on the recent financial downturn. They also talked about Thomas Schelling's systematization of Thomas Hobbes and David Hume's idea of credible commitment, and Schelling's notion of "brinksmanship".

Here is a synopsis of this book:

"Game theory means rigorous strategic thinking. It's the art of anticipating your opponent's next moves, knowing full well that your rival is trying to do the same thing to you. Though parts of game theory involve simple common sense, much is counterintuitive, and it can only be mastered by developing a new way of seeing the world. Using a diverse array of rich case studies—from pop culture, TV, movies, sports, politics, and history—the authors show how nearly every business and personal interaction has a game-theory component to it. Are the winners of reality-TV contests instinctive game theorists? Do big-time investors see things that most people miss? What do great poker players know that you don't? Mastering game theory will make you more successful in business and life, and this lively book is the key to that mastery."

Nobel Odds...

From PinnacleSports:

101 Martin Feldstein +753
102 Thomas Sargent +1186
103 Robert Barro +1305
104 Paul Romer +1350
105 Jagdish Bhagwati +1365
106 Paul Krugman +1626
107 N. Gregory Mankiw +4367
108 Any other person -136

Actually I don't bet any money on this, so there is no incentive for me to make difficult comparisons (it's soooooo unpredictable!!!!). Although the above list suggests the winner this year might be in macro, or in international trade, I still hope it will go to organizational economics in the end, maybe the combination of Oliver Williamson, Oliver Hart and Bengt Holmström, or Paul Milgrom and John Roberts, or Armen Alchian and Harold Demsetz. Just wait for another day!

Freakonomist Steven Levitt also has his own predictions in a recent post, however, I find the story he told is more appealing, "Some colleague of me said he identified a strong leading indicator of economists who think they are on the short list for winning the prize: getting a haircut the week before the Nobel is announced. He also claims to have many data points supporting his theory..." Interestingly, this colleague of his just had a snazzy new haircut!

Who is it? Not Eugene Fama (he need not to), then Lars Peter Hansen?

Views on bailout

...by Stiglitz, Rogoff (1, 2), DeLong, and Zingales.

Call for papers

Two professors from my group, Nick Argyres and Todd Zenger, together with Teppo Felin of BYU and Nicolai Foss of Copenhagen Business School are going to co-edit a special issue of Organization Science (now ranks as the 4th most influential management journal according to JCR, even made it to the 3rd a year ago), on Organizational Economics and Organizational Capabilities: From Opposition and Complementarity to Real Integration. I am very exicted about this ongoing trend and just in the PhD seminar last week, we and Todd discussed this paper by Nick and him, "Capabilities, Transaction Costs, and Firm Boundaries: A Dynamic Perspective and Integration", which is exactly an integration of Transaction Cost View and Capability based View of the firm. I highly recommend this paper to those of you who are passionate about organizational economics, business strategy and their ongoing blending, although I am still not so convinced on part of the illustration of the Disney case. Here is the abstract:

A large literature has developed in recent years that attempts to compare transaction cost and capabilities explanations of firms' vertical boundaries. Much of this literature has treated comparative capabilities (buyers' vs. potential suppliers') as determinants that are independent of transaction costs, based on the idea that capabilities theories of the firm are distinct from the transaction cost theory of the firm. We argue that this approach is mistaken. We contend that capabilities and transaction cost determinants interact with each other dynamically, and that the two theories of the firm cannot be conceptually distinguished. We then seek to articulate an integrated perspective that incorporates both capabilities and transaction cost logic. Our argument carries implications for theories of the firm, and for empirical research aimed at testing those theories.

As to the special issue, papers can be both theoretical and empirical, and must be submitted between Oct. 1 and Oct. 30, 2009.

Hat tip to Nicolai Foss.

Please...Nobel for organizational economics!

...claimed by Peter Klein, co-blogger of Organizations and Markets.

