Coalition government and/or a left-wing merger in Canada is all the rage at the Globe and Mail, with a Globe and Mail editorial discussing the ramifications of a shift left, Jeffrey Simpson arguing that the whole thing is a stupid idea, and Neil Reynolds talking about the Whigs for no good reason. The arguments on all sides contemplate a merger or coalition of the Liberals and the New Democratic Party, which is the most logical assumption considering that the Greens are nonviable nationally (although I did enjoy discussing the “hypothetical Mango Coalition” that could result from the 2008 election if the red, orange, and green parties joined up).

I’m interested in the effect of a merger, so I’m going to make some assumptions, not all of which are warranted:

• The Bloc Québecois is not party to any coalition. BQ voters will always vote for the BQ. (This is probably the weakest assumption, since the BQ actively campaigns for votes and almost certainly won marginal candidates.)
• The Green Party is not party to any coalition. Green voters will always vote for the Greens. (Again, this is a fairly weak assumption and I might examine the hypothetical Mango Coalition in a later post, but they’re not considered relevant by the editorialists so I’ll ignore them. However, they would have made quite a difference in the model below.)
• Ridings won with a majority by any party remain with that party.
• A riding won with a plurality by a Liberal or NDP candidate would remain with the merged party regardless of the current vote split.
• A riding won with a plurality by a Conservative or BQ candidate needs to be reconsidered. I’ll do so by assuming that 66% of the NDP vote goes to the merged party and the other 34% evaporates (to model voters being displeased by a perceived shift to the middle and staying home). Based on those numbers, the party with a plurality takes the seat.

There were some surprising results. The Liberal-NDP merged party ended up poaching 24 seats in total, including 17 from the Conservatives and 7 from the Bloc Québecois. In total, that puts the parties at:

• Liberal Democrats: 137 seats
• Conservatives: 127 seats
• Bloc Québecois: 41 seats
• Independent: 3 seats

This puts a different spin on the current House. However, we must take into account the Bloc’s behavior. After the 2008 election, there was discussion of a Liberal-NDP-Bloc coalition government. However, it is not in the Bloc’s interest to form a coalition, since the Grits’ position on Québec sovereignty is not compatible with the Bloc’s. As a result, we must consider this a non-coalition government – a majority run by the Grits.

It’s difficult to imagine this situation as being much better for the Grits. Dion would have run a minority government, but as a weak leader he likely would have been forced into an election some time between October 2008 and now. Ignatieff would still have been waiting in the wings to take over the leadership of the party in the ensuing chaos.

A merger is not a panacea.

One of the first books I read with the intent of understanding the quantitative basis for it was Moneyball by Michael Lewis. Regardless of what I write on my résumé, my research interests in mechanism design, industrial organization, and price theory take a back seat to sports economics (as this blog’s faithful readers, if any, know).

For that reason, while I don’t know much about soccer, I had to read Soccernomics. The book is arranged much like Freakonomics, right down to the cover design, and takes on the format of devoting individual chapters to interesting research questions. It differs, however, in that it also devotes chapters to telling stories about game changers as opposed to analyzing data. There are numerous subchapters that follow Moneyball‘s familiar narrative format focusing on a charismatic individual as a lens through which the economics can be viewed. For example, the discussion on Guus Hiddink is a fascinating palate-cleanser that puts the authors’ theory into action rather than relying solely on the data to tell the story.

The data are, however, the backbone of Soccernomics. The authors include descriptions of their statistical techniques at a level appropriate for the non-technical reader without being frustratingly simplistic. One chapter analyzes the data on world power too deeply (yes, there is such a thing!) but comes to interesting conclusions that justify the deep discussion of world-level finishes in multiple sports.

The book tells interesting stories and is clear enough that even I could understand it despite knowing nothing about soccer (although the repeated references to ‘bottle’ still don’t make any sense to me). I would have like a technical appendix of some sort to show some of their regression results more clearly, but as it stands this is an excellent book for the technical or nontechnical reader.

