Tuesday, December 06, 2005


Walker Economics Blog is currently on hiatus and will return better than ever at the beginning of the year.

Here is a link to where this blog was quoted in a C-Net article (scroll to the bottom of the page).

Also, here is a link to our page on a website called BlogShares that is a "fantasy stock market where weblogs are the companies." Ummmm......wow, that sounds like fun. I am pretty confident that the only thing more dorky that having an economics blog is trading "fantasy shares" in them.

Apparently, the assign a value to a blog and then you can buy shares in it, and it gains or loses value based on how many websites it links to and how many sites link to it. Right now, the Walker Economics Blog is valued at a whopping $1000 blogdollars...

Sunday, November 20, 2005

What Affects Tips?

Remember this in case you ever get a job waiting tables (from an article in the Washington Post by Richard Morin):

Scrawling a patriotic message on a restaurant tab is a great way to boost tips -- at least in northern Utah. Communications professors John S. Seiter of Utah State University and and Robert H. Gass of California State University at Fullerton instructed two waitresses to serve up four different types of bills to 100 diners at two local restaurants.

The servers wrote "United We Stand," and "God Bless America" or "Have a nice day" on the bills. A control group received no personal note.

Patrons gave a 20 percent tip on tabs that included "United We Stand" but only 15 percent when they got no message at all. The other two messages garnered slightly more than 15 percent, Seiter and Gass reported in a recent article in the Journal of
Applied Social Psychology.

These conclusions about tipping come from a researcher named Michael Lynn from Cornell:

1. Two studies show little relationship between quality of waiter service and size of tip.

2. Hotel bellboys can double the size of their tips, on average, by showing guests how the TV and air conditioning work.

3. Tipping is less prevalent in countries where unease about inequality is especially

4. The more a culture values status and prestige, the more likely that culture will use tipping to reward service.

5. Tips are higher in sunny weather.

6. Servers can increase their tips by giving their names to customers, squatting next to tables, touching their customers, and giving their customers after-dinner mints.

7. Drawing a smiley face on the check increases a waitress's tips by 18 percent but decreases a waiter's tips by 9 percent.

8. In one study, waitresses increased their tips by 17 percent by wearing flowers in their hair. In general it pays to look distinctive albeit not freaky.

Here is a full article by Dr. Lynn offering advice on how to increase tips based on his research.

Any thoughts on why these techniques work for increasing tips? Any other things that you think affect the amount that you tip in a restaurant?

(Source: Marginal Revolution)

Wednesday, November 16, 2005

Hiring Funeral Guests

Here is an article about professional funeral guests in Taiwan. You hire them to create the appropriate level of sorrow at a family member's funeral:

Liu and her five-member Filial Daughters' Band are part of a thriving mourning business in Taiwan. They're professional entertainers paid by grieving families to wail, scream and create the anguished sorrow befitting a proper funeral.

The performances are as much a status symbol for the living as a show of respect for the dead on this island of 23-million people lying 145 km off the Chinese coast.

Weary, grieving relatives hire groups like the Filial Daughters' Band to perform their mournful stuff for $600 for a half day's work.

Maybe for a little more money, you could get Al Pacino to give an impassioned eulogy or bring in a phone booth and have Will Ferrell scream out "I'm in a glass case of emotion!" at your funeral.

(Source: Marginal Revolution)

Tuesday, November 15, 2005

Social Benefits and Costs of Advertising

This is an extension of our discussion in class on advertising.

What do you think of advertising? In what ways is it good for society as a whole or bad for society as a whole? In what ways is it efficient or inefficient? You should come up with specific examples.

From the individual perspective, advertising is pretty avoidable in a lot of cases if you find it personally annoying (XM radio, HBO, Tivo or other DVRs, popup blockers on web browsers). See this post from economist Bryan Caplan.

Feel free to throw in your own favorite commercial in addition to your comment. One of my favorites was one I saw on a big screen in the middle of the Ginza district in Tokyo: it featured a a big formation of people singing and dancing with a huge smiling, laughing teapot at the front of the formation. I may have found it funny because it was really strange, because it reminded me of the Kool-Aid guy, or because I don't think the commercial was advertising anything to do with tea or teapots, but then again it was mostly in Japanese.