"Coase, of course, whose 1937 paper is foundational to the field, has already won, as have Akerlof, Spence, Stiglitz, Mirrlees, Vickrey, Hayek, and others whose work has greatly informed the study of organizations. But, for a prize recognizing organizational economics per se, whom would you pick? Williamson, Holmström, Milgrom, Roberts, Hart, Tirole, Aghion? Perhaps Alchian, Demsetz, or Jensen. Maybe a personnel economist (Lazear) or someone in corporate finance or accounting (Bill Schwert, Stewart Myers, René Stulz, Raghuram Rajan, Cliff Smith, Milton Harris, Artur Raviv)? Or an entrepreneurship Nobel for, say, Baumol and Kirzner isn’t out of the question, but seems unlikely. "

Here is my view last year. What do you think?

Problems run deeper??

Martin Feldstein comments on the recent financial crisis and how the economy would suffer.

Ig Nobel 2008

The "18th First Annual Ig Nobel Prize Ceremony" was held on 2 October 2008 at Harvard University. The winners of this year are:

Archaeology: Astolfo Gomes de Mello Araujo and Jose Carlos Marcelino, for showing that armadillos can mix up the contents of an archaeological site.

Biology: Marie-Christine Cadiergues, Christel Joubert, and Michel Franc, for discovering that fleas that live on dogs jump higher than fleas that live on cats.

Chemistry: Sheree Umpierre, Joseph Hill, and Deborah Anderson, for discovering that Coca-Cola is an effective spermicide, and C.Y. Hong, C.C. Shieh, P. Wu, and B.N. Chiang for proving it is not.

Cognitive science: Toshiyuki Nakagaki, Hiroyasu Yamada, Ryo Kobayashi, Atsushi Tero, Akio Ishiguro, and Ágota Tóth, for discovering that slime molds can solve puzzles.

Economics: Geoffrey Miller, Joshua Tyber, and Brent Jordan, for discovering that exotic dancers earn more when at peak fertility.

Literature: David Sims, for his study "You Bastard: A Narrative Exploration of the Experience of Indignation within Organizations". (Also see here.)

Medicine: Dan Ariely for demonstrating that expensive counterfeit drugs are more effective than inexpensive counterfeit drugs. (Also see here.)

Nutrition: Massimiliano Zampini and Charles Spence, for demonstrating that food tastes better when it sounds more appealing.

Peace: The Swiss Federal Ethics Committee on Non-Human Biotechnology and the citizens of Switzerland, for adopting the legal principle that plants have dignity.

Physics: Dorian Raymer and Douglas Smith, for proving that heaps of string or hair will inevitably tangle.

Here is an overview.

Time Paradox

Philip Zimbardo, a renowned psychologist at Stanford describes how our individual perception of time shapes the choices we make.

2008 Thomson Prediction in Nobel Prize in Economics

Thomson Scientific predicts the 2008 Nobel Prize this year. In economics, three groups of preeminent scholars seem to win the titile this year. They are:

Group 1
LARS P. HANSEN, Homer J. Livingston Distinguished Service Professor, Department of Economics, University of Chicago, Chicago, IL USA
and
THOMAS J. SARGENT, William R. Berkley Professor of Economics and Business, Department of Economics, New York University, New York, NY, USA; and Senior Fellow, Hoover Institution, Stanford, CA USA
and
CHRISTOPHER A. SIMS , Harold B. Helms Professor of Economics and Banking, Department of Economics, Princeton Univeristy, Princeton, NJ USA
"for their contributions to dynamic econometric models"

Group 2
MARTIN S. FELDSTEIN, George F. Baker Professor of Economics, Department of Economics, Harvard University, Cambridge, MA USA; President Emeritus, National Bureau of Economic Research, Cambridge, MA USA
"for his research on public economics, including taxation, social security, health economics and many other topics"

Group 3
ARMEN A. ALCHIAN, Emeritus Professor, Department of Economics, University of California Los Angeles, Los Angeles, CA USA
and
HAROLD DEMSETZ, Arthur Andersen UCLA Alumni Emeritus Professor of Business Economics, Department of Economics, University of California Los Angeles, Los Angeles, CA USA
"for their publications on property rights and their contributions to the theory of the firm"

There are many other nominees who have very high academic citations and are still in the running for the Nobel title. They are ROBERT J. BARRO; EUGENE F. FAMA AND KENNETH R. FRENCH; PAUL MICHEAL ROMER; RICHARD H. THALER; JAGDISH N. BHAGWATI AND AVINASH K. DIXIT AND PAUL KRUGMAN; DALE W. JORGENSON; OLIVER D. HART AND BENGT R. HOLMSTROM AND OLIVER E. WILLIAMSON; ELHANAN HELPMAN AND GENE M. GROSSMAN; JEAN TIROLE; ROBERT B. WILSON AND PAUL R. MILGROM.

