Borda Saves Diwali

Today, my suitemates and I wanted to do something to celebrate Diwali. Our options ranged from getting dinner at Kanak, lighting fireworks, watching India's cricket match against the Netherlands, or going shopping for new clothes While we had several options on what to do, we were struggling to pick just one as all of us did not have the time to do all of these activites.

All of my suitemates have taken ECON 2010, and when one of them jokingly brought up comparing our utils, my Econ brain turned on, and within a few seconds, I realized a possible solution to our problem was using the Borda Count. I quickly told my friends about this method and instructed everyone to rank the events based on their individual interests. We would assign a point value to each rank, and then sum up each event's points. The activity with the most points would be the one we would partake in.

I then created a table with everyone's preferences ranked and used a point system where 1st gets 4 points, 2nd gets 3 points, 3rd gets 2 points, and 4th gets 1 point.

	Kanak Dinner	Fireworks	Watching Cricket	Clothes Shopping
Krishna	1	3	2	4
Saahas	3	2	1	4
Raj	2	4	3	1
Siva	4	3	1	2
Quinn	2	1	4	3

Kanak = 4 + 2 + 3 + 1 + 3 = 13

Fireworks = 2 + 3 + 1 + 2 + 4 = 12

Cricket = 3 + 4 + 2 + 4 + 1 = 14 (Winner)

Clothes Shopping = 1 + 1 + 4 + 3 + 2 = 11

After computing everything, I was able to determine that watching India's cricket match was the activity all of us would do for today, as it had received the most amount of points (14). The cricket match was fun to watch as India won their match and is now advancing to the World Cup semifinals this coming Wednesday!

Rent Sea-king Behavior

Bristol Bay, Alaska, is the most bountiful source of sockeye salmon in the world. In 2023, the Bristol Bay salmon fishery harvested 40.6 million sockeye salmon for a total value of nearly $117 million, and has historically provided over 50% of the worldwide supply of the fish. In order to maintain a sustainable population, the fishing season is restricted to just 6 weeks, and boat length is restricted to 32 feet to discourage over-fishing.

However, these indirect regulations on the total catch have presented opportunities for some rent sea-king behavior. Fisherman must race from the docks to the fishing grounds, and once they are out there they battle dangerously – veering wildly towards each other, crowding the waters and tangling their nets together, all of which reduces fishing efficiency. Additionally, the boat length restriction didn't account for all dimensions, and so fisherman began investing money into building upwards instead of outwards – the two boats pictured below are both 32 feet long for example:

5'11 vs 6'0

A potential solution to these issues introduced by the regulatory catch restrictions could be to instead allocate quotas on catch amounts through auction. Similar to the auction we ran in class, this approach would better select the fishermen with the greatest benefit of salmon production without any of the aforementioned wasteful and dangerous activities.

Shirking in SNL

         This week on Saturday Night Live’s Weekend Update segment, they featured one of the cast members as a “guest” titled “Your Co-Worker Who Is Extremely Busy Doing Seemingly Nothing.” The character was one that was dressed professionally, carrying all a sticky-note-covered laptop, pages and pages of loose paper, three cell phones and a giant water bottle that just kept talking about how busy she was with work and how important her job was, despite the fact that she could never really say what she did and all of 900 emails were from horoscope.com. 

As Colin Jost was interviewing her, I realized that her character was a great example of a shirker. She “worked and worked and worked” but actually just wasted everyone’s time and money by getting literally nothing done. Whoever her boss was could possibly implement some ways to get her off of horoscope.com and actually working, like maybe setting up firewalls on her work computer and phones so that she could only access work-related sites, or tie her pay to objective metrics or tasks that she accomplishes, or just sit next to her and make sure she’s working. Let's just hope this co-worker never decides to run for Congress, because she would shirk constantly and truly demonstrate the Principal Agent Problem.

Money printer goes brrr

To the surprise of absolutely no-one Big Pharma has built and operated its own home in the political arena, amplified by the megaphone of "all da money". The pharmaceutical industry spent a meager $372 million on lobbying last year. It follows somewhat naturally that in a system of patents, regulations, and healthcare policies, lobbying is an essential part of the game for pharma. The why is less shocking than the how.