Economics of Torture Policy

A big news item of late is the debate over whether to make torture illegal that has involved Dick Cheney and Congress. Alex Tabarrok posted a very interesting point on how the debate over whether to make it illegal is not a debate over whether to never use torture, but rather on how high to make the price of torture:

President Bush, Dick Cheney and others who support the use of torture by the United States and its agents usually rely on the ticking time bomb argument. Sometimes torture is necessary to prevent a greater evil. I accept this argument. If my kid were kidnapped and the suspect was refusing to talk, I'd want Vic Mackey to do the questioning.

But it does not follow from the "ticking time bomb" argument that torture should be legal. The problem with making torture legal is that the government will abuse its powers. I do not trust the government, any government, to use this power responsibly. Leviathan must be heavily restrained, especially when it comes to torture.

Here is where economics can make a contribution. By making torture illegal we are raising the price of torture but we are not raising the price to infinity. If the President or the head of the CIA thinks that torture is required to stop the ticking time bomb then they ought to approve it knowing full well that they face possible prosecution. Only if the price of torture is very high can we expect that it will be used only in the most absolutely urgent of circumstances.

Again, no need to get political; stick to an economic discusion of incentives and what you expect to happen in various circumstances.

Sunday, November 13, 2005

Economics of Thanksgiving

I know it is a little early for Thanksgiving talk since it is still a couple of weeks away, but here is the question anyway:

What do you think are the economic effects of Thanksgiving?

Or you could just discuss the economic effects of the Thanksgiving holiday weekend. Again, the more creative the answers, the better. For example, I thought one of the best answers about the economics of Halloween was from Andrew, who talked about how all of the planning of Halloween parties and leaving work early to get little kids dressed up in their costumes, would probably cause a decrease in productivity that day.

Thursday, November 10, 2005

Let the market do the work

There are lots of claims that we are too dependent on oil as an energy source, and that the government should step in and tax gasoline to fund research into alternative energy. For an example of this line of thinking, the New York Times today has an editorial calling for a "windfall profits tax" on oil companies used to fund alternative energy. There is also a lot of controversy lately over "price gouging" by the oil companies, as evidenced by the current Senate hearing on the profits of the big oil companies.

The useful thing about markets, though, is that high prices are a signal of the degree of scarcity in the market. High prices of gasoline have decreased the quantity of gasoline demanded by US consumers over the past months. Further, high prices of gasoline spur investment into other energy sources (since the potential profits from alternative energy sources are much higher). In an article in this week's Economist (subscription required), they confirm that the recent high oil prices have led to more investment in alternative energy sources:

GE's wind-turbine business, which was inconsequential a few years ago, made over $2 billion in sales this year. Ethanol, a costly green fuel which in America is usually made from corn, now looks a better buy. And wind and solar power are also back in fashion.

Industry sources reckon that global sales of solar panels this year will reach $11 billion, up from $7 billion last year. America's Energy Conversion Devices, a pioneer in hydrogen storage and solar cells, has seen its shares soar by 50% this year and venture-capitalists are taking an increasing interest in the industry.

All told, reckons Christopher Flavin of the Worldwatch Institute, a green think-tank, investments in “new renewables” (not including big dams, which nobody likes anymore) grew from $24 billion globally in 2003 to $29 billion in 2004—and, he thinks, the pace of growth is even faster this year.

The article goes on to discuss that high oil prices are not only increasing environmentally friendly energy sources, but also alternative sources that are not so "green," like coal.

Overall, the point is that even though high prices of gasoline are painful to pay, those same high prices will help reduce reliance on oil more efficiently than any reasonable government plan could.

Wednesday, November 09, 2005

Don't be grumpy, ja!

A German company has banned grumpiness at work, according to this article:

After one female employee refused to smile all day at work, a German IT company banned grumpiness in an effort to promote a more congenial atmosphere, according to The Australian.

The new policy requires employees at Nuzwerk, in the German town of Leipzig, to sign a contract requiring them to remain in a good mood all day at the office and leave complaints and gripes about co-workers and work conditions at home.

"We made the ban on moaning and grumpiness at work official after one female employee refused to subscribe to the company's philosophy of always smiling," office manager Thomas Kuwatsch told TheAustralian.

(Source: Marginal Revolution)

Tuesday, November 08, 2005

Sponsoring an African business

You are probably well-acquainted with the commercials that offer a chance to sponsor an African child. There is a new site called Kiva.org, that offers the opportunity to sponsor an African business through a small loan (as little as $25).

