Economic Development, Despite the Law

I am reading Hernando de Soto's "The Other Path" for an upcoming class. I highly recommend it. His points are difficult to summarize in a short blog post, but I'll do my best. Writing in 1989, de Soto and his colleagues examined the poor "informals" residing in Peru's capital, Lima.

The legal process in Peru at that time made it next to impossible for most residents to do anything through formal means. Acquiring formal housing took nearly two decades. The above photo shows de Soto's staff holding a 30-meter-long list of procedures that were required to start a small business.

So, the informals took the law into their own hands, setting up 60% of the city's housing and establishing 95% of its bus routes without the proper government endorsements. De Soto argues that such "illegal" activity did not reflect an outlaw mentality, but rather, economic entrepreneurship.

While these informal residences and businesses were surprisingly efficient, they wasted a huge amount of resources defending their property and bribing public officials. These residents had no guaranteed property rights, which severely hampered their willing to invest. After the book's publication, de Soto's organization worked with Peru's government to drastically simplify these legal processes.

E-readers and Voting Theory

The celebrated Arrow's impossibility theorem demonstrates how no voting system can consistently aggregate individual preferences.

One tenet of the theorem is that irrelevant alternatives should not change the result of an election. For instance, suppose that candidate A would beat candidate B in a two-way race. But in a three-way race also involving candidate C, voters now prefer candidate B. Some people might call this the Ralph Nader effect.

I have known about the Amazon Kindle for years, and I've used the iPhone version for quite a while. Once the iPad came out, I filtered with buying one. As I mulled over the iPad's high price, the Kindle started to look better by comparison. A few weeks ago, I bought one (unfortunately, this was before the $70 price drop).

I just had lunch with someone yesterday who had the same experience. Why has the introduction of the iPad spurred us to buy Kindles?

Parity by Division

Major League Baseball has six divisions. All six divisions have won the World Series since 2001:

NL West: D'Backs ('01)
NL Central: Cardinals ('06)
NL East: Marlins ('03), Phillies ('08)
AL West: Angels ('02)
AL Central: White Sox ('05)
AL East: Red Sox ('04 and '07), Yankees ('09)

In fact, from '01 to '06, there were six Series. All six divisions won once.

The NBA also has six divisions. No team currently in the Northwest Division has won a championship since the Thunder (who were then the Seattle Sonics) won in 1979.

Why Are Cash Advances so Expensive?

My primary credit card charges 24.99% APR for cash advances and 9.99% APR for purchases. Unlike purchases, cash advances have no "grace period," meaning customers are still charged interest even if they pay off their bill in full every month.

Both transactions involve borrowing money from the credit card companies: one for purchases and the other for cash. Yet the companies encourage the former while strongly discouraging the latter. Why?

When consumers swipe their cards at stores, the credit card companies charge the merchants an interchange fee, typically 2% of the value of the transaction. When someone gets a cash advance, there is no merchant to pay the fee. The credit card company needs to make up this money somehow to remain profitable; thus, they charge a higher interest rate.

If there were a grace period for cash advances, they would amount to interest-free loans. Customers could deposit their cash advances into interest-earning saving accounts and then return the money before the end of the month. Many customers would max out their credit to take advantage of this risk-free profit opportunity (also known as arbitrage), as credit card companies watched their losses mount. Eliminating the grace period for cash advances is one way to prevent such behavior.

Is the "Choking" Effect in Sports Real?

There's an interesting discussion over at the Sabermetric Research blog about whether a "choking" effect exists in soccer:

Gier Jordet, a professor at the Norwegian School of Sport Sciences in Oslo, reports that, when the score is tied, penalty kick shooters succeed at a 90% rate. But when the shooter's team is behind by a goal, and presumably there's more pressure, he succeeds only 60% of the time.

I made a similar point in the comments on the SR blog post, but I'm not too surprised that teams perform worse when they're losing.

On average, bad teams spend a larger portion of the game trailing. It's reasonable to assume that they would therefore get more penalty kicks in such situations than good teams would, thus making them overrepresented in the "behind by one goal" sample. If bad teams also have inferior penalty kickers, it's no surprise that they do worse.

Similarly, if your team is playing against an outstanding goalie, you're more likely to be trailing at any given moment than you would be otherwise. In such situations, the outstanding goalie is also more likely to block your penalty kicks.

If we could control for these factors (say, if we had 100 observations of penalty kicks by one team against a certain goalie) and still observed the choking effect, I'd be more convinced.

Am I a Baseball Keynesian?

The blog Bayes Ball cites my post among several theories attempting to explain the recent trend of perfect games. He then conducts a careful analysis using the Poisson distribution, which is perfect for studying events that are extremely rare (in this case, perfect games) but have many, many chances of occurring (there are thousands of regular season games each year). His analysis shows that a season with two perfect games is well within reason.

After reading the post, I had a few protests. For instance, if Jim Joyce gets the call right, we'd have three perfect games this year, and the Poisson analysis goes out the window.

Even if we let Joyce's call stand, I speculated that a season with three games in which the pitcher gets the first 26 batters out would still be exceedingly rare by historical standards, and we'd have to start questioning the assumption that the dominance of pitching relative to hitting hasn't changed much in the past few decades.

In my previous post, I argued that the string of perfect games in fact did demonstrate a change in favor of pitching. I even suggested that baseball should change its rules (like adjusting the height of the mound or the dimensions of the strike zone) to restore the historical rates of success and failure between batters and pitchers.

But after a while, I was forced to wonder: What if I had spotted a trend where there wasn't one? What if I had advocated that we fix a problem that doesn't exist?

There is a connection to macroeconomic policy. To keep the economy on track between the undesirable extremes of too much unemployment or too much inflation, the federal government often modifies monetary policy (such as changes to the interest rates) or fiscal policy (such as changes to taxation and government spending).

The chief advocate of such tools was John Maynard Keynes, who is regarded as a hero among most economists but whose theories are generally dismissed among the George Mason economics faculty and students.

One has to wonder how often we are tempted to implement macroeconomic policy changes in response to economic news that might just be the result of statistical fluctuation. Perhaps action is occasionally warranted to rebalance both baseball and the economy, but we should think twice before moving in the fences and allowing each batter five strikes, or introducing stimulus programs and holding down interest rates.

Moral Hazard, in Layman's Terms

I sent along to my grandparents the interesting discussion on Marginal Revolution about kidnapping insurance. My grandpa replied:

Greg, don't get your grandma started on how auto insurance has escalated the price of repairing, say, a fender. Auto body work used to be fairly inexpensive because a good many people paid for it out of their own pocket. They cared. Does anyone care how much the insurance company has to pay to fix my fender? I guess kidnap insurance works the same way.

Papa

Economists call this phenomenon "moral hazard." A line from the Wikipedia entry describes it this way: "In insurance markets, moral hazard occurs when the behavior of the insured party changes in a way that raises costs for the insurer, since the insured party no longer bears the full costs of that behavior."