Olson’s theory in "The Logic of Collective Action" posits that large groups have a much more difficult time providing a public good—like lobbying—without a nudge. In Big Pharma's case, the nudge is fascinating, since there are almost 600 prolific entities that stand to benefit from lobbying. Though each company knows that it could technically free-ride the industry's lobbying efforts, there seems to be some effective selective/separate incentive to stimulate significant and growing collective action. 

So perhaps our model isn't covering the whole story. Perhaps in this industry, getting a line-item on a bill is so valuable (Vi) that even at low quantities of the public good (T), the value to the firm is greater than the cost (Ci). This would make sense, right? Because the value of a drug getting funding, rights, etc. is so impactful to a firm, the firm is compelled to want to "produce" lobbying activities individually in a manner that is also consistent with the group (Pharma's) interest. So maybe this is one way for us to explain the money flying off the printing press...

"Read my Lips: I'm a Shirker"

"Read my lips: no new taxes." These were the famous words former President George HW Bush uttered at the 1988 Republican National Convention, reflecting a prevailing conservative ideology favoring low taxes and smaller government. Bush's words were politically popular after years of tax cuts and economic growth under the Reagan administration, and they undoubtedly helped him win the 1988 election.

However, as the title of this blog post suggests, George HW Bush's lips may have said he was an ideological conservative in favor of low taxes, but his actions indicated that he was an ideological shirker. In 1990, the economy was receding and there were rising political pressures in Congress, leading to an amendment of the Gramm-Rudman-Hollings Balanced Budget Act that raised multiple taxes. While most Americans believed that some tax increases were necessary due to the state of the economy, there was a loss of trust in Bush that led to his 1992 election defeat. 

While on the campaign trail, Bush tried to atone for his shirking by apologizing, but to no avail. Bill Clinton would become the next president of the United States, making Bush a one-term president. The case of George HW Bush exemplifies the consequences of ideological shirking. Shirkers don't just lie; they also lose.

He Was Not Ken-Enough

Last Saturday, I went to a charity banquet for a student org, partly for the delicious food and partly because my friend wanted to see a boy she liked who was also attending. For clarity, the boy will hence forth be referred to as Ken. 

This event was "ticket optional." All proceeds went to charity, so you could pay/donate as much as you wanted when registering. And if you wanted to be a real jerk, you could pay nothing. Either way, you would still receive entry and have access to the catered dinner. The dinner here is our public good. 

While we were in line for the buffet, Ken told my friend he didn't donate any money and was just here for the "free" food. In that moment, I realized: 1) Ken sucks and my friend can do so much better, and 2) this was an exact replica of the situation outlined in Chapter 1 of the Olsen reading. This student org was relying on voluntary monetary contributions, driven by emotional/idealogical factors, to the cover event costs. Ideally, org members would want to pay something to support the cause. But this creates a free-rider problem. 

There's no way to exclude people like Ken, who weren't sufficiently motivated by sentiment to contribute, and yet still receive the benefits of the common interest/public good (dinner) the org managed to obtain. As Olsen points out, this is why governments can't survive on voluntary dues and instead impose compulsory payments like taxes. The state provides public goods, ie non-exclusionary goods. It'd be impossible to exclude citizens who didn't voluntarily contribute to the cost of public defense from the benefit of said defense.

In conclusion, I'll be advising my friend to stay single!!!

Stop! In the Name of Bourbon

My dad and I took a winding drive through Napa Valley when my dad stopped by a winery to buy a case of wine. At the counter, the cashier asked us where we were from, to which my dad said Kentucky. This prompted the man to pull out a massive binder with the state-by-state rules for shipping wine. 

And much to my dad’s dismay, Kentucky was listed in the binder as a no-ship state. This is a prime example of one of Stigler’s types of regulations – controlling substitutes. Kentucky’s bourbon industry knows very well that fans of liquor also tend to be fans of fine wine – so by restricting their ability to buy California wine, they can reduce competition for Kentucky residents. 

There’s one problem with no-ship rules…other states retaliate. California had a similar law prohibiting shipments of Kentucky bourbon to their state to prevent competition with their precious wine. 

While it seemed like capture was here to stay, the COVID-19 pandemic and the ensuing economic pressure on Bourbon Trail tourism pushed distillers to finally sign on to a new law that would open up shipments of bourbon and wine between both states. Public interest finally prevailed – and now Kentuckians and Californians can get whatever bourbon or wine they want (within the quantity restrictions). 