By choosing a business on our website and then lending money online to that enterprise, you can "sponsor a business" and help the world's working poor make great strides towards economic independence. Throughout the course of the loan usually 6-12 months), you can receive monthly email updates that let you know about the progress being made by the small business you've sponsored. These updates include reports on loan repayment progress, photos of new capital equipment, narratives on business growth and standard of living improvements, and more. As loans are repaid, you will get your original loan money back.
It is currently being offered just in Uganda and because of the publicity they have been receiving, they are currently out of businesses to sponsor. Apparently if the company defaults on the loan, your loan becomes a donation, but none of the companies have defaulted yet.

You can see the businesses that are being sponsored here.

What do you guys think of this strategy for helping people in developing nations? What are the advantages of this over traditional aid that are pure donations?

(Source: Private Sector Development Blog)

Monday, November 07, 2005

Which disasters do people donate aid to?

An interesting article in the Washington Post looks at which disasters compel Americans to donate aid. There are a lot of disasters that happen around the world (Katrina, the Pakistan earthquake, civil war in Sudan), and some receive a lot more donations from private American citizens than others. It is not surprising that US disasters get more donations than non-US, but some are more puzzling (the immense giving for tsunami aid last year). The author has a few rules for the disasters that provoke the most giving:
  • Natural disasters beat manmade disasters (e.g. victims of hurricanes and tsunamis generally attract more donations than victims of war and other politically caused crises like Sudan & Uganda)
  • Sudden disasters beat slow-moving crises (a sense of urgency mobilizes donors in a case like Katrina, whereas the devastation of a famine is so gradual)
  • TV counts (e.g. videos that allow viewers to imagine themselves at the scene make a huge difference)
  • Drama and timing play an important role (e.g. the Southeast Asia Tsunami occurred during the US holiday season)
  • Ease of giving makes a big difference (i.e. over a fourth of the dollars received by the Red Cross following Katrina came in through its Web site.)
  • Personal experience helps (people have visited New Orleans but have a hard time picturing a Pakistani village)
  • Disaster giving doesn't supplant donations to other causes (just because people give to disaster relief does not mean they give less to their regular charities)

(Source: Private Sector Development Blog)

Voting and Rational Ignorance

Here is a seemingly simple question:

Why do people vote?

Voter turnout has been decreasing over the past decades (a little more than half of eligible voters voted in the most recent Presidential election), and one reasonable explanation is from the first chapter in Friedman: rational ignorance. The basic idea is the following: Voting is costly in terms of time. It takes time to actually go out and vote, and it takes even more time if you plan on actually finding out about the candidates. Then combine that with the fact that the probability that your vote will influence the outcome of an election is essentially zero. In fact, according to an article from the guys who wrote Freakonomics,
Of the more than 16,000 Congressional elections...only one election in the past 100 years - a 1910 race in Buffalo - was decided by a single vote.
So as opposed to asking why people are not voting, the better question becomes: why do people vote?

(by no means am I saying that people should not vote, I am just asking what I think is an interesting question that could help reaffirm the choice to vote anyway)

Wednesday, November 02, 2005

Off This Week

So the blog is not going to have any posts this week. You guys (my students) have 4 days off, and I have a huge grad school exam Friday, so I think it would just be better to pick up with blog entries and comments Monday 11/7.

Saturday, October 29, 2005

Economics of Halloween

A fairly open question to end things for the week:

What do you think are the economic effects of Halloween? The more creative (and the less obvious) the better. What markets do you think are most affected by the holiday (positively or negatively)?

To go ahead and take away the most obvious answers, I am sure that candy makers and costume shops have a sharp increase in demand for their products. A more interesting question along those lines though: If the demand for those products is higher during Halloween, why do most grocery stores have sales on candy? Or why don't costume shops increase prices during Halloween (it is my experience that they have sales suring this time as well)?

Why Do We Laugh?

