Urban Field Research

This is the age of field experiments but too few of these experiments take place in cities.  Yes, I know about MTO and I'm glad it increased happiness and reduced  stress levels for those in the treatment group but that is only the tip of the iceberg.  Yes, energy economists are randomizing incentives to nudge households to change their electricity demand patterns but that isn't an "urban economics" field experiment.

1.  I want to see researchers randomizing the cash amount given to people for housing vouchers to see how households tradeoff neighborhood quality for the size of the housing unit.

2.  I want to see researchers randomize admissions letters among the waitlist to elite public schools to see how far households are willing to ship their kid on a bus to go to a good school (or whether they move to be closer to the school they have been assigned to).

3.  I want to see researchers take random pollution readings and report these pollution levels to households to test whether such information changes self protection investments by at risk families.

4.  I want to see public transit systems that have metro card systems run a pricing experiment where they announce a week ahead what the price of public transit will be the next week and then randomize the price that will be charged.  This will yield a short run demand curve that can be compared to contingent valuation hypothetical estimates.

Since I don't know of anyone actually running these experiments, I will have to do my own field work. Over the next couple of weeks, I will be in Barcelona, New York City and Boston.   For those folks who know something about Barcelona, please email me what excitement there is in this town that a staid 46 year old might enjoy.

  

Water Consumption Reduction as LA Homes Install Artificial Turf and Ditch Grass

This report claims that Californians who live in new homes use 57% of their water outside.  If we now face a drought, wouldn't basic supply and demand suggest that we consider adaptation strategies to reduce our demand?   In this picture below, I present a Westwood home with no "real grass".  This home has ripped out the grass and installed what appears to be a miniature golf astro turf substance.  They must be saving water by doing so.  Yes, this is tacky but this is climate change adaptation and I like it.

Why haven't their neighbors imitated them?  LADWP charges too low a price for water.   This wonderful utility can't keep the lights on in my neighborhood and I see bursting water pipes all around wasting water.  Does LADWP have any Ph.D. economists on payroll?   If "yes", please get in touch with me and I will pay you $5 for corresponding with me by email.   

Many non-economists implicitly assume that all demand curves are perfectly inelastic. In English this means, that consumers do not change their behavior as the price goes up.   It is time that we tested "the law of demand".   Give the price system a chance, and we will enjoy a smooth adaptation path to handling climate change in the Southwest.  

T-Mobile Teaches Me a Lesson in Behavioral Economics

I have learned about the power of inertia the hard way.  I often travel abroad so when I travel to exotic places I call up my cell phone carrier (T-Mobile) to place me on the international rate category.  I always tell them the dates when I'm leaving the USA and returning home.  I had assumed that my cell phone company would start my international rate when I leave and end it when I return.  This assumption turns out to be false. T-Mobile earns more $ from me (roughly $20 a month) when I'm on the international rate and once I was on it, this company was happy to keep me on that rate.  I had falsely assumed that this company switches me off the plan when I return to the U.S (and they know the date I return and I'm 99% sure I told them to stop the plan when I returned).  I pay my bill using direct pay but in the monthly statement, I saw that my monthly bill was roughly $20 more than what I expect but until I called T-Mobile I didn't connect the dots concerning my being billed for the International deal when I was in the USA.

So, the interesting point here isn't that I'm a sucker.  The more interesting point is that there is a synergy between "direct pay" and the "opt out".   Since I wasn't writing a check each month, I didn't give much thought to really itemizing my cell phone bill and my International Plan was an explicit  "opt out".  How much windfall profit does T-Mobile earn from such hustles?   What other examples exist of this being billed for services we don't need in a user friendly way that doesn't draw explicit attention to it?

I am a victim.  Will Elizabeth Warren protect me?

The Start of the New Academic Year at UCLA

UCLA is now filled with young, physically fit enthusiastic students walking (and jogging) around the campus.   As a not-young, not fit, cynical professor, I'm wondering who has the right attitude?   I'm now wondering whether the students are right and I am wrong.  With that thought in mind,  I am trying to change my game.   I plan to be kinder to people, to show up to some meetings and to try to do my job.  I have hired some talented undergrads to work for me as research assistants and I'm hopeful that they will nudge my work forward.  In the classroom, I will teach 4 classes this year and my goal is to make each of my lectures real good and memorable.