Today, the Times published several letters in response, including one from Stuart Taylor of Los Angeles. Dr. Taylor’s letter, the second on this page, argues that the oversupply of scientists created by open immigration policy has negative effects on the United States because it leads to American scientists facing too-stiff competition for employment. Specifically,

Without stricter immigration policies, the oversupply of Ph.D.’s just gets worse and worse, with the result that in some fields immigrants are being given a large fraction of the jobs. These are science jobs that Americans want, are applying for and are being turned away from.

Wisely, Dr. Taylor does not argue that the large proportion of immigrant scientists has a negative effect on productivity in science. Rather, he argues that “It is harmful to trumpet the rest of the world’s students who are being given our jobs as “America’s Real Dream Team.”” His argument contains the assumption that given the choice between an American scientist and an immigrant scientist, there is some inherent good in favoring the American. He does not explicitly consider the possibility that the large fraction of jobs given to immigrant scientists are given to them because they are better prepared for those jobs than Americans are. Dr. Taylor would do well to consider the effects of his suggested policy of stricter immigration standards on productivity in fields employing PhD scientists. It seems evident to me that since employers are self-interested, they are employing the scientists they expect to be most productive, and as a result, the open supply of scientists from abroad leads to a net positive effect on the science produced in the United States.

Dr. Taylor does, however, mention an item of concern: the oversupply of PhDs in the current job market. This oversupply is generally attributed to one of two causes:

1. Standards for granting a PhD are too lax, and the degree is losing its signaling value;
2. Non-economic concerns lead students to pursue PhDs which are not necessary for their careers, leading to a glut of qualified applicants.

There is essentially no economic solution to situation (2). The solution to (1) would of course have to involve aligning incentives such that fewer PhDs are granted, but such a solution would be unpalatable and would likely have the effect of tightening admissions as well as graduation. As a result, fewer candidates who are not predicted to be highly successful would be given the chance to work toward a doctorate, and since predicting academic success is an imperfect process, it stands to reason that fewer brilliant scientists would be produced.

Instead, the solution to the oversupply of science PhDs is probably one that allows profit to be derived from them. Dr. Taylor should instead be arguing for incentives to run independent research and development labs, in order to put additional resources (i.e., unemployed scientists) to use. These incentives might take the form of tax credits or even more robust outsourcing on the part of major corporations similar to the X Prize model. After all, even a marginal PhD still has rigorous training in research methods and would present a benefit to a development lab.

The Invisible Hook is a fine little pop economics book by University of Chicago Visiting Assistant Professor of Economics Peter Leeson. It follows the format of many other pop econ books, such as The Economic Naturalist, Naked Economics, and More Sex Is Safer Sex in that it asks questions about topics superficially unrelated to economics but analyzes the answers using economics as a lens. Each chapter tackles a different idea, with a title and subtitle of the format “Pirate Pun: The Economics of ______.” Chapter 6, for example, is entitled, “Pressing Pegleg: The Economics of Pirate Conscription.”

From an economic standpoint, Dr. Leeson is quite adept at explaining why seemingly counterintuitive behavior is in fact justified by economic logic. For example, Chapter 7, “Equal Pay For Equal Prey: The Economics of Pirate Tolerance” deals intelligently with the reasons why pirates often treated black shipmates as full equals rather than slaves, as for-profit ships generally would have. Using the standard rational choice framework, Dr. Leeson ably analyzes the possible actions of pirates and determines the differing results. Through the usual assumptions (mostly that people are self-interested utility maximizers), Dr. Leeson paints a picture of pirates as self-interested men who, in the interest of protecting their own ability to earn, stumbled on one of the most efficient systems of political economy available to them.

The book does have its warts, however. One minor irritation is that the chapters all take a keyhole-essay format – they begin with an introduction, then expose and analyze that material, finally concluding with a summary. As a result, Dr. Leeson’s book appears to repeat the same information at least three times in short order; this format is unusual in the pop economics literature and can seem simplistic at times.