This post relates more to evolutionary biology than economics, but it is a questions that I have always been interested in: Why do humans laugh? What biological or evolutionary purpose does laughing serve? A possibility is offered by V.S. Ramachandran in his book: A Brief Tour of Human Consciousness:
The common denominator of all jokes is a path of expectation that is diverted by an unexpected twist necessitating a complete reinterpretation of all the previous facts -- the punch-line...Reinterpretation alone is insufficient. The new model must be inconsequential. For example, a portly gentleman walking toward his car slips on a banana peel and falls. If he breaks his head and blood spills out, obviously you are not going to laugh. You are going to rush to the telephone and call an ambulance. But if he simply wipes off the goo from his face, looks around him, and then gets up, you start laughing. The reason is, I suggest, because now you know it's inconsequential, no real harm has been done. I would argue that laughter is nature's way of signaling that "it's a false alarm." Why is this useful from an evolutionary standpoint? I suggest that the rhythmic staccato sound of laughter evolved to inform our kin who share our genes; don't waste your precious resources on this situation; it's a false alarm. Laughter is nature's OK signal.
What do you guys think of this explanation? Can you think of other biological reasons or evolutionary reasons why people laugh? Can you think of jokes that are counterexamples to this explanation?

Source: Marginal Revolution

History of the Minimum Wage

An interesting excerpt from a paper by Tim Leonard called Protecting Family and Race: The Progressive Case for Regulating Women's Work:

It's no surprise that progressives at the turn of the twentieth century supported minimum wages and restrictions on working hours and conditions. Isn't this what it means to be a progressive? Indeed, but what is more surprising is why the progressives advocated these laws. A first clue is that many advocated labor legislation "for women and for women only."

Progressives, including Richard Ely, Louis Brandeis, Felix Frankfurter, the Webbs in England etc., were interested not in protecting women but in protecting men and the race. Their goal was to get women back into the home, where they belonged, instead of abandoning their eugenic duties and competing with men for work.

Unlike today's progressives, the originals understood that minimum wages for women would put women out of work - that was the point and the more unemployment of women the better!

When we discussed minimum wage in class, our main conclusion was that the minimum wage would result in increases in unemployment among low skilled workers. The implication of the above excerpt is that the creators of minimum wage knew this and intended it to only apply to women so women would be kept out of the workforce to a certain degree.

Source: Marginal Revolution

Wednesday, October 26, 2005

Terrorism & Nuclear Weapons

There was an opinion piece in Monday's Wall Street Journal by the Nobel laureate Thomas Schelling called "The Nuclear Taboo," where he discusses a bit of history of nuclear weapons and, more interestingly, what would happen if a terrorist organization obtained nuclear capability:

"[Terrorists] will discover, over weeks of arguing, that the most effective use of the bomb, from a terrorist perspective, will be for influence. Possessing a nuclear device, if they can demonstrate possession--and I believe they can, if they have it, without detonating it--will give something of the status of a nation. Threatening to use it against military targets, and keeping it intact if the threat is successful, may appeal to them more than expending it in a destructive act. Even terrorists may consider destroying large numbers of people and structures less satisfying than keeping a major nation at bay."

What are the implications here? Do you agree with what Schelling says about the likelihood that terrorists will actually use a nuclear weapon if they obtain the capability? What factors could affect this likelihood?

I don't have a link to the article since you need a subscription to view it online, but for my students I have a copy in my room if you would like to read it.

Size of Developing Economies

Another interesting fact from the upcoming book The Undercover Economist:
A small African state like Chad has an economy smaller than that of a Washington suburb like Bethesda and a banking sector smaller than the Federal Credit union set up for World Bank staff.
These facts are good to give us perspective on the problem of developing nations...

Source: Marginal Revolution

Tuesday, October 25, 2005

Channel One?

Here is a question posed by Maria that might be very easy to answer with a little research, but I don't know the answer off the top of my head:

Why is there never a channel one on TV?

I imagine the reason is technical or has something to do with industry regulations for the television broadcast industry as a whole, but I will leave it up to you guys to find out.

Monday, October 24, 2005

Replacing the Almighty Greenspan

Today Bush announced that Ben Bernanke will take over for Alan Greenspan as Chairman of the Board of Governors for the Federal Reserve, which is a major announcement, considering the fact that Alan Greenspan is the equivalent of an economics "rock star" (which I know is a oxymoron) and the fact that Greenspan has led the Federal Reserve since before some of my students were born (August 11, 1987).

We will talk much more about the role of the Federal Reserve chairman and Ben Bernanke next semester when we get to Macroeconomics, but for now here is a link to various economists talking about how this is a good nomination, and here is link to a summary of Bernanke's major contributions to macroeconomics.