I'm now optimistic about UCLA's trajectory.  The School has made some very strong faculty hires in economics, public policy, urban planning, the Law School, and the Business School.  I would like to see more hiring at the senior faculty level but we need our endowment to grow to achieve this goal and I can't control that.   We are told that our leaders are effectively raising private $ and I will give them the benefit of the doubt.

UPDATE:  Read this obituary for BU's President John Silber .   He's my kind of University Leader.

Vegan Dinning and Green Social Networks

We know that the pursuit of "green social status" has helped the sales of the Prius and solar panels but now the New York Times reports about vegan dining in Los Angeles and the role that celebrities play in making it hip and thus creating a bandwagon effect.

A Quote:

"The same goes for explicitly vegan or vegetarian restaurants like Café Gratitude, Elf Cafe,Real Food Daily and SunCafe, which is chronically full of luminous-skinned sylphs who seem to have floated in from a Fashion Week catwalk.

“The popularity thing took a turn mostly when a lot of celebrities started showing up,” said Cary Mosier, who runs the Café Gratitude outposts in Southern California with his brother, Ryland Engelhart. “Generally, celebrities are always concerned about eating well and taking care of themselves, so it started becoming flooded with actors. And then it was all the movie executives because the actors were there. And then they were having lunches there to discuss movies.”

Why Does the IPCC Ignore the Environmental Economists?

Have you read this new 594 page report by the IPCC?  This volunteer crew writes updated reports about what we know and don't know about climate change's causes and consequences.   The media such as the New York Times pay careful attention to what these reports say.  This crew has even won a Nobel Peace Prize! For those of you who are too lazy to read a 594 single spaced report, here is the executive summary.

The 594 page report cites roughly 4,000 papers but by my crude calculation only 5 of them were published by economists in economics journals.   Yes, my 2005 RESTAT paper is cited on page 282 but that doesn't make me feel any better.   Are you telling me that 20 years of economics research has created less than (5/4000) = .12% of the literature on this subject?

There appears to be a strange bias going on here.  Is it politically motivated?  Take a look at this roster of environmental economists at NBER.  Roughly 25% of this group have worked on topics that are relevant to the issues of risk exposure and self protection and political economy discussed throughout the IPCC report.

Take a look at the U.S authors associated with this IPCC report. They are listed on page 552.  Howard Kunreuther of Wharton is the only economist that I have heard of on this list.  For the rest of the hundreds of authors listed, does this group think highly of economists?  The answer appears to be "no" based on their citation trail.   Why?  Is it our belief that people respond to incentives and form expectations of the future to pursue their own goals?  Is it our fondness for free markets and our focus on measuring the unintended consequences of government policy?

UPDATE:  I suggest that there are at least 40 papers published in the Journal of Risk and Uncertainty alone that would merit citation in the IPCC Report.

Does the Fear of Recession Nudge Politicians to Embrace Efficiency?

As China and India seek to keep their recent economic growth rolling will their political leaders embrace pro-growth policies such as allowing foreign direct investment in India and in the case of China shrinking subsidies for State Owned Enterprises?    Hsieh and Klenow document  large total factor productivity differentials across manufacturing plants in China.  Here is a direct quote from their paper:


"For example, imagine an economy with two firms that have identical
technologies but in which the firm with political connections benefits from subsidized
credit (say from a state-owned bank) and the other firm (without political connections)
can only borrow at high interest rates from informal financial markets.  Assuming that
both firms equate the marginal product of capital with the interest rate, the marginal
product of capital of the firm with access to subsidized credit will be lower than the
marginal product of capital of the firm that only has access to informal financial markets.
This is a clear case of capital misallocation: aggregate output would be higher if capital
was reallocated from the firm with a low marginal product of capital to the firm with a
high marginal product of capital.  The misallocation of capital results in low aggregate
output per worker and TFP."

Note that this is a static example where the two firms have identical technologies.  In the "real world", when firms face competition they make costly investments to increase their efficiency.  Consider an extension of the Hsieh and Klenow discussion above in which "connected firms" do not bother to make such efficiency investments because they know that their connections to government provides easy access to special treatment.  In this case, the non-connected firms may give up and not make sunk investments to achieve efficiency because they know that they can't compete with the connected firms.  In such a setting, industries will under-invest in innovation a dynamic effect and in then in each round of this game; capital will be misallocated for the reasons that are discussed above.  The net effect is bad macro performance.