Another quibble is not really a quibble at all but a note about intended audience. Dr. Leeson’s book seems intended for the Freakonomics crowd – those who are not trained in economics but who may or may not have taken a Principles course years ago. Though invariably correct, Dr. Leeson’s analysis is at times simplistic and left me wanting him to discuss the underlying material more deeply. A student with a stronger background in economics might do well to investigate the articles in Dr. Leeson’s CV on which the book was based.

The Invisible Hook was fun, and I recommend it, but it will be enjoyed most by people who are not formally trained in economics.

With the usual caveats about sample size (as discussed in the paper), it seems that officials were systematically under-assessed and so carried a lower-than-expected property tax burden.

Why was Ramirez suspended? Because he was using a banned substance, yes, but let’s unpack that. The purpose of the suspension is, presumably, to attempt to align the incentives such that a player who is tempted to use performance-enhancing drugs will find that the expected value of the marginal productivity of the drug use is lower than the expected value of the penalty. To break that down, there’s a probability π that a player who chooses to use banned substances will be detected, and a complementary probability (1-π) that he won’t be detected. As I discussed in an earlier post, we can run a regression and figure out what the values of the various statistics are worth. If the player is rational, he’ll be considering that using steroids will adjust his stats by some positive amount (i.e., that there will be a marginal product of drug use) and that will increase his salary when he next negotiates his contract. It’s also likely that the increased chance to be voted into the Hall of Fame or win a batting title, for example, will provide non-cash utility to the player, which we could also factor into MPdu. With the complementary probability, the player will be caught and will lose 50 games worth of salary (that is, the disincentive is 50*Salary/162, or 25/81 of his salary). Additionally, there will be disutility generated by the fans’ unwillingness to vote for him in the All-Star Game, for example, and the diminished likelihood of making the Hall of Fame.

If π*MPdu > (1-π)*25*Salary/81, then the player will rationally choose to use drugs.

If π*MPdu < (1-π)*25*Salary/81, then the player will rationally choose not to use drugs.

If π*MPdu = (1-π)*25*Salary/81, then the player will be indifferent between using drugs and not using drugs, so either choice makes sense based on the player’s tastes.

There are two main ways to decrease the proportion of players who use drugs – increase the probability of detection through more testing, or increase the disincentive to be caught using drugs by adding a lump-sum fine or increasing the length of the suspension (the 25 in our model) or both. I’m going to presume that 50 games was chosen as the length of the suspension for no good reason other than that it’s a nice big round number, and thus that the multiplier is essentially arbitrary. I’m also going to presume that Manny playing for the Isotopes imposes some positive externality on them and on the Dodgers – that the parent club will get better gate receipts from his appearances and that the players will benefit (probably by learning) from playing with a Major League-caliber player. The players in the Dodgers system will presumably be considered for MLB appearances at some point, and so the Dodgers benefit forM Ramirez‘s coaching function in his appearances at the AAA level.

(As a side note, a lump-sum fine would be a fine example of a Pigouvian Tax.)

It hardly seems fair that the Dodgers should benefit froM Ramirez‘s drug use. How do we solve this problem?

Auction Manny.

When a Major League player is suspended for drug use, allow him to make his 10 rehab starts. However, don’t automatically grant the right to assign him to the AAA club to the team he plays for. Instead, allow the clubs to bid on the right to have him do his rehab starts for their AAA team. Thus, Manny generates an externality on, say, the Buffalo Bisons (and therefore the Mets); however, the Mets have to pay an amount back to MLB that is, by the definition of an auction, more than anyone else was willing to pay.

A rational team will bid almost as much as they expect the player to generate in ticket sales and general utility, so the system is self-correcting with respect to the fame and ability of the player. However, MLB seems to benefit here. We can’t really allow that under a fair system, so I propose that the winning team’s bid be allocated to some combination of baseball development and drug education. Thus, every detected player loses $SuspensionMultiplier*Salary/162 in salary, some arbitrary club is granted the opportunity to profit from a shrewd bid but is unlikely to do so, and some combination of kids and drug education programs benefit about the amount that the arbitrary club feels Manny is worth to them as a AAA player.