The Rational Gambler Hypothesis

We have discussed the rationality behind voting behavior, and I think that the   pB + [D] - C > 0 model could also be used to create a “rational gambler hypothesis” with sports bettors. Each individual bet can be seen as a “vote,” with p representing the probability of it being successful, B being the potential payout, and C representing the wagered amount as well as the time and effort spent to place the bet. Similar to voting, pB will virtually always be less than C because sportsbooks both set accurate lines and offer odds that are advantageous to the house. If we assume that lines favor the house and gamblers know this, then the “D” value, the added utility of watching a game with a bet placed on it, is the reason that people gamble on sports.

If we attempt to analyze the model to get the optimal bet size (similar to Peltzmann’s work), then the first step is to take the derivatives of (pB - C) and (D) with respect to bet size. (pB - C)’ is negative as the size of the bet increases due to the disadvantageous odds, and there is also a significant "fixed cost" associated with placing any bet. D’ is positive until some satiation point where the bet becomes stressful, and D’’ is negative before this due to the law of diminishing returns.

A normative implication of this model is that gamblers should place bets that are big enough to be worth their time but not too large that they start to become stressful. These moderately-sized wagers could benefit both the bettor and the house, who knew that gambling could be pareto-efficient?

Raise the roof: chaos in the house representatives

   Around a month ago, the house of representatives fell into chaos with a debt issue and turmoil inside the ranks of the GOP. The GOP holds the majority of of the seats in the house by a 4 seats. A group of 8 "hardliners" inside of the republican party have consistently caused issues by voting against republican bills that they don't support. Most recently this happened in a crucial moment when the house was voting on a bill which would raise the debt ceiling and avoid a government shutdown.

    The "hardliners" wouldn't work with the republicans or democrats. They contain enough members and clout to stop any bill that only has single party agreement on. In a hypothetical world where reps only vote for their party (except for the "hardliners"), the hardliners would be the agenda setters and the bills passed would need to be approved/ appeal to them the most. In reality, the democratic and the republican blocs were able to work with each other (logrolling). The bill therefore fit bipartisan ideals and the "hardliners" lost their agenda setting power. Ironically, they held the power all along because they promptly ousted McCarthy by calling a vote for his removal (a novel power log-rolled by McCarthy so he could gain the votes to become the speaker). 

Dolly Rocks with Redistribution

        The 2023 Rock & Roll Hall of Fame induction ceremony happened on Friday, and as I saw advertisements from it and highlights from it, I thought back to last year’s ceremony when Dolly Parton was inducted into the Hall of Fame. Dolly Parton is a fantastic singer, songwriter, performer, and all-around icon, and she also demonstrates some interesting economic ideas about redistribution. 

Dolly is one of the most famous singers in the world, and has been for a while, and she has had the opportunity to become a billionaire at many points in her life, yet she chooses to donate hundreds of millions of her fortune to philanthropic causes. Compared to others, such as Jeff Bezos, who have achieved billionaire status, she demonstrates that different individuals may choose to redistribute money until their marginal utility of income is equal to that of the super rich. Part of the reason why Dolly has donated so much of her potential billion-dollar fortune may be because her marginal utility for income is far less than some, like Jeff Bezos, and she contributes to philanthropies in order to get her marginal utility for income to a point where it is equal to someone who is a billionaire. Overall, to me this is just one example as to why Dolly Parton is a total rockstar, both on and off the stage.

A Royal(ly Absurd) Decree

Australia has a system of public inquiries called royal commissions, and they've become a particularly popular way for politicians to "respond" to the public's concerns. One of these commissions was called in 2017 to conduct a review of the banking and financial services industry after a series of exposés unearthed misconduct including bribery, money laundering, and even the charging of service fees for customers who were already dead. Australia has two financial regulatory bodies: the Australian Prudential Regulation Authority (APRA), and the Australian Securities & Investments Commission (ASIC). The commission found that both had fallen to regulatory capture from the Big Four Australian banks, causing them to turn a blind eye when evidence of this misconduct had been presented to them for years.