To return to the title of this blog, during boom times the State can claim that all is fine and the favoritism isn't costly (and they may deny that it is even taking place).  During bad times, such inefficiency becomes costly and may prolong the recession itself. In this sense, the fear of recession can act to purge inefficient policies that simply redistribute to connected firms.

Naming Names in California Carbon Cap & Trade

Have you seen this list that names names of which companies will have to participate in California's nascent carbon cap and trade market?  I don't see my name mentioned but I still plan to buy some permits.  I hold a diversified portfolio.

A young structural microeconomist might want to ask the following question; for each of the companies listed above how will they respond to the new regulation?  Will they simply pay the market price of the permits?  Will they innovate?  Will they run to Texas?  In a diverse world where firms differ with respect to their ability to reduce their emissions,how costly is regulation?  Will new green consultant jobs appear because these firms will now seek to increase their energy efficiency and will team hire engineers and economists to work together to get rid of the waste?  Could the Porter Hypothesis turn out to be true?   Or do you believe that California has gone nuts as it embraces "Free market environmentalism"?

I'm excited about this experiment and this one of the reasons I continue to live in California.  When the excitement ends, we will move to China.   That's a nation where the students study hard and I like that.

The Economics of University Hospitals

UCLA is about to learn an economics lesson in revenue generation at research hospitals .  The LA Times reports that UCLA's and Cedar-Sinai are being cut out of public health insurance plans in the City of LA

"Anthem Blue Cross has eliminated doctors affiliated with the hospitals from a health plan offered to about 60,000 employees and dependents at the cash-strapped city of Los Angeles.

The city opted for Anthem's plan because it will save $7.6 million in annual premiums next year by excluding physicians from the two institutions known for tending to the Southland's rich and famous."

The article claims that UCLA doctors charge the insurance company almost double what the same patients would be charged at non-research and training hospitals.  This is the tip of the iceberg.

For years, major urban hospitals have been allow to cross-subsidize their teaching and research missing using big bills to insurance companies.  A nasty haircut is now unfolding as insurance companies face pressure to not raise premiums (think of Obama jawboning) and profit maximizing insurance companies will now play hard ball with the costly providers of health care to either lower their cost or face being dropped in the roster of covered doctors.  If UCLA has signed long term contracts with doctors guaranteeing their salary but these guys are no longer covering their salary by treating patients (because the reimburse rates are down or they have open slots as insurance companies drop UCLA) then UCLA is losing $ on its star doctors.  That wouldn't be good!   If UCLA has short term contracts with doctors, then these doctors will suffer a sharp pay cut and the stars will leave to private universities who can guarantee their pay.

So, urban hospitals such as UCLA face a fundamental revenue issue.  Private insurance reimbursement is going to fall sharply.  Such insurers will stop covering "fancy procedures" that are quite costly and use cutting edge technology.  The National Institute of Health's budget will fall sharply in 2013 and this means less grant $ and overhead money for the Medical School.  As the research hospital's costs rise and its revenue falls sharply, how will they keep going?  Can private philanthropy really fill this void?   

Perhaps the leaders believe that patents on drugs and IP can provide a flow of $ to the University. I hope that is true but this is a risky path with 99 failures for every success story.

The rest of the University could be affected by the economic decisions made by UCLA Hospital because their budget is 50% of the University's budget.  Thus, I hope that the leaders of South Campus consult with the economists and management experts at Anderson before making any major decisions.    As usual, I am willing to offer free consulting.  I have a logical mind and I can often see the future.

California High Speed Rail from Fresno to Merced!

Can a bullet train through farm country help to reinvent California?  Will the owners of the land near the bullet train stations become rich?  Will Southwest's stock price plummet as guys like me substitute from plane to train to go from LA to Northern California?  I realize that every journey starts with a first step but these first 65 miles are expensive.  All those who support this train should be required to ride it enough trips so that the average cost per mile of use per passenger is less than that of a new Mercedes.

So, suppose this train costs $100 billion dollars.

Suppose that 5 million people ride it a year and the train lives for 20 years.    Suppose that the average ride is 150 miles.   Assuming the interest rate is 0% and there is no maintenance investment for these trains then the average cost per passenger mile over the life of this train  =  100 billion/(100 million*150) =  1000/150 = 6.66.

Suppose that you buy a $100,000 Mercedes and you alone drive it 100,000 miles.  You must buy gas at $4 a gallon and if the vehicle achieves 25 MPG then you will need $16,000 in gas.   The average cost per passenger mile = 1.16 = 116000/100000.    