Minor-league rehab
should not benefit users;
auction Manny off.

I haven’t had time to run the numbers, but I’m a bit dissatisfied with the Misery Index in this case. The most obvious issue is that while inflation is a bad thing, so is deflation; however, under the Index, a high deflation rate is seen to mitigate high unemployment. The second is that steady, targeted inflation is a sign that the economy is growing smoothly and under control.

Again, without crunching the numbers, I can’t say anything specific, but it seems to me that a formula with nicer properties might measure either the absolute rate of change from one period to the next (capturing volatility fairly cleanly) or, for the less mathematically inclined, the absolute value of the change. The problem of measuring a rate of change is that you’d need to correct for unemployment as well; measuring rates of change also leaves you sensitive to different lengths of time being measured, whereas the misery index as it stands can be seen as a snapshot.

So, a compromise: set a benchmark – perhaps 3% for inflation and 5% for unemployment, since those are numbers that are bandied about as “targets.” Snapshot the measure by measuring the absolute value of the rate minus the benchmark figure.

Misery Index
Accurate, but hamfisted
Plausible? Who knows?

[I]t is clear that a large part of the world either derives disutility from the seal hunt, derives utility from decrying the seal hunt, or some convex combination thereof. If it the former, there is a possibility for a Coasian bargain, i.e. the rest of the world pays off Atlantic Canada to stop the hunt/transport the seals somewhere else. If the latter dominates, then it is optimal for the hunt to continue.

A Coasian bargain is an application of the Coase Theorem, which in this case basically says that if the seal hunt imposes externalities on the rest of the world, then the rest of the world can pay Atlantic Canada some amount a) greater than or equal to the economic benefit derived from the seal hunt, and b) less than or equal to the economic cost generated by the seal hunt.

The Coase Theorem is applied commonly in tort law, where the cost of the tort is allocated to the party most able to bear it, and the parties are expected to negotiate out a more efficient allocation themselves (with failed negotiations penalizing the more-able party). The idea is that if the court’s allocation is inefficient, the parties are in the best position to make it optimal.

That said, neither of us is aware of any situation in which a Coase bargain has been attempted in a similar situation.

Barry Bonds is, without a doubt, one of the most controversial figures in baseball. He’s currently trying, again, what he tried last year – shopping himself around for the league’s minimum salary. (Thanks to the Sports Law Blog for the link.) Inside, I’d like to briefly discuss collusion and look at the incentives involved with this situation.

Collusion in the economic sense involves an agreement to act inefficiently. To give an oversimplified stock example, suppose a competitive market for chili peppers. That is, there are many people growing chili peppers and many people who want to buy chili peppers. Each bushel of peppers costs about $1 to produce and process from seed to sale. The market is big enough that no one producer or consumer can affect the overall price of the peppers. If one person raises his prices, the others can easily undercut him, and if he wants to sell his peppers he’ll have to meet them. As a result, the sale price approaches the (marginal) cost of production ($1).

Now suppose that only one person grows chilies. They still cost $1 to produce, but the chili monopolist can maximize his profits however he chooses. (The standard assumption is that he’ll set the price equal to marginal revenue, not marginal cost.) If I had made up a demand function and were in the mood to do calculus, I could figure out exactly how many bushels he would produce, what their price would be, and how many fewer bushels that would be than the perfectly competitive market would yield, but the important thing is that monopolies derive more profit than competitive firms, at a cost to the consumer. (Let’s leave aside the idea of a natural monopoly, where high production costs make it more efficient for only one firm to produce.)

So, what’s collusion? Simply, it’s an agreement by two or more firms to act like a monopoly and split the much higher monopoly profits. This is good for the firms and (generally) bad for the consumers because there’s a loss of welfare – some people want the product but at the higher monopoly price they can’t afford it and the monopoly produces fewer goods than the competitive market.