When the commission concluded in 2019, a report of recommended actions was presented for parliament to consider. While some of it seems sensible, I nearly spat out my drink when I reached Recommendations 6.13 and 6.14. They call for "a new oversight authority" consisting of "three part-time members" and "regular capability reviews" to keep APRA and ASIC from being captured by the banks again. A regulator to regulate the regulators. The absurdity of this is two-fold – not only would this super-regulator be just another target for the banks, it would also present an incentive for APRA and ASIC to take up their own lobbying efforts to swing its oversight in their favor, thereby adding even further to the inefficient allocation of resources. It seems like the bill implementing this authority has yet to pass, but I think I need to take some public choice material back home with me if even our highest form of public inquiry can produce recommendations like this.

What's the Deal with the Delian League?

 While studying the Ancient Greeks, I came across something quite interesting. During the Persian Wars and the time that preceded the First Peloponnesian War, interest groups were at the center of Athens and its policy. In this case, the interest group at hand wasn't one in the traditional sense, like one might think of when they refer to the NRA. Instead, this interest group was far more similar to NATO. It was known as the Delian League, and it was formed as a preventative measure against the inevitable Persian invasion in the future.

This group was quite large, consisting of most of the islands in the Aegean Sea and quite a few other Hellenic cities. Its goal was to create a force of Greeks that was enough to rival the Persians, so the selective incentive here was that by joining one would be protected against Xerxes and his foreign invaders. Protection was to the Delian League as a duffle bag is to the NRA. But soon, they realized that the Persians weren't coming back and that even if they did, Athens, the leader of the group, could handle it even without their tribute payments. In a sense, they realized that the duffle bag wasn't as valuable as the little flier had made it out to be. As a result, many islands, such as Naxos, tried to free ride and get the public good of protection without paying tribute. (Of course, this was free riding since they knew Athens wouldn't allow the Persians to enter and gain any Greek territory). Athens didn't love this and then forced membership, turning it into an Empire with taxes instead. Even back then, people hated free riders.

The Tuesday @ 9:30 Union

         As we all know, on Tuesday we held a unanimous vote to hold class on election day instead of having a lecture on the Tuesday before Thanksgiving. Is it a coincidence that this occurred at the end of our lecture on Olson’s theory on interest groups and how their size determines their success? I think our quick vote spoke to his theory. As our class was yelling new dates for class across the room to one another, I thought to myself, “this would be a nightmare in a large lecture-sized class”. In a larger group like that it would be nearly impossible to reach a unanimous decision, due to high organizational costs and free-riding. Students that refuse to contribute (or in this case vote), whether it be purposeful or not, would be considered free-riding and prevent a unanimous vote from being reached.

        In a way, our class acted like a small, monopolistic interest group. We were effective at this size because it was easier to incentivize everyone to vote as well as monitor the two folks who were absent and quickly communicate to them the situation. The social pressure present in small groups was also evident in our class. I heard one peer say “I would’ve had to be here the Tuesday before Thanksgiving anyways, but I voted for you guys!”. I am sure she would’ve liked having the full day off on election day, but since she could hear how passionate everyone else in the room was, she felt obligated to vote to move class. Overall, I think our collective bargaining as a small interest group was very successful, which is largely due to the small size of our class.

Regulatory Capture and my former employer

Following my first year at UVA, I returned home to Springfield, Virginia for the Summer in search of employment. With few options available to me, I found work at an Amazon fulfillment center (a warehouse), and started work at the end of May. For the next four months, I worked 11.5-hour labor-intensive shifts, from 6:00 p.m. to 5:30 a.m., four days a week, for the privilege to enjoy a $15.95 an hour compensation. As you can probably guess, it was a dream come true.

While I was there, I learned of Amazon's efforts to raise the federal minimum wage, which they proudly publicize. Since 2018, Amazon has held its starting wage at $15 an hour, which is over double the federally required minimum of $7.25 an hour. If Amazon is already willing to compensate their employees at a higher than required rate, then why do they lobby Congress to ask for this regulation? 

Ultimately, with massive revenues and market share, Amazon can afford to pay its thousands of warehouse workers and delivery drivers $15 an hour. At the same time, Amazon knows that some of its competitors, without such economies of scale, cannot afford the same costs. An increase in the federal minimum wage would create a barrier to entry for smaller firms incapable of producing with the same costs, giving Amazon even more market power. Who would have guessed that Amazon is acting in their rational self-interest?

The War on Margarine!