Let's see!

Still on GM and Fisher???

Organizations and Markets just has another post (see the first one here) on yet another round of debate over the acquisition of Fisher Body by General Motors. It's a classic case, particularly in the analysis of vertical integration when parties face high asset specificity.

The new issue of Industrial and Corporate Change has two more papers, “Lawyers Asleep at the Wheel? The GM–Fisher Body Contract” by Victor Goldberg and “The Enforceability of the GM–Fisher Body Contract: Comment on Goldberg” by Ben Klein. Apparently, the debate will still go on.

I think this case and the idea of asset specificity have already become a standard in Transaction Cost Economics and even in the recent advancement of Incomplete Contract Framework. When I ask him to make some comments on these recent debates, Harvard Prof. Oliver Hart just replied, "I wish that we could get beyond this case! Relationship specific investments have got to be an important factor in determining the costs and benefits of vertical integration, even though there may be many others!"

Map of Scientific Paradigms

See here. (Transaction cost, firm size, innovation etc. are somewhere in the 9 o'clock area.)

This map "was constructed by sorting roughly 800,000 scientific papers into 776 different scientific paradigms (shown as red and blue circular nodes) based on how often the papers were cited together by authors of other papers. Links (curved lines) were made between the paradigms that shared common members, then treated as rubber bands, holding similar paradigms closer to one another when a physical simulation forced them all apart: thus the layout derives directly from the data. Larger paradigms have more papers. Labels list common words unique to each paradigm"

Time to dump Word??

Microsoft Word is pervasively used to write ordinary documents and academic papers, because it is easy to operate and you will see what you will get. But if you are going to deal with much more sophisticated mathematical equations, LaTex may become a better choice. But with LaTex, you cannot simply get what you see (maybe sometimes if you want to insert, say, a table, it would be difficult for you to define the specific attributes of the table unless you become very experienced).

What if we combine the merits of Word and LaTex? Then here comes Lyx (also see here). Most of the time, the quasiconcavity of preference relations will hold.

So is it the time to dump Word??

Hat tip to a friend of mine.

A little bit diverting...but interesting posts

From NewScientist:

1. Why preschool is more than just child's play?
2. Do we need help making sensible decisions?
3. Eight facts about Cold; and
4. Are happy kids dumb kids?

Shiller on housing and bubbles

Robert Shiller of Yale University had a conversation with Econtalk host Russ Roberts, in which he argues that the current housing and related financial market problems are much due to speculative fervor in the past (here for audio). He also had an interview with Princeton University Press, talking about his new book, The Subprime Solution (see here and here).

What's new in econometrics?

See the 2007 Summer Institute mini-course organized by NBER and all the related video files.

Nobel Symposium on Foundations of Organization

Stockholm School of Economics hosted the Nobel Symposium on Foundations of Organization on August 28 and 29. Many prominent figures in economics, business administration and sociology have taken part in this symposium. Papers, slides and discussions can be found on this page. Interestingly, MIT prof. Robert Gibbons presented a SEVENTY-EIGHT page long paper on Economic Theories of Internal Organization, in which he tries to present an integrated framework on the internal structures and processes of an organization by combining insights from economics, sociology, politics and business strategy. Although it's huge, it is worth a read!

Update (Dec. 16, 2009): the former links to this program were broken, and now they are all fixed. Thanks to James Yen for the pointer!

For fun...

A friend told me today that there are lots of jokes on Prof. Sergiu Hart's homepage.

Nudge

Chicago Economist Richard Thaler and his colleague Cass Sunstein of Law School have written a new book, "Nudge: Improving Decisions About Health, Wealth, and Happiness". (also see here.)