So the Bullet train's cost is 6.66 times higher than the Mercedes.  Think about it!

This is the challenge that the train faces.  For my loyal readers, what do you predict will be the ridership per year?   There are 365 days in a year.   Do you believe that more than 13,900 people will ride it a day?  

General Electric's Natural Experiment: The Demand for Health Care is Pretty Elastic

The WSJ reports that  General Electric just ran an experiment in which it sharply increased the medical deductible that its workers have to pay for health care.  Here is the key quote; "In the first two years after the plan went into effect, use of advanced imaging including MRIs and CT scans has dropped by as much as a quarter, as covered employees' overall use of health services fell, according to the company."

The CEO of General Electric could publish this in the QJE?   

The article goes on to say that GE as a company has a problem because as other private companies raise their medical deductibles demand for MRI and CT Scans will decline.  GE sells these devices and thus will suffer a profit loss from the aggregate change in demand for its high tech services.  

So, this article has two pieces of interesting economics.  1. Demand curves do slope down!  2.  Health expenditure is a cost for some firms and represents revenue for other firms so changes in health care demand due to shifting incentives will have wide reaching effects on major companies.  This is general equilibrium at work!  

Rising Demand for Redistribution in California

Here is a recent Press Release from UCLA.  I bought my house from the main person quoted in the article so I was interested in what he has to say (he doesn't mention his old house).   Here is the key point;

"Nearly half of California voters aged 40 and older say they will need long-term care for a close family member within the next five years, yet just as many say they couldn't afford even a single month of nursing home care, according to a new poll from The SCAN Foundation and the UCLA Center for Health Policy Research.  The poll, now in its third year, shows that Californians — regardless of their political party or income level — are struggling in the weak economy to save money for future long-term care expenses. One month of nursing home care in California costs an average of $6,800."

Here is one of my favorite economics papers on financing long term health care.  

So, middle aged people in California recognize that they will need to provide long term care for a family member but they can't afford to pay even a single month of the bill.  What happens next?  Will an angel such as Warren Buffet provide this for the people of California?  I don't think so.

There are some possible solutions;

1. We can open up the borders and allow more workers to move to California to work at low wage in the long term care industry.

2.  We can jaw bone the nursing home care business to lower their prices and perhaps take losses.  

3. We can allow more entry into this industry and perhaps allow some unregulated firms to enter.

4. Government can intervene and offer "long term care" vouchers to households who need this service and then allow these households to shop around for a good deal.

#4 would add up to billions of $ of new expenditure obligations for government.  What taxes should be raised to pay for this?

It is interesting that the desire for more government in our lives is a growth industry!

1043 Economics Journals to Choose From

Product differentiation and variety is a hallmark of modern capitalism.  In academic economics, did you know that we have 1043 journals to choose from?  Here is the rankings list.  I haven't heard of 964 of these journals but still I celebrate our degree of choice.   I wanted to see a list of all the journals because my wife and I have a funky new paper. It is a major revision of an old paper that was rejected on a second round at a very good journal because I made some mistakes in how I wrote the paper.  I've learned my lesson and I've streamlined the paper down to just a couple of tables.

The paper uses unique micro data to document that political liberal home owners consume less electricity than observationally identical political conservatives.  This liberal/conservative differential is the largest during the summer months.   We document that this liberal/conservative differential shrinks when we control for the home owner's size of home, whether the home owner has a pool, the number of people in the household.  Liberals and conservatives live their lives in different ways.  Note that this isn't flashy Prius ownership.  In this case, it is consumption of a privately observable commodity for which your neighbors do not observe.   

How Does Money Help a City Adapt to Climate Change?

Here is a relatively simple short term solution for how an older city can handle intense rain without having its sewer system overflow onto the streets or having to inject raw untreated sewage into the local rivers.   It costs $ but not that much money.  As I understand it, these inflatable devices create dams within the sewer system and can hold smelly water until the water treatment system can treat the flow of waste water.    

This is an example of how new ideas help an old city adapt to new climate challenges.  This is our future.  

Vanity Plates

Which economists have a vanity license plate?   Dr. Krugman might go with "Go Keynes" while John Taylor might choose "No QE3".  I doubt either of those plates have been taken.   As I walked in Westwood today, I passed the usual number of Mercedes but this vanity plate caught my eye.