On August 7, 1886, Congress passed the Margarine Act. This imposed steep annual fees for licenses on manufacturers ($600), wholesalers ($480), and retailers ($48), and a tax of two cents per pound on the product. In 1902, Congress passed a tax on margarine five times higher than the 1886 act, and two years later the Supreme Court upheld the law’s constitutionality. Congress finally repealed the margarine tax in 1950 (poor Prof. Elzinga...), and Wisconsin became the last state to repeal its anti-margarine regulations in 1967.

Capture theory, in the context of regulation, suggests that regulatory agencies may be "captured" or heavily influenced by the industries they are meant to regulate. Now, how does this tie in with margarine?  At the time, the dairy industry held significant sway over and a large impact on government decisions. The Margarine Act was essentially pushed through by dairy interests to restrict the production and sale of margarine. Furthermore, the regulations imposed by the Margarine Act, such as coloring and labeling requirements that made margarine less appealing to consumers, were essentially a result of dairy lobbying influence on the regulatory process in order to "protect public interest." This was also a move to protect the butter industry from competition, as margarine was becoming a cheaper alternative (aka a substitute!). The regulatory decisions were influenced by the dairy industry to preserve its own interests. This is a great example of how regulatory agencies can become captive to the industries they are meant to oversee. Hopefully, this more in-depth exploration of the war on margarine got your brain churning!

Roller Coasters and Recess Bells

     If you went to Virginia public schools growing up, then you know that schools often started after Labor Day. But did you ever wonder why? No? Well I’m gonna tell you the answer anyways. The Kings Dominion amusement park lobby played a significant role in pushing for legislation that mandated public schools to begin their academic year after Labor Day. This decision, rooted in economic interests, reflects the ideas outlined by George Stigler in "The Theory of Economic Regulation." Stigler's theory suggests that industries often seek to use the state's regulatory power to enhance their profitability. In this case, Kings Dominion aimed to safeguard its financial interests by ensuring that schools started after Labor Day, believing this would boost tourism and the park's revenue.

    However, a critical analysis of this decision reveals its limited economic impact. A report from Old Dominion University found that the economic ripple effect of tourism spending during Labor Day weekend was relatively small, accounting for only approximately $40 million, or one-sixth of one percent of total tourism expenditures in the state. So essentially, the lobby has its power to exercise political control rather than to tangibly impact Kings Dominion’s revenues. The Kings Dominion lobby successfully lobbied for this law, highlighting Stigler's assertion that regulation is often acquired and operated for the benefit of the industry it seeks to protect.

Homeland economics: the tight-rope walk of trying to prepare for the future

    Since 2008 it is no secret that the United States has experienced significant economic turmoil from economic shocks such as the housing crash, covid, and on-going wars across the Atlantic. These shocks caused a reaction from policy makers called "Homeland economics". The supply chain issues from covid and the energy crisis from Russia's war on Ukraine have created the want to strenghten domestic production, so that future disruptions are avoided. Predictions of future pandemics and international conflict seem like good reasons to prepare our economy with foresight. The means of "Homeland economics" lie in industrial policy. Industrial policies include subsidies, tax-breaks, or protective regulations for domestic producers, including incentives for firms to "re-shore" production back to the USA. With the goal of fortifying the economy for long-term success and creating sustained benefits felt by society, the use of government regulation often fails to follow through on its original intentions.   

    George Stigler wrote, "As a rule, regulation is acquired by the industry and designed and operated for its benefit". When these industrial policies are created they look to model successful usages of regulation such as China or South Korea; however, without proper implementation regulation fails to benefit society. From the many examples given by Bill Gurley's presentation, it is evident that more often than not, regulation is not implemented correctly and consequently benefits the bigger, incumbent firms. Homeland economics looks to stabilize inflation and increase domestic innovation and production in industries like green-energy and microchip manufacturing; however, it is likely inflation and price levels would increase if global trade is restricted; and furthermore, domestic innovation could be snuffed out by unintended barriers while production would be controlled by a limited number of firms. Overall, I believe that trying to prepare our economy for a tumultuous future is a worthwhile cause; however, with the wrong policies in place Stigler's model suggests that private interests would out-gain public interest causing a net loss for society. If the true goal is for societal benefits and not special interests, the industrial policies in place cannot restrict entry into the markets and prices must be determined by market forces, otherwise is likely that few will benefit and most will pay. 