Using vivid examples from the most ordinary but important aspects of life (like the way to layout different kinds of food in cafeteria, the way to avoid car accident at a sharp turn, etc.), Thaler and Sunstein show that by knowing how people think, we can actually design choice environments that make it easier for people to choose what is best for themselves, their families, and their society. They demonstrate how thoughtful "choice architecture" can be established to nudge us in beneficial directions without restricting freedom of choice.

Here is a video lecture from Richard Thaler, talking about the whole idea inside this book. You can also read this review from Harvard Economist Benjamin Friedman.

Top 11 Unsolved questions in Economics???

Like there are lists of unsolved problems in Mathematics, Physics, and Chemistry, Wikipedia also has a list of the 11 unsolved questions in economics. Sounds interesting? Take a look.

1. What caused the Industrial Revolution?
2. What is the proper size and scope of government?
3. How can heterogeneous production goods be included in a mathematically trackable intertemporal equilibrium constrution?
4. What truly caused the Great Depression?
5. Can we explain the Equity Premium Puzzle?
6. How is it possible to provide causal explanations using the purely logical constructions of mathematical economics?
7. Can we create an equivalent of Black-Scholes for futures contract pricing?
8. What is the microeconomic foundation of inflation?
9. Is the money supply endogenous?
10. How does price formation occur? Why do some markets achieve Pareto efficiency?
11. What causes the variation of income among ethnic groups?

I think some problems are quite solid (like the one on the size and scope of government, maybe more generally, organizations and institutions, also the other on EPP) therefore need careful investigation, but some of them, particularly those problems on causalities (one of them should be listed on unsolved problems in philosophy), are really too broad and too hard to tackle.

Hat tip to Mike Moffatt.

How to raise a PhD?

OrgTheory has the answer...

Derman...the Quant

I suggested everyone who is interested in modern finance theory read two books (now three), one is Capital Ideas (and now Capital Ideas Evolving) by Peter L. Bernstein, who is the former editor of the Journal of Portfolio Management and the founder and president of Peter L. Bernstein, Inc; the other is My Life as A Quant, by Emanuel Derman, now the director of Columbia University's program in financial engineering.

Recently, Prof. Derman spoke with Science & the City on how a theoretical physicist can find his own way and made a mark on Wall Street.

Poterba and Feldstein

Two recent interviews from Bloomberg.

The NBER new head, James Poterba of MIT talks about the micro perspective on asset and credit markets, possible retrenching of U.S. consumers, and also on the characteristics of Harvard and MIT's economics departments.

His predecessor, Martin Feldstein of Harvard talks about the current macroeconomic condition. He says that Fed is slow to recognize the credit crisis.

Hal Varian on Technology

What is the role of technology in everyday lives? Can we predict the paths of innovation? What can economists contribute in this technology driven era? Hal Varian, Google's Chief Economist and UC Berkeley Professor has his own thoughts.

Chicago Conference on China

1991 Nobel Laureate Ronald Coase will organize an international conference on China's Economic Transformation this July. Steven N. S. Cheung is also invited to give a keynote speech there, talking about his most recent paper, titled, "The Economic System of China".

Although this paper has not been put onto the conference website, here is some clue. As Cheung argued for himself, "...section three of this paper generalizes the concept of contract, by far nobody in the field of institutional economics has reached that far...". Let's hope!

Are Humans Unique?

According to an article in the latest issue of NewScientist, we humans are not special as we used to believe since we now know better. We are not the only species that feels emotions, empathises with others or abides by a moral code. Neither are we the only ones with personalities, cultures and the ability to design and use tools. Yet we have steadfastly clung to the notion that one attribute, at least, makes us unique: we alone have the capacity for language.

Some recent research has revealed that six seemingly "uniquely" human traits are already found in animals (here), and that animals can even "possess" some human abilities (here).

Bless Sichuan, Bless My Hometown

The 5.12 earthquake has already killed more than 60,000 people in Sichuan province. Being very close to the epicenter, my hometown city, Mianzhu, is severely damaged. More than 10,000 civilians lost their lives in this devastating earthquake. One of my aunts, a beloved wife and mother, also died in the disaster. To me, she was always kind, generous and supportive. May she rest in peace in a rainbow heaven!