Does anybody else see a PG-13 comment here?  A few years ago, I had access to a California data set at the vehicle level. I knew each vehicle's emissions, its attributes such as make, model year, mileage and I knew the license plate. I thought about exploring whether those who have a vanity plate have a different emissions profile but I couldn't convince myself that this was very interesting.

My thought was that choosing a vanity plate reveals something about your personality and that certain types of people may be prone more to minimize pollution externalities because they are a "do gooder".  

Was this Bernanke's QE3?

Armed robbers in LA drove through the streets with bags of cash and engaged in an urban "helicopter $ drop".  To elude the police, they threw cash out the windows and this attracted people to run into streets and   helped the bad guys with their escape.  Was Dr. Bernanke the real Mastermind here?

Iron Man

Permit me to contrast my day today and my father's.  At 230am this morning, my 73 year old father received a phone call that a patient of his needed his medical care.  He dressed and went to the hospital to treat her and remained at NYU hospital until 830pm tonight.  That's a 18 hour day.  That's my Iron Man.  

Contrast that with my day.  I woke up at 630am and walked my son to school at 745am.  I made a couple of phone calls to co-authors and worked a bit on a paper.  I had lunch with my colleagues and took it easy in the afternoon. I believe that I worked 3 hours today.   I'm now listening to Soundgarden and typing this nonsense.  Is America growing stronger or weaker?  What are we maximizing?

Gains to Trade and International Migration

Russia has land but lacks agricultural human capital.  China is land scarce but has productive farmers.  The NY Times reports about the gains to trade as some Chinese rural households move to Russia during the farming season.   This is a prime example of how migration works to increase economic efficiency.  Over the next few decades we will see more of such migration taking place across Asian nations.  

GMO Hybrid Corn as Climate Change Adaptation Strategy

In today's WSJ, R. Paul Thompson makes the case for new drought-resistant hybrid corn produced by Monsanto. He argues that such GMO crops will allow us to grow corn even when Mother Nature doesn't provide much rain.  Note the following "rational expectations logic" in his article;

"Rising world-wide affluence, particularly in countries such as China and India, will place ever greater demands on food production and, in turn, on water resources. These increases will amplify agriculture's negative impact on the environment.

Better to act now to blunt those effects by learning how to produce food using less water, fewer pesticides, herbicides and synthetic fertilizers. Drought-resistant crops may become a vital tool in achieving those aims."

This is how adaptation to climate change will take place. With millions of small investment decisions similar to this one.  No world leader, Putin?,  will shield you from risk.  Instead, self interested companies and individuals pursuing their own self interest will make such investments and a safer world will emerge.   Given that we are not reducing our GHG emissions, what is your "back up" plan?

The Causal Effects of Movies on Our Opinions: Evidence from "Jaws"

In the 1970s, Spielberg achieved fame with his movie "Jaws".  Today, the NY Times reports the obituary for Ron Taylor.  Mr. Taylor filmed the shark scenes for "Jaws".  Mr. Taylor worried that these scenes had a permanent effect on audiences as they now feared sharks and worried that sharks would eat them.  

Shleifer's Comments on Acemoglu's Institutions Research

Two of the most talented and hard working economists I can think of are engaged in an important debate.  Andrei Shleifer's comments are posted here.  He is responding to this presentation  by Daron Acemoglu.  The profession (and world knowledge) benefits when Clark Medalists have a direct debate about key ideas.

Africa's Farmers Adapt to Climate Change

How nimble are small farmers in adapting to new climate conditions?  This article about Africa's farmers suggests some optimism.  As basic microeconomics would predict as such farmers anticipate that climate conditions are changing and that they face more risk of temperature extremes and rainfall extremes (both drought and flood risk), they are responding by;

1.  growing a more diversified set of crops (i.e similar to asset diversification the farmers are growing some crops that boom if rainfall is strong while others that can still be grown even if there is low rainfall).
2.  Using futures contracts that allow them to hedge risk
3.  Using information technology to provide real time updates about the challenges they face

The economic question here is;  "given that more farmers are taking these adaptation steps, are their real incomes as farmers rising?  Or even though they are taking these steps, their farming incomes are declining?" For those farmers who are suffering income losses, they can move to the cities.   Migration to Africa's cities offers challenges and opportunities. For those looking for an even handed report on Africa's recent progress, take a look at this.