AC and Voting

     Living with roommates means there are certain things you have to agree upon so you can live amicably. One of those things is how high/low you set the AC. The way we determine the AC is by simple majority with runoff. We first determine what we deem as a cold temperature, a moderate temperature, and so on until we have 4 options (cold, warm, moderate, or the AC is off and windows are open). For us, we need 3 out of the 5 of us to agree upon a temperature for it to pass. Cold passes under a simple majority after a runoff. However, upon reviewing the different types of voting methods that we learned in class, I wondered if Borda would produce a different result. Borda picks the Condorcet winner more often than simple majority with runoff so I thought that the Borda method might be a better (where better here simply means: picks the Condorcet winner more often) method for determining the AC than the simple majority with runoff.

To demonstrate why the Borda method might be better I laid out my friends' preferences in the following table:

	Sam	Nathan	Zachary	Sami	Alex
4	cold	warm	Off	cold	off
3	off	cold	moderate	off	moderate
2	moderate	off	warm	moderate	cold
1	warm	moderate	cold	warm	warm

Cold= 4(C) + 4(C) +3(C)+2(C) +1(C) =14

Off= 4(O)+4 (O) + 3(O) + 3 (O) + 2(O) + = 16

Moderate= 3(M)+3(M) + 2(M) +2 (M) + 1(M) =11

Warm=  4(W) +2(W) + 1 (M) + 1 (M) +1 (M) = 9

In a simple majority after a runoff “Cold” wins. But with the Borda method “off” wins. However, in a pairwise election where it is “Cold vs Off’, “Cold” wins. In this situation it seems that the Condorcet winner is “Cold” yet Borda chooses “Off”. In this unique example simple majority with runoff chooses the Condorcet winner yet Borda does not, even though Borda on average chooses the Condorcet winner more than the simple majority with runoff.

Baptist and the Bootlegger

Marc Andreessen was a guest on the Lex Fridman podcast a few months ago. Among the many interesting topics they discussed was a conversation about the Baptist and Bootlegger theory. In short, this theory illustrates how disparate groups may unexpectedly align to support and/or lobby for the same regulations or policies. The most classic example is how the Baptists and Bootleggers aligned in their interests of banning alcohol during the Prohibition era. The Baptists for moral reason and Bootleggers to increase their alcohol sales.

Recently, Sam Altman appeared in front of congress begging for regulations against open source AI. These big AI companies are asking the government to regulate the development of AI to a few "trusted" tech companies. 

Marc then compares this theory to Sam Altman, and the leaders of other Big Tech companies, begging for regulations against open source AI, saying "Economists will tell you it's the same pattern every time ... this is what's happened dozens and dozens of times throughout the last 100 years". 

It is clear that Andreessen is referring to these big AI companies rent seeking and riding off the backs of the general public's fear of the possibilities of AI, to get regulations passed that create barriers of entry into the AI field. Big Tech companies are known for being extremely slow to change and adapt, which is why new successful tech startups are constantly emerging. These AI regulations would efficiently make it impossible for new startups to enter the space and compete against these tech giants. 

Aint No Rest for the Wicked

    Saturday night, the night of the historical UVA upset over UNC, I ordered a couple of pizzas to eat with my friends. When I went to pick up the pizza from the delivery women at our front door, I greeted her with a pleasant, "Hi, how are you doing tonight?". This prompted her to begin telling me all about her week, which she complained about having her hours cut at a different job and having to pick up another job delivering pizzas. I expressed sympathy as I know no one wants to be delivering pizzas at 10 pm on a Saturday night, but she responded with "It's ok, it's free money". As I closed the door, the Coppock voice inside my head screamed, "There aint nothing in this life for free!" (shoutout Cage the Elephant). 

    For this delivery women, the money earned was not free. The cost of the money she made is the opportunity cost of what else she could have been doing with that time. Now, for some people, the opportunity cost of their time would be too high to pick up a lower paying job like delivering pizzas. This could be because they have a higher paying/valued opportunity, or it could be their marginal utility per extra dollar is low enough that leisure time is more valuable than an extra dollar would be. Even for this delivery women, she may have higher valued activities she could be doing (activities that bring her utility but not necessarily money); but, in her precarious position, any extra dollar is extremely valuable for her and her family. I was able to restrain myself from telling her she was wrong when she said the money is free, but in the future it is going to be difficult to subdue my inner economist.  