May God bless everyone in Sichuan!

The Mystery of Monogamy

Three economics professors from Hebrew University published an interesting paper on the American Economic Review, examining why developed societies are monogamous while rich men throughout history have typically practiced polygyny.

Wealth inequality naturally produces multiple wives for rich men in a standard model of the marriage market. However, we demonstrate that higher female inequality in the marriage market reduces polygyny. Moreover, we show that female inequality increases in the process of development as women are valued more for the quality of their children than for the quantity. Consequently, male inequality generates inequality in the number of wives per man in traditional societies, but manifests itself as inequality in the quality of wives in developed societies.

As summarized by Mahalanobis, the main empirical prediction is that the composition of inequality, not just the level, is an important determinant of the degree of polygyny in society. Specifically, societies should be more polygynous in countries where variation in overall wealth inequality is determined more by differences in nonlaber income (capital and inherited wealth) versus income variation generated by differences in the levels and returns to human capital investments.

Worth a read.

The Intellectual Portrait Series

...from The Online Library of Liberty.

This Intellectual Portrait Series features several interviews with some of the most notable economists and leading classical liberal figures of our time, including Milton Friedman, James Buchanan (part I, II), Ronald Coase, Armen Alchian and Gary Becker. This series also has an one hour summary of the life and thought of Friedrich A. Hayek.

Happy Birthday...

...to my Econ-Biz Blog! Cheers!

Learning by blogging does make a large difference!

Economics makes you selfish??

As Ray Fisman puts forward on Forbes: We are what we learn.

"Exposed to these (Milton Friedman and Ayn Rand's) compelling intellectual frameworks, which emphasize market efficiency and model human behavior as driven primarily by rational self-interest, do students become more selfish?

It is not easy to measure the effect of indoctrination (or, more euphemistically, "learning"). Students don't randomly decide to study, for example, economics rather than French literature. Perhaps the econ majors were efficiency fanatics to begin with.

Except, it turns out, at Yale Law School. All students are required to take courses in contracts and in torts, and they're randomly assigned to an instructor for each class. Some of these teachers have Ph.D.s in economics, some in philosophy and other humanities, and some have no strong disciplinary allegiances at all. Professors are encouraged to design their courses as they see fit. Instructors from economics may emphasize the role of contracts in making possible the efficiency gains of the marketplace, while philosophers may emphasize equal outcomes for contracting parties. So economists teach about efficiency and philosophers teach about equality.

To figure out whether this affected their young charges, we put 70 Yale Law students in a computer lab, and had them play a game that would reveal to us their views on fairness...It turns out that exposure to economics makes a big difference in how students split the pie, in terms of both efficiency and outright selfishness. Students assigned to classes taught by economists were more likely to give a lot when it was cheap to do so. But they were also much more likely to take the whole pie for themselves.

These findings hint at the influence that powerful ideas may have in shaping how we see the world, even late in life. It's also a sobering message for teachers such as myself. The students in my classroom will venture forth into the world of business and management, carrying with them some of the viewpoints and attitudes that I choose to emphasize in my lectures. Students learn much more than the facts; what we choose to communicate to them is a responsibility not to be taken lightly."

Hat tip to Mankiw.

After Stepping Down...

Freakonomist Steven Levitt stepped down as the editor of one of the most prestigious academic journals in economics, Journal of Political Economy, a few weeks ago. Here is his earlier message to economists and here is a story describing how he was treated after stepping down...

Three Podcasts from Science & the City

Science & the City has three interesting podcasts:

The first one is Future of the Stockmarket, in which investors, economists, and quantitative finance experts discuss how technological innovations have hastened the growth of the markets.

The second piece is Physics of the Impossible. The cofounder of string field theory offers a scientific exploration of the world of phasers, force fields, teleportation, and time travel.

In Distortions of Memory, experts in language, literature, neuroscience, philosophy, and psychoanalysis discuss what is known about how we store and subsequently recall the past.