Thursday, October 20, 2005

Focal Points

Back to the discussion of Thomas Schelling and his Nobel Prize, one of his key game theory insights was about the use of focal points (which Merrick discussed in her comment last week). Here is the explanation of the basic concept:
Schelling again offers a framework for analysis by offering powerful evidence for the existence of focal points in social life. People who may never have met are nonetheless capable of coordinating their behavior under some circumstances. Perhaps even more surprising, certain open-ended questions can elicit a high amount of agreement. For example, in one experiment Schelling asked his subjects what they would do if they were simply told to go and meet someone in New York City on a certain day. Out of all the possibilities for when and where to meet, a majority, trying to intuit where and when other people would expect them to be, would have converged at the information booth in Grand Central Station at high noon!
Today, Tyler Cowen wrote a post that considers whether Grand Central Station is still a focal point in NYC.

What do you think would be the focal point in NYC? If you had to meet someone in New York City, but you only knew which day -- you did not know what time of day or where -- where would you go and what time would you be there? I think the fact that some of you have been to New York and others haven't makes this even more interesting to see. You also have to assume that neither of you have the use of a cell phone...

What if instead you had to meet another student (could be any student in the high school) at Walker? Where would it be and what time?

(Just posting an answer here does not count as a thoughtful post for this week. It would count if you post reasons why some places work and others don't)

Wednesday, October 19, 2005

Shanghai Follow-up

I just posted two days ago about the booming construction market in China. Further evidence is this article on scrap metal thieves in Shanghai:
Being bolted down is not enough in booming Shanghai where a crackdown has begun on scrap metal thieves stealing phone booths, traffic lights, manhole covers and wiring. Tempted by soaring prices for metal, thieves stripped one residential compound of two thirds of its fire extinguishers.
This is a good application of how high demand for one good (construction) affects other markets (high demand for scrap metal). My guess is that stealing scrap metal is partially a result of the inelastic supply of scrap metal, which makes the price change from an increase in demand higher. Since the supply of scrap metal in the short run cannot increase very much, thieves are stepping in by taking existing structures and turning them into scrap metal to take advantage of the high prices.

Basic Economics - Hawaiian Style

Back when we discussing price controls, I discussed with at least one of my classes the price ceiling on the wholesale price of gasoline that was being instituted in Hawaii. What is our prediction when you institute a price ceiling? Two articles show the expected result:
From the first:
Robinson said Chevron, which prides itself on keeping station tanks full, has had more than 40 "runouts" since the gas cap law went into effect. Robinson said before the gas cap one "runout" a month was considered unacceptable.

The second talks about increased activity for tow trucks:

Several tow truck companies said yesterday the number of "out-of-fuel" roadside service calls have doubled — or more — since Hawai'i's first-in-the-nation gas cap law took effect on Sept. 1.

This adds another level to the effect of a price ceiling on gasoline. If the trend of increased demand for tow truck calls continues, what do you think will happen to the price of those service calls?

As you see from the first article, even though they are seeing the result of the misguided policy, Hawaii is dropping is price ceiling even further next week.

Tuesday, October 18, 2005

Instant Replay in Baseball

Another question about baseball since it is the playoffs:
Some disputed calls in this year's baseball playoffs have brought up discussion of whether to incorporate instant replay into baseball (especially the third strike in the dirt play during the White Sox-Angels series).

Do you think MLB should adopt instant replay? Only in certain situations/games?
What are the benefits to having instant replay?
What are the costs to having instant replay?
Who receives these benefits and who bears these costs?
I want the answers to be reasoned out in terms of benefits and costs, not just a gut reaction because a team you root for got jobbed by an umpire.

Also, why do you think baseball has not seriously looked at the issue before?

OK, so maybe China is growing...

We will be better able to discuss this topic when we cover economic growth next semester, but this NY Times article talks about the booming housing market in China. The key interesting fact is the following:

This year alone, Shanghai will complete towers with more space for living and working than there is in all the office buildings in New York City.

That is in a city that already has 4,000 skyscrapers, almost double the number in New York. And there are designs to build 1,000 more by the end of this decade.