Coase's Theorem...Apply to Roommates

 This week I was slammed with work, and at some point had to find time to fit in a 3 hour take-home midterm for my memory distortions class. The only time that I could carve out 3 consecutive hours to take this test before the deadline was unfortunately Thursday night from 7-10 pm. My roommates were out for most of the time that I was taking the test, but they started coming back in with our other friends around 9, right when I was starting to feel the time crunch as I started my essay question on retrieval practice. For them, it was a regular Thursday night, and they were having fun in the living room, which is right next to my room, meaning I could hear everything and kept getting distracted.

I thought of the Coase theorem and his two key assumptions about the nonexistence of transaction costs and clearly defined property rights. I considered striking a deal with them, in which they compensated me for every minute they spent talking in the living room and disrupting the silence. I realized, however, that we did not have clearly defined property rights. We all live in the apartment and pay for equal ownership of areas such as the living room, and I could not be sure if they would have to pay me, or if I would be stuck paying them for some peace and quiet. I only had an hour left to finish my test at this point, so instead of spending my time working out the correct Coasian solution, I just opened my door and politely asked them to be a little quieter.

Please Fix My Broken Dorm Light

    We have a system for reporting maintenance requests in the UVA dorms. If a particular shower is clogged or a door alarm is wonky or a light is broken, you can simply file a request and maintenance will take care of it within two days. It is an impressive system and an advantage over living off-grounds where you are lucky if the landlord even responds to your email asking for repairs. But such a system is akin to the example in Chapter 6 in The Calculus of Consent where “any individual in the municipal group under consideration may secure road or street repairs or improvements when he requests it from the city authorities”.  

    In such a system, even a remote road traveled by only a few people would lead to repairs whose benefits are not shared evenly. Since only one individual is needed to take collection action to request repair and a student is rarely charged for the service, the expected external costs are high. There is an over investment because repairs for the smallest issues are filed, and the facilities staff size is likely larger than it would need to be. We likely see the external cost of such a system in the form of higher housing costs than would be if these expenses were charged to the individual rather than collectively. Nonetheless as someone with free housing as an RA, I am quite content with the current system.

An Indecisive (and costly) HOA

 When we lived in Nashville, my dad put his handiness to work and built my sibling and me a beautiful playhouse (not one of these pre-bought sets). Once he finished, he unveiled our new house after school – and we quickly got the attention of the kids on the block…

…and the HOA. My dad had painted the trim of the wooden house red, thinking it matched the neighborhood homes. The HOA did not agree. A few days later, they dropped off a letter telling him to repaint the trim a less bright color. My dad begrudgingly compiled, painting the trim a pale blue. Yet again, the HOA sent a letter telling him to repaint the trim, this time to a neutral color – resulting in our white playhouse having a mud-brown trim. 

The fact my dad had to repaint the playhouse multiple times suggests that the Na for the HOA may have been low. Having to repaint the playhouse TWICE increased the cost of the decision (Ci) for my dad – and the decision-making costs (Di) of trying to negotiate with the HOA – some of whom wanted the playhouse to be out of sight from the street. If the HOA had used a simple majority, my dad would not have had to make so many runs to Home Depot (although I think he liked painting so
much he may not have minded too much).

Coase in the Cul-de-sac

The street my family used to live on has a cul de sac at the end of it. Recently, I heard that a family on this street, the Gondi’s, were going to sell their house at the end of the cul de sac, and this was a big deal! It is the most expensive house in the entire neighborhood not only because the two physicians who lived there invested a lot of money into it, but more importantly because the Gondis own an empty lot next to the house which they never sold. This immaculate housing lot is filled with dense green trees that create a positive externality of a tranquil viewing for other neighbors. Additionally, it makes the club good of the cul-de-sac less rivalrous. However, with the news that the Gondis are selling their house comes the fear that this empty lot will also be sold. 

To make up (potentially inflated) numbers to illustrate this, let’s say the value of the house combined with the empty lot is $1.2 million (house: 1 million + empty lot: 200k). The new homeowner may decide to buy the house and then sell the adjacent empty lot to someone else to minimize their costs. When a new house is being built on the empty lot it will create negative externalities such as loud construction equipment, red clay tire tracks, and porta-johns to take the place of green trees. Therefore, given sufficiently low transactional costs of private bargaining, a potential Coasian solution could take place. The neighbors on the street could decide to pay a collected amount to the new home owner to keep the empty lot unscathed. However, if the cost to contribute towards the green lot is greater than the benefit of the scenic view then people may just have to get used to CAT excavators in the cul de sac or pack up and move!