Henderson on Strategy and Sustainability

MIT Sloan School Professor Rebecca Henderson had a nice talk on what firms should do to implement strategy around sustainability, and why it is so hard to do new things in old organizations.

"...companies looking to act in fundamentally different ways, says Henderson, must prepare for overload, accepting and managing the fact that the business will be 'worse before better.' Becoming unstuck, says Henderson, means, measuring capacity, tracking resources, finding time to step back and make decisions, demonstrating a commitment at all levels of the company, and having serious conversations, from the mind and from the heart. In sustainability, concludes Henderson, we 'need to break the logjam between overload and strategy,' and we 'need to be very precise about what we want to do.'"

Another Empirical Review on the Boundary of the Firm

We had this post last September. Francine Lafontaine and Margaret Slade had a superb review paper on vertical integration titled "Vertical Integration and Firm Boundaries: The Evidence", which appeared in the Journal of Economic Literature (Non-gated version here).

A few months later, Kellogg professor Thomas Hubbard also published a paper on the same topic. "Viewpoint: Empirical research on firms' boundaries" appears in the current issue of the Canadian Journal of Economics. Instead of going through and summarizing all the major empirical work in the fields, like Lafontaine and Slade did last year, most of Hubbard's discussion concerns empirical work that is related to three key theoretical insights that build from each other, i.e. , relationship-specific investments, residual control rights and correlated organizational variables. Worth a read.

Hat tip to Organizations and Markets.

Evidence on The Future of Economics

...via Marginal Revolution. Here is the paper.

In a nutshell: This short paper collects and studies the CVs of 112 assistant professors in the top-ten American departments of economics. The paper treats these as a glimpse of the future. We find evidence of a strong brain drain. We find also a predominance of empirical work.

Olin School: My Next Trip

I am going to join Olin School, Washington University this August to pursue my doctorate in Business Strategy there! The possibility that I would work with Professors Jackson Nickerson, Todd Zenger and Nicholas Argyres in the near future really makes me feel excited!

Any suggestions?

Interesting Posts

...from Organizations and Markets by Peter Klein. (see here and here)

Jeremy Siegel on Wall Street's High-profile Victim

Last week, Wharton Finance professor Jeremy Siegel, author of The Future for Investors, discussed Bear Stearns, inflation pressure and Fed's efforts to boost investors' confidence with Knowldge@Wharton.

Incomplete contract and international trade

Peter Klein has the post. For earlier contributions to international trade theory through the lens of incomplete contracting, see here, here and here.

Steven Cheung is coming

From April 14 to 25, Steven Cheung (here for his blog, in Chinese), a major contributor to the "classical property rights theory" (as opposed to the new property rights theory pioneered by Grossman, Hart and Moore) is going to give us a series of lectures in our university on his economic thoughts.

He will cover two major topics in his recent book (volume I, II, III. Unfortunately, also in Chinese) -- the Law of Demand and the Change of Economic Constraints (i.e., property rights, transaction costs, etc.)

Bloomberg Radio Last Week

...featured eight Nobel Laureates: Becker, Spence, Solow, Fogel, Phelps, Sen, Samuelson, and Schelling.

Top Business School Research Rankings

The University of Texas at Dallas's School of Management has just launched a newer version of their UTD Top 100 Business School Research Rankings.

They have created a database to track publications in 24 leading business journals (here for the list). The database contains titles and author affiliations of papers published in these journals since 1990.

In this version, you can customize your search by any journal or combination of journals (maybe in your own field) between the time period 1990 to date to get a ranking of schools, and you can also use school name or author name as key words to see a list of publications by the school or the author for any combination of journals and time period between 1990 to date.

Recession or not??

J. Bradford Delong of UC Berkeley talks about the current US economy on Bloomberg Television, for transcript, see here.

How Property Rights Theory Furthers Strategic Management?

Here is the post.

2008 BYU-University of Utah Winter Strategy Conference

The BYU-University of Utah Winter Strategy Conference 2008 ended a couple of days ago in Sundance, Utah. Several papers have incorporated organizational economics reasoning into the analysis of business strategy, see here and here. In the final session, Jay Barney, Jackson Nickerson and Joel Baum discussed the methods related to the past and current strategy research. Many other papers can also be downloaded from the webpage.