Below is a picture of the skyline in Shanghai. Source: Marginal Revolution

Friday, October 14, 2005

Sabernomics = Economics + Baseball

In honor of wasting an entire day watching the Braves lose an 18-inning playoff game to end the NLDS last weekend, here is a post about baseball for this weekend:

You know those times when a group is sitting around talking about a baseball player or a baseball game you are watching and there is always that one guy who always knows waaay too many stats off the top of his head (like stats you didn't know existed, while you are just trying to watch the game without knowing Andruw Jones' ratio of 7th inning walks to 3rd inning groundouts)? Well, the consummate "that guy" has a blog called Sabernomics where they apply economic research and reasoning to following baseball, and much of it is pretty interesting, though of course still dorky (what in economics isn't?).

One interesting post I have read there is a recent post on a report that home run hitting has not really increased in the past few decades and therefore is not the product of steriods. Instead, the author claims that it is just that we had 3 ridiculous home run hitters come at the same time (Bonds, McGwire, and Sosa).

Another even more interesting post (it's long, but worth reading if you are a Braves fan) is about research confirming the positive effect that Leo Mazzone has on the performance of Braves' pitchers.

Unique Enterpreneur

Here is a story for those of you who hate corporations and root for the small entrepreneur. This Wall Street Journal article tells about a Chicago lawyer who has found an interesting way to enrich himself:

Using a state whistle-blower law, Mr. Diamond since 2002 has filed about 95 suits in Cook County court here against retailers that failed to charge him taxes on Internet sales, alleging that they broke the law. In cases where the state of Illinois joins the suits and prevails, he is entitled to up to 25% of the financial damages, with the rest going to state coffers.

Mr. Diamond's first eight suits were filed against such retailers as Wal-Mart Stores Inc., Office Depot Inc. and KB Toys Inc. He has netted about a half-million dollars already, from some retailers.

The article goes on to talk about how states are trying to stop him from doing this. What do you think? Is Diamond an opportunist exploiting a loophole to make easy money or is he a hero for stopping the corporations from breaking the law?

Source: Division of Labour

Thursday, October 13, 2005

Grocery Store Pricing

From Marginal Revolution, the following is an excerpt about grocery store pricing from a new book coming out called The Undercover Economist: Exposing Why the Rich are Rich, the Poor are Poor -- and Why You Can Never Buy a Decent Used Car by Tim Harford.

Companies find it more profitable to increase prices (above the sale price) by a larger amount on an unpredictable basis than by a small amount in a predictable way. Customers find it trouble some to avoid unpredictable price increases -- and may not even notice them for lower-value goods -- but easy to avoid predictable ones...

Have you noticed that supermarkets often charge ten times as much for fresh chili peppers in a package as for loose fresh chilies? That's because the typical customer buys such small quantities that he doesn't think to check whether they cost four cents or forty. Randomly tripling the price of a vegetable is a favorite trick: customers who notice the markup just buy a different vegetable that week; customers who don't have self-targeted a whopping price rise.

I find these pricing strategies pretty interesting, and I can verify that they happen from my work on pricing strategy with an unnamed company that is headquartered in Atlanta. Now as opposed to more comments on why you think corporations are evil for such tactics, I would like to see a good reasoned comment on why this is not an "evil" thing to do, pehaps even other ideas of how to price along these lines, or other pricing strategies you or your parents may have noticed at the grocery store.

Source: Marginal Revolution

Wednesday, October 12, 2005

Incentives & Abortion Protests

An interesting new strategy is being employed by a Planned Parenthood clinic in Philadelphia to discourage pro-life protests in front of their health center. It is called "Pledge-a-Picket":

Here's how it works: You decide on the amount you would like to pledge for each protester (minimum 10 cents). When protesters show up on our sidewalks, Planned Parenthood Southeastern Pennsylvania will count and record their number each day from October 1 through November 30, 2005. We will place a sign outside the health center that tracks pledges and makes protesters fully aware that their actions are benefiting PPSP. At the end of the two-month campaign, we will send you an update on protest activities and a pledge reminder.

This type of strategy is a prime example of the use of incentives to change the cost-benefit decision for the protesters. My question is: Do you think this strategy will work? What is your prediction for the result of this strategy? It would be useful to talk about the decision to protest in terms of costs & benefits (monetary or non-monetary).