And what does this have to do with Bonds? Consider that Bonds is a producer of runs, and production can be roughly measured by the OPS stat. (There are other methods, but I’ll follow SI’s lead.) Assume that there’s a positive relation between previous OPS and salary (that is, that when negotiating contracts you can put OPS into a formula and that formula will spit out a salary, and that most salaries more or less line up with it), and that Bonds would play either right field or DH, so defense wouldn’t impose an additional cost. A rational team, when offered Bonds’ OPS number for a significantly smaller salary than it would otherwise have to shell out for the same number, should sign Bonds for $400,000. It would be fairly easy to make the leap from this statement of rational behavior to declaring that the teams are behaving irrationally and therefore must be colluding.

SI make a good counterpoint – in economic terms, Bonds’ clubhouse demeanor and notoriety would cause high amounts of negative utility in terms of unhappy and distracted teammates in the first case and customers unwilling to buy tickets to see Bonds in the second. Both of these can affect the profit of the firms and would have to be accounted for in any analysis of the value the team can expect to derive from Bonds. Suppose the most extreme case – that all fans are so disgusted by Bonds that they refuse to attend games he plays in, and that his teammates are so distracted by his attitude that they produce zero runs. In that case Bonds will still be a high producer, but he would still have a decidedly negative effect on profit and on his team’s record.

SI also makes two suggestions I don’t agree with – that Bonds’ felony charges might provide a disincentive in that the team has a high probability of losing him, and that Bonds’ age makes him unattractive. The first assertion ignores the fact that Bonds will still probably produce more than $400,000 worth of runs in a partial season, so in a strict runs-to-salary relation he still represents a net profit. The second doesn’t take into account that at age 42 in 2007 Bonds was worth $15.5 million dollars and that he would have to have declined at an almost impossibly high rate to fail to produce $400,000 worth of runs. Bonds will be out of shape and fragile, but the comparison need not be Bonds now to Bonds in 2007. I’d much rather have an out-of-shape and fragile Barry Bonds as my designated hitter than a $400,000 wet-behind-the-ears rookie. Hell, considering how fragile David Ortiz is, I’d rather take Bonds at $400,000 than Ortiz at his market salary. (The Red Sox could spend the difference on a new fifth starter now that Curt Schilling retired.)

Collusion thus doesn’t make much sense to me in this case, since the incentive to break collusion would be so strong. Stable collusion requires some method for the colluders to punish a fellow colluder who cheats. In a market this would be by simply returning to competitive prices, depriving the undercutter of his excess profits. Here, unless Selig is directly involved (unlikely), there’s no way for the teams to punish anyone for signing Bonds. (Yes, I suppose they could start plunking the batters every time, but that’s not sustainable.) The alternative explanation that makes the most sense to me is the disutility argument – that production and ticket sales will suffer for any team that employs Bonds. If, however, the SI article is correct in its idle suggestion that Bud Selig has ordered teams not to sign Bonds, Selig should be ashamed of himself.

Inexpensive runs
will not placate angry fans.
“Cheap offense” indeed.

In addition, I am a twin. Why this is relevant will become clear behind the cut.

The models we studied in class were interesting, of course, but what I really wanted to write in was “This is just make-work bias.” (Make-work bias is a generalized case of the Parable of the Broken Window.) The application of Keynesian public-work theory – that the Obama plan creates jobs to weather the recession, and when the project is done, you have a public good – ignores the question of whether the resources utilized to create the public work are being used as efficiently as they can be.

Imagine how amused I was to read Bryan Caplan’s article, Separating Twins as Economic Illiteracy, which looks at putting twins in different classrooms through the lens of make-work bias. As a twin myself, I was subject to the rule of thumb Caplan discusses. My brother and I were in a small school for kindergarten and first grade, so since there was only one class for each grade, we were stuck together. In second grade we changed schools and were separated; we spent half of third grade separate, half together, and then we were entirely separate until we began class-mixing in seventh grade. Talk about your natural experiments.

Applying the efficiency criticism to Caplan’s twin hypothetical, separation arguments based on encouraging twins to make new friends ignore the benefits of the twins’ relationship. The analogy of the new friends to the public works project is clear – they are facially positives, but they may not be the optimal product of the available resources, and isn’t optimization the goal?