Update: Nicolai Foss of Organizations and Markets blog offers his impressions and highlights of this conference:

• Michael Tushman (HBS) did a nice and interesting piece of advertising for his notion of organizational “ambidexterity.”
• Evan Rawley (Wharton) presented an excellent paper on ownership arrangements in the taxi industry, concentrating on deregulation (that allows taxi companies to offer limo services) has resulted in an increase of drivers' ownership of taxis.
• Lyda Bigelow (UUtah) presented some fascinating current work with Nick Argyres on how economic organization varies over the industry life cycle (extending their recent Management Science paper on the same subject by including considerations of competitive positioning).
• Jay Barney, Jackson Nickerson and Joel Baum made three excellent presentations in a panel on “Research Methods Opportunities and Challenges in Strategy.” Jay pointed that the key idea of strategic management of successfully matching idiosyncratic capabilities to opportunities is at conflict with the dominant empirical approach of predicting means. Theorizing about individual firm-level effects while estimating an average can be highly misleading, a point he illustrated by discussing the diversification-discount literature. He argued that hierarchical Bayesian methods may help solve the conundrum. Jackson concentrated on the endogeneity problem, pointing out that only 10 years ago most empirical strategy researcher essentially didn’t know about endogeneity. However, strategy had clearly catched up since then, and in general empirical strategy scholars (meaning 98% of strategy scholars) were now approaching economists in econometric sophistication. Joel Baum linked up with Barney by arguing that because strategic management is taken up with extreme events, scholars should take much more of an interest in Extreme Statistics, looking at Paretian rather than Gaussian distributions).

Two Interviews

One is Peter Bernstein, author of the great books Capital Ideas (I just finished reading in winter vacation) and Against the Gods, interviewed by Tom Keene of Bloomberg.

The other is Vernon Smith, former Nobel Leaurate, author of Rationality in Economics: Constructivist and Ecological Forms, interviewed by EconTalk host Russ Roberts.

Shleifer on the Age of Friedman

...with disagreements conveyed by two recent books, see here.

James Poterba, New CEO of NBER

see here. (also see here and here.)

Hat tip to Greg Mankiw.

Levitt on Game Theory and Tom Schelling

...it's interesting.

Bounded Rationality in Organizational Economics

To integrate bounded rationality with organizational economics, should we follow the lead of Ariel Rubinstein? Or the behavioral approach stems from Kahneman and Tversky? Or something else?

Here is a post that deserves a read.

Is the New Supply Side Better Than the Old?

...by Austan Goolsbee.

Lin As the New Chief Economist of the World Bank

Justin Lin is poised to become the World Bank's next chief economist, following the departure of Francois Bourguignon. Some reactions in the blogsphere (Here and here).

Update: Tyler Cowen said that Lin's story was like a movie.

CEO of Princeton Economics Department

Democratic Rep. Marcy Kaptur of Ohio launched into a lengthy question to Ben Bernanke during the Fed chairman's House testimony about community banks, securitization of home loans and investment banks' role in the crisis, ending with this point: "Seeing as how you were the former CEO Of Goldman Sachs…"

She was quickly stopped by Mr. Bernanke and the laughter in the room.

"I’ve got the wrong firm?" she asked, before being corrected that she was thinking of Treasury Secretary Henry Paulson. “Oh, OK. Where were you, sir?”

Said Mr. Bernanke: “I was the CEO of the Princeton Economics Department.”




Hat tip to WSJ RTE.

What Has Tyler Cowen Learned Last Year?

According to Brad DeLong, Tyler Cowen, the Shiva Nataraja of economists, a. k. a. the blog-champion economist, has learned FOUR new things last year! Here are the four things in a nutshell:

#1 REVISING THE CHINESE ECONOMY
#2 IT’S NOT JUST THE LENDERS
#3 IN MUSIC, HARDWARE RULES
#4 LETHAL COLD FRONTS

The Year of the “China Model”

Here. Although I have no idea where to start to comment on this commentary, it's safe to say that it can generate long deliberation for those who truly care about the future of China and many other nations with similar qualities or problems.