Everyday Failure of Simple Majority Rule

Recently, I polled my roommate group chat on whether or not we should adopt a Russian Tortoise. The result: two resounding “yes” responses and two resounding “no” responses. In a situation where we were all 5 taking collective action via simple majority rule, my third “yes” would have broken the tie, and we would now have a tortoise named Clyde! 

But, imagine that I am a Downsian political party, trying to maximize votes via policy to win office and power— or, to win inter-roommate popularity. I face a conundrum in trying to craft my party "policy," given that there is no median to in my current four person electorate, and no winner under simple majority. If I was competing with some other, external “party” to be the most popular roommate via simple majority rule, and we were trying to appease this specific electorate of four via our tortoise policies, there would be no median vote for us to tailor our policy to and no deciding winner under simple majority rule. Even without parties, in a simple situation with four people taking collective action, majority rule fails to produce a winner in the 2-2 case.

This may seem both trivial and obvious, but this phenomenon could scale up to create serious political issues in the real world! Admittedly, this problem becomes less pronounced in a national election with millions of voters, given that you are probabilistically less-likely to have a race that comes down to a single, median vote. However, even with a massive, 10-trillion-person-sized electorate, the outcome could be 5,000,000,000 votes for “tortoise” and 5,000,000,000 votes for “no tortoise." In this case, neither a "pro-tortoise" or an "anti-tortoise" party could win. It could becomes necessary to scrap the simple majority tenet in order to resort to an alternative decision-making rule... might I propose a new, "tortoise and the Hare" method? Regardless, further economic research should compare the external costs generated by a tortoise litter box and the treatment of tortoises as a public good.

Bankruptcies and their Infinite Individual Equilibria

I am responding to a critique of my last blog post's characterization of a point (the final landing point) on the x1-x2 plane as an equilibrium.  I still posit that is an equilibrium, and I will build out the game that is bankruptcy, restructuring, and distressed debt, and briefly introduce its game theory to show not only that this past example reached an equilibrium, but furthermore that every bankruptcy ends in an equilibrium.  After all, that's why they exist.

The players of the game are investors, employees, and other third party players.  All players fight on a multidimensional plane to maximize internal rate of return.  US Chapter 11 bankruptcy and the broader legal infrastructure function to meet two main goals of stability in the US credit markets and the turnaround of failing corporations.  They collectively are the master agenda-setter that exists to expediently "right-size" the balance sheet of the debtor and reach a stable equilibrium.  

Mr. Coppock has described an equilibrium as an outcome where no player is incentivized to change behavior.  The players in this game consider their ex-ante expected probabilities of outcomes (often regarding who gets to vote) and find a balanced solution that fits their respective risk preferences.  The rounds of strategic moves by players influence and clarify the probabilities of these outcomes.  The players play the game until an agreement is found at which point the game is played no more: there is no incentive for the players to make any more moves, and an equilibrium is found.  

Friday's "Fun" Fiasco

Last night, I came home from teaching a spin class only to find my roommates arguing about who each of them was going to bring to their sorority date function this Friday night. My friend Charlotte was particularly struggling. She had three options: bring a roommate, a set-up, or one of our guy friends. In a logical (but somewhat superficial way), I suggested she rank her potential dates based on how much fun she thought she would have with each of them. But before I suggested this, our roommates who would also be in attendance at the event cast their ranked votes on who Charlotte should bring (1 being first choice and 3 being last choice): 

                    Roommate    Set-Up    Guy Friend

Sadie                   1                2                3

Cait                     2                3                1

Annika                1                3                2

Grace                  3                1                2

Bella                   2                1                3

Based on what we've discussed in class, I suggested Charlotte use the Borda Method to determine the group's preferences (apparently, she does not care in the slightest herself the outcome...). She assigned a first place ranking 3 points, a second place ranking 2 points, and a third place ranking 1 point. If we look at everyone's totaled preferences:

Roommate: 3 + 2 + 3 + 1 + 2 = 11

Set-Up: 2 + 1 + 1 + 3 + 3 = 10

Guy Friend: 1 + 3 + 2 + 2 + 1 = 9

The Condorcet winner as determined by Borda's Method in this case would be Charlotte bringing one of our lovely roommates...needless to say I am excited to attend the date function on Friday!