(Note: this will not be a forum to express opinions about being pro-life or pro-choice or moral judgements, it is only a forum to discuss the incentives and economics of the situation)

Source: Freakonomics blog

Tuesday, October 11, 2005

Gift-giving Revisited

The gift-giving post also had a lot of comments. Here are the best explanations that were given for why people give gifts instead of just money:

1. Zabell pointed out that giving a gift shows that you know that person's interests, and people value that the giver knows them well enough to find a gift that suits their interest. Money is not appreciated because it shows that you do not know enough about the person to get them a good gift.

2. The act of opening a gift is fun. This explanation breaks down because if it was only the opening of the gift, then you could just wrap money in a box and that would be just as good. However, it could be that the suspense/surprise at not knowing what the gift will be is the fun of opening it (if everyone gave money, even if it was in a box, there would not be the same suspense). This is also supported by the fact that unwrapped gifts are not fun.

3. Greg added that it is the time and thought that people put into the gift that gives it more value. However, I would put the emphasis on the thought part because people could spend lots of their time earning the money to give you and it would not be the same as a good gift.

4. Jessica's post about costing the receiver time by giving them money is very astute, but I don't know that it plays a large part in the decision to get a gift versus money because for small amounts of cash getting money actually lowers opportunity cost because you don't have to go to the ATM to get cash.

Overall, the consensus seems to be that the main reason why gifts are given instead of money is that the person receiving the gift gets extra utility from knowing that the person cares about them and therefore knows their interests, and some extra utility from the suspense of opening the gift.

Now let's test our predictions:
1. There are still some situations where people give money as a gift. What are those situations normally? How does that fit into our analysis of gift-giving? Does that contradict our analysis or complement it?

2. What about the fact that people many times give a list of things they want, and then people just go and buy the things off of that list? This strategy does not show that the givers know the recipient's interests. Is that the same as giving money? How does that fit into our analysis?

This article by Robert Frank offers a very interesting perspective in my opinion on why we give gifts, involving receiving gifts that we wouldn't buy ourselves as a way of avoiding guilt.

Further text message questions

The text messaging charges post garnered quite a bit of discussion, so here is another post with two questions to clarify the discussion and keep it going:

1. If you asking whether you want to receive a message is such a good idea and then not charging if you reject, why don't the cell phone companies adopt this? Why would they still charge for the message?
2. Garrison pointed out that cell phone companies in Europe charge for more services than in the US. Why do you think that is?

Again, I urge you to think from the perspective of the cell phone company constrained by the consumers and competition.

Monday, October 10, 2005

Schelling and Aumann - Nobel laureates

The Nobel laureates for 2005 in Economics are Thomas Schelling and Robert Aumann for their work in game theory, which is basically the theory of strategic interactions between individuals or groups. Marginal Revolution has a good summary of the work of both Schelling and Aumann on their blog. I am not familiar with Aumann's work, but just last week, we discussed some of Schelling's racial segregation work in my graduate Urban Economics course.

The most interesting aspects of Schelling's work in my opinion:
1. His analysis of how people racially segregate into neighborhoods. He starts from a fairly realistic assumption that most people do not want to be a significant minority in their neighborhood. From that innocent assumption, he shows that people will start to move to neighborhoods where they are a majority, and you end up with neighborhoods that are totally segregated even when most people do not prefer a totally segregated neighborhood.

2.He also did very interesting work on using game theory to explain the nuclear conflict of the Cold War in his book The Strategy of Conflict. Schelling showed that countries can make their bargaining position better by giving themselves less options (giving yourself less options make your likelihood of retaliation greater). He also showed that uncertain retaliation is more credible in nuclear war than guaranteed retaliation (why would you retaliate after you have already been destroyed?). As pointed out by Marginal Revolution, you can see pretty good illustrations of his ideas in the movie Dr. Strangelove.

No questions here, just illustrating more interesting, non-mainstream applications of the field of economics...

Another Cell Phone Post

Cell phones are on my mind, particularly since mine broke and I can see about 1/5 of the screen at any given time -- just enough to see who I am calling and allow me to procastinate on buying a new one, so here is another question or two about the mobile phone business.

This article from the Economist (which you have to have a subscription to access yourself) discusses the effect of taxation of mobile-phone services on the adoption of mobile phones in countries around the world. The article is particularly interested in the effect of taxation on the adoption of mobile phones in developing nations because:
"Mobile phones are increasingly recognised as powerful tools in the fight against poverty, since they reduce transaction costs, facilitate entrepreneurship, and substitute for slow, unreliable transport and postal systems."