How far can self protection go to allow individuals to protect themselves against new shocks?  When we refuse to collectively work together (i.e pass a global carbon mitigation treaty), what happens next? Can rugged self interested individuals take care of themselves as they trade through free markets?

Rational Planning for Economists

I just read about the location of the AEA Winter Meetings through the year 2020.

SCHEDULE OF FUTURE MEETINGS:

January, 3-5, 2014 (Friday, Saturday, & Sunday)
Philadelphia, PA - Philadelphia Marriott

January, 3-5, 2015 (Saturday, Sunday & Monday)
Boston, MA - Sheraton Boston

January 3-5, 2016 (Sunday, Monday & Tuesday)
San Francisco, CA - Hilton San Francisco

January 6-8, 2017 (Friday, Saturday, & Sunday)
Chicago, IL - Hyatt Regency Chicago

January 5-7, 2018 (Friday, Saturday, & Sunday)
Atlanta, GA - Atlanta Marriott Marquis

January 4-6, 2019 (Friday, Saturday, & Sunday)
Philadelphia, PA - Philadelphia Marriott

January 3-5, 2020 (Friday, Saturday, & Sunday)
San Diego, CA - San Diego Marriott Marquis & Marina

I will attend the 2013 meeting in San Diego, the 2016, 2017 and 2020 meetings and skip the others.

The Fine Line

Blogs have blurred the line for when Ph.D. economists are being "scientific" versus when they are merely firing off a personal "opinion" (i.e Romney is right or Obama will deliver 4% growth).  In blog entries, there are no footnotes.  Nobody is "two handed". Nuance vanishes and this creates a negative externality for the profession as a whole as prominent economists leverage their stationary and their past reputation to make bold claims that offer great soundbites but may not be true.  This worries me because such claims reflect on the whole profession.

Here is a smart quote I found in the comments in the Chronicle of Higher Education.

"We seem to be having the same conversation in different threads, so I'll stop repeating myself after this. Whether some "economists" choose to stay within the boundaries of their professional expertise in other roles, e.g., columnist, pundit, mercenary witness, etc., is an independent issue from whether economics is a science. Are we critiquing the discipline, or the actions of a subset of members of the discipline? (You should also ask yourself whether the subset of "'economists' that I read" is a representative sample of economists in general.)

Krugman is a great example of this. I imagine that his column is popular and well-received because he is leveraging his professional reputation to peddle his ideologically liberal views. The fact that the same data can lead to different interpretations does not (necessarily) make the process that analyzed the data less scientific."

The NBER and NIH and NSF are asking researchers to be upfront about their financial conflicts of interest.  Should there be an analogous ideological conflict of interest form where each researcher declares all of his ties to stakeholders?  Perhaps these are self evident but how do we put all of our cards on the table?  Does anyone care at this point or have Internet readers concluded that nobody is impartial?

  

Statistical Discrimination Enabled by New Technology: The Case of NYC Taxis

There is a new smart phone app that allows you to prearrange taxi rides with taxis.   In Los Angeles,  you can't flag down a cab on the street so I just call in to arrange a ride.   In NYC, it will be a game changer if you can prearrange your ride.  The taxi rider wants to minimize the wait time and the uncertainty about this wait time.

In a statistical sense (i.e per 1000 rides arranged using  this app rather than picking 1,000 people off of the street at random), the taxi driver gains several benefits from using the app;

1.  Richer people are more likely to use the app so the driver will collect a larger tip.
2. The richer rider who uses the app is more likely to be left off in a prime part of Manhattan where the cab driver can quickly find another fare paying customer.
3. The app user is less likely to mug the cabby or try to avoid paying the fee.

So, this app allows for  "beneficial" statistical discrimination at work!

An Earthquake in Beverly Hills and Drought in India

I woke up at 325am this morning because my house was shaking.  I said to my wife; "earthquake" and she told me that she had already figured that out.   Later this morning, I learned that the epi-center of the quake was in Beverly Hills. It immediately crossed my mind that the Subway to the Sea must have caused this event.  What else could rock Beverly Hills?

Switching subjects, the NY Times reminds us that farmers are suffering from too little rain in India.  As usual, the article doesn't bother to discuss water pricing and wasted water in India but more serious scholars have pointed out the major inefficiencies that exist with regards to India's water markets.  In Climatopolis, I argue that a silver lining of climate change is that nations all over the world will more efficiently allocate scarce resources because the cost of keeping silly inefficient policies will rise.   Allowing for more free markets is a major adaptation strategy but the environmental reporters who work for the Times have forgotten their micro economics.