Combining TCE and PRT

A recent paper by Patrick Schmitz, “Information Gathering, Transaction Costs, and the Property Rights Approach” (AER, March 2006) tries to reconcile two perspectives in the theory of nature and the boundary of the firm, namely Transaction Cost Economics (TCE, a la Coase, Williamson, Klein, Crawford and Alchain) and Property Rights Theory (a la Hart, Grossman and Moore) by creating a GHM-style incomplete-contracting model in which parties can obtain private information about their ex post benefit, resulting in inefficient rent-seeking over the realized gains from trade. Under certain circumstances, the PRT conclusions are reversed — i.e., the party with the most important relationship-specific investment should not necessarily own the other party’s asset, as the PRT implies. Worth a read.

Hat tip to Organizations and Markets.

Munger on some "old stories" of the Nature of the Firm

On this week's EconTalk (click to download the audio), Mike Munger, of Duke University, talks about some relatively old stories related to one of the most intriguing questions in economics - why firms exist.

Economics: The Year in Books, 2007

...from The New York Times.

Down in New Orleans

Economic Principals, an independent weekly, features in the current issue a variety of topics that have been discussed and debated in the annual meetings of the Allied Social Science Association, including the economics of paid sex markets and sports behavior, the sub-prime lending crisis, and the debate around Nicholas Stern's study of climate change and development.

Unions are evil?

Harvard Economist Richard Freeman dropped by the returning episode of Colbert Report yesterday, explaining why unions are good...

Here is part of the dialogue between Richard Freeman and Stephen Colbert:
...
- (RF) We've had the experience that in the last 30 years, unions have got weaker and weaker and weaker...
- (SC) Hasn't the market spoken? Isn't that just a free market speaking?
- (RF) Every survey that we have says that many more people want unions than ever before...
- (SC) Many more? Many more?
- (RF) Half the American people...
- (SC) Half?!
- (RF) Yes.
- (SC) Fifty percent?!
- (RF) Fifty percent.
- (SC) You can get fifty percent of Americans to say anything! (laughter) ... (ask the audience) Who wants to be a pirate? (Audience yelling...) That's a hundred percent of a RANDOM sampling of American out there...
...
- (SC) Do you yourself belong to a union?
- (RF) No.
- (SC) Thanks for stopping by.

Chinese Medicine Fuels the Illegal Wildlife Trade?

Here is an introduction to a short documentary appeared on Mediastorm sponsored by washingtonpost.com (here watch the video):

"The wildlife trade is the third largest illegal trade in the world, rivaled only by guns and drugs. Every year up to 30,000 primates, 2 to 5 million birds and 10 million reptile skins are traded. Strong beliefs in obscure parts of traditional Chinese medicine fuel the development. According to ancient custom, animal parts are imbued with 'magical' properties. For the superstitious, eating the flesh of a tiger provides the animal's strength. Despite scientific studies proving these beliefs wrong, the trade of animals and animal parts continues largely unchecked, fueled by desire, greed and corruption. The problem seems insurmountable; one way of curbing the rampant killing and to decrease the demand for rare animals is by educating future generations and removing antiquated and false beliefs."

For me, this seems a myth rather than reality...Yes, indeed, traditional Chinese medicine does hold the belief that some animl parts can be used as the "magical" treatment to certain kinds of illnesses. However, what the documentary doesn't tell us is the underlying incentives to kill wild animals, i.e., for what purpose do those poachers engage in illegal trading? Again, animal parts. But what really matters is which parts do they care most! Intuitively, I just don't think the black market for traditional Chinese medicine can sustain the large demand of "magical" parts from wild animals. It's not even a universal economic phenomenon. What's more obvious to us is that we actually do not rely on Chinese medicine to treat our illnesses. Out there exists a much larger market for Western medicine.

What is really intriguing is the deeper needs of human beings. The pervasive worldwide markets for luxury goods might easily outweigh the markets for Chinese medicine. These needs are hard to measure, but they do exist. As a natural outcome, what we see is actually a small tip of a giant iceberg...