The conclusion is unsurprising: countries with high tax rates have less mobile phones per capita. In fact, the article says that every 1% decrease in mobile phone taxes would increase mobile phone penetration in a typical developing country.

The question I would be interested in is first of all, why do you think governments single out mobile phone services to tax in the first place? Also, do you think this is an effective tax (in terms of raising a lot of revenue and limiting the loss of efficiency)?

Also, what about the claim that mobile phone services are a powerful tool for fighting poverty? What are some specific ways that mobile phones could help alleviate poverty (perhaps specific examples of the claims in the above quote)? Do you agree that alleviating mobile phone taxes will help the poorest countries of the world?

Charging for Incoming Text Messages

This impetus for this interesting question comes from Chris Hellmann:

Why do mobile phone companies charge for incoming text messages? For instance, according to the Cingular website, you are charged $0.10 per text message whether you sent or received the message and whether the message was solicited or unsolicited.

Looking at this from the perspective of the mobile phone companies like Cingular or T-Mobile, why would they price text messaging like this? Would there be a difference if they charged $0.20 to the sender of the message and charged nothing for receiving? Why do they choose the first option?

Again, it is more useful to look at it from the perspective of the profit-maximizing cell phone company, not the consumer upset because you have to pay for unsolicited text messages.

Friday, October 07, 2005

Maybe I could win an Ig Nobel Prize?

On the subject of the Nobel Prize, last night they also gave out the annual "Ig Nobel" Prizes for research that is unusual/humorous. As they say, research that "cannot or should not be reproduced."

The award this year in Economics was awarded to Gauri Nanda (a master's student at MIT) who:

"invented Clocky, an alarm clock that scurries around the room as it rings, forcing the person it awakens to get out of bed and chase it."
Click here to see the rest of the awards for this year and past years. My personal favorite is an actual published paper entitled: "Pressures Produced When Penguins Pooh -- Calculations on Avian Defaecation." Talk about a bad laboratory job for some grad student...

Addendum: Here is the website for "Clocky." You can even buy a boring t-shirt.

(Source: Division of Labour)

Nobel Prize Possibilities

The 2005 Nobel Prize in Economics is scheduled to be announced on Monday.

The top candidate whose work I am most familiar with is Oliver Williamson in contract/transaction cost theory.

Here is a link to an actual betting market that they had for the 2004 Nobel Prize in Economics (it has not been updated for 2005). You could buy shares in an economist and then you win a share of the proceeds if that economist wins the Nobel prize (it did actually predict the winner last year).

Sadly, my teaching of high school economics and "groundbreaking" work in the area of paper footballs and paper airplanes is once again likely to be overlooked by the Nobel committee...

Automatic bonus points for any of my students that can look up and give a quick summary of Williamson's contribution to the field of economics (in your own words, not copied directly from somewhere of course).

Thursday, October 06, 2005

Stocks Recommended in Spam Emails

If you needed more reason to ignore spam email, here it is: Spam Stock Tracker

The author of this site tracked the performance of any stocks that he was offered in a spam email for a few months. His results were unsurprisingly horrible. In his words,

"almost ALL of those stocks I added went up a few cents max, then dropped like flies the next day."
What do those results tell you about why someone might send a spam email advertising stock that they own? How might those spammers make money off the stock if they only increase a few cents the first day and then drop sharply?

(Source: Marginal Revolution)

Wednesday, October 05, 2005

Economics of Gift-Giving

One puzzle that seems to contradict the economic way of thinking is the fact that people give gifts at holidays or on birthdays instead of money. One would expect that people would always rather receive money for two reasons:

1.) Almost all gifts are not exactly what the person wanted, and the receiver could buy something they like better for the same amount of money.
2.) Even if the "perfect" gift was given, the receiver could still have bought that same gift if just given the money.

Therefore, in most cases, money gives the receiver more utility, and at worst, it gives the same utility as a gift.

Question to think about:
Why do people give gifts instead of the equivalent amount of money?

Post a comment through the link below to weigh in on this question.

Welcome to the New Walker Economics Blog

I plan on using this blog to post interesting articles on current news events and some of my own comments to go along with it.

Most of the articles I post will have some relevence to basic economics, and I will occasionally ask a question that I want to generate discussion about in the comments section.

This blog will start as just a blog for my AP Economics class, but I eventually plan on expanding the audience to more people within the Walker community.