Facebook's Stock Price Dynamics and the Finance CAPM Model

Now that I'm a Professor at the Anderson School of Management at UCLA, it is time for me to do some academic finance.  Rather than publish my empirical work in the Journal of Finance, I will publish it right here.  The submission fee is lower and the probability of publication is higher and the time to publication is shorter.   Does Google Scholar count cites to blog posts?

Facebook has traded for 73 days.  This is roughly enough days to allow us to do some daily econometrics.  The question that interests me is "what is Facebook's Beta?"  How does its daily stock price return correlate with the daily return on the SP500?  The answer is that the correlation is zero!  


reg   dfbook dsp500

      Source |       SS       df       MS              Number of obs =      73
---
------------------------------------------------------------------------------
      dfbook |      Coef.   Std. Err.      t    P>|t|     [95% Conf. Interval]
-------------+----------------------------------------------------------------
      dsp500 |   .0945637   .5145525     0.18   0.855    -.9314249    1.120552
       _cons |   -.009508   .0047872    -1.99   0.051    -.0190534    .0000373
------------------------------------------------------------------------------



I then include the daily return for Facebook's little friend Zynga as an additional explanatory variable.



reg dfbook dsp500 dz   ,  N = 73,  R2= .20


dfbook       Coef. Std. Err.    

dsp500    .1909244 .4645074  
dz            .3058899 .0734589  
_cons     -.0063281 .0043832  

Note the efficient markets hypothesis at work,  Zynga and Facebook have a correlation of daily returns of .44.   The market believes that a lot of Facebook's profitability is determined by Zynga.  To my surprise the correlation of the trading volume is higher between Facebook and the SP500 than between Facebook and Zynga



corr z_vol f_vol sp_vol
(obs=74)

             |    z_vol    f_vol   sp_vol
-------------+---------------------------
       z_vol |   1.0000
       f_vol |   0.1928   1.0000
      sp_vol |   0.3514   0.2665   1.0000

Should I give up my day job and become a pure finance guy?  Would this blog be more interesting if I pursue this strategy?

Yearning for the "Good Old Days"?

Tomorrow, the NY Times will publish my letter to the editor in this debate about progress and perfect competition.  They edited me down sharply but the core issue here is whether "monopoly capitalism" offered benefits as "fat cat" firms could over-pay workers and provide public goods for their local communities?  In this new age of international perfect competition, firms no longer have this luxury of being "nice".  This is a spin on Gary Becker's the economics of discrimination.    In his work, the discriminator sacrificed profit in order to engage in his taste for being mean to a given group. In this case, the firm sacrifices profit to give away either to workers or to the town.  As Becker argued, competition chips away at one's ability to engage in such activity.

To repeat my point again;  "A key dynamic implication of the Becker model of discrimination (1957) is that increased product market competition will drive out costly discrimination in the long run."

My point is that international competition has driven out "reverse discrimination" in the short run!

Journey to the Center of Los Angeles: The Sequel

With my wife and son out of town,  I left the comforts of Westwood and journeyed to USC yesterday.  The trip was well worth it.  Since I don't drive, I enriched two taxi drivers and helped to stimulate our stagnant economy.  Professor Siqi Zheng and I went to USC to listen to a seminar by Joe Tracy.   He presented a new paper documenting that households with negative equity (debt - current home price < 0) are significantly less geographically mobile.

Professor Zheng and I spent the afternoon at USC sitting outside in the shade and revising a submission for the Journal of Economic Literature.  We made great progress and I give their pretty campus the credit.   We then joined the dinner group at the Kitchen Table's Rooftop Dining Room  .  I'm not used to eating dinner outside in the middle of the center city.   The food was quite good.  The funny thing about the menu is that the chef doesn't tell you what stuff is; there are broad choices;  "bird, cow, fish"  and the waiter then tries to tell you the specifics of what is the "cow" for that night.

Here is the view looking out onto the street.





At night, downtown LA is a funky mix.  We saw plenty of people who do not appear to work for a living but we also saw plenty of upscale urban life.  I had never been to Pershing Square before and it looked nice.  We found our second cab at the Biltmore Hotel at Pershing Square and headed West down Wilshire Blvd and once again I was back in the bubble called Westwood.