Eric Rasmusen’s Weblog

Here are some notes on “Avoiding Invalid Instruments and Coping with Weak Instruments” by Michael P. Murray, Journal of Economic Perspectives, Volume: 20 | Issue: 4 Fall 2006 111-132

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A company is thinking of building a hotel. If nothing goes wrong, the profit will be 100. The known problem is that after it buys the land, the company will not get zoning permission for a big enough parking lot, and the profit will be -100. After much thought, the company concludes that not getting permission has probability X=.3. But the company knows that something else as yet unidentified might lead to a profit of -100. The company estimates the probability of this to be Y=.1.

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Consider the old joke about the farmer who, having noticed that watermelons were disappearing from his garden, posted a sign saying,

“One of the watermelons in this garden is poisoned.”

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This site tells about the paper this GDP Density diagram is from.

A proposed Wisconsin law of a few years ago would have resulted in the names of delinquent taxpayers being posted on the Net. This is a good example of my argument in my stigma article that one function of punishment is publicity. This function has relatively low cost, and has a direct beneficial effect on efficiency. Here’s the Wisconsin story:

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From the 2003 State Department report on religious freedom, here are some excerpts from the part on Israel , the PLO territories, and Egypt. Things are better than I’d thought. First, Egypt and the PLO.

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There’s a very nice NASA-GISS site where you can click on a map of the United States to get monthly weather station temperatures since 1880. This will be useful to check out the facts when people say in conversation, “Oh, global warming has made it so much warmer this past few years around here.” Here’s some of the yearly averages for Bloomington, Indiana.

1980 11.71
1981 11.88
1982 11.08
1983 13.19
1984 11.3
1985 12.73
1986 12.39
1987 12.89
1988 12.11
1989 11.83
1990 12.32
1991 13.38
1992 12.18
1993 11.68
1994 11.97
1995 12.43
1996 10.91
1997 10.9
1998 13.64
1999 13.17
2000 12.06
2001 11.74
2002 12.76
2003 11.22
2004 12.26
2005 12.58

Tirole (p. 139)

Suppose 2 markets have different linear demand curves, and demand in
both is strong enough that under monopoly and under price
discrimination both markets will be served. Start with the monopolist
just charging one price.

If the monopolist can charge two prices, he will raise the price in
one market and reduce it in the other. Tirole shows that total output
remains the same. Efficient allocation of a fixed amount of output,
however, requires that the marginal rates of substitution be the same
across consumers, which they aren’t if prices differ. This means that
unless output strictly rises after price discrimination, total surplus
falls. Thus, in our linear-demand case, allocation has become
inefficient and welfare has fallen.

We had an unusually stimulating law lunch today. Professor Stake said he thought the Calabresi-Melamed idea of property vs. liability rules was useless, and Prof. Richards sympathized with that view. Let me rethink the idea here.

Let’s make the action the unit of analysis: Tom’s hunting in Bagley Wood. We can imagine four legal rules: (more…)

This is a paradox, seemingly about backwards induction, that I come across now and then.

VERSION ONE. On Sunday, a teacher tells his students, “I will give a quiz on or before Friday and surprise you.”

If Friday came, and there had been no quiz, the students would know the quiz would be on Friday, and it wouldn’t be a surprise the day they came in. So the quiz can’t be on Friday.

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I liked reading bits of Professor David Nanney’s
“Candide in Academe Meets Tracy Agonistes
A Memoir of the Morning of Molecular Biology :
Coming of Age in Bloomington - 1946-1951″. He’s the husband of my grade-school music teacher in Urbana, and it’s interesting to compare his stories of Bloomington Genetics in 1950 with Sylvia Nasar’s stories of Princeton Mathematics at the same time. I wish we had as thrilling an atmosphere in my department now, but of course those two departments were at the top of their fields at the times they are described.

Kevin Du told me about a good Stephen Ross 2004 article on risk
aversion and call options as compensation. It’s an example of how
top scholars can think of seemingly obvious ideas for articles that
nobody else thinks of. This article could have been written any time
since 1970, but only now does it appear.

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What is a good life? Not only is that a question for the
individual, but for the policymaker. The policymaker could use answers
to the question in a number of ways. For simplicity, imagine that
everybody in the country is identical, but the policymaker is standing
outside and deciding the country’s laws.

1. He could use his own notion of a good life, even if the citizens
disagree with him.

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One of the odd things in Genesis is that there are two similar stories about how Abraham pretends to be Sarah’s brother instead of her husband, out of fear of a king who admires her beauty. In Genesis 12 [+/-]Genesis 12 [12:1]Now the LORD said to Abram, "Go from your country and your kindred and your father's house to the land that I will show you. [2]And I will make of you a great nation, and I will bless you and make your name great, so that you will be a blessing. [3]I will bless those who bless you, and him who dishonors you I will curse, and in you all the families of the earth shall be blessed." [4]So Abram went, as the LORD had told him, and Lot went with him. Abram was seventy-five years old when he departed from Haran. [5]And Abram took Sarai his wife, and Lot his brother's son, and all their possessions that they had gathered, and the people that they had acquired in Haran, and they set out to go to the land of Canaan. When they came to the land of Canaan, [6]Abram passed through the land to the place at Shechem, to the oak of Moreh. At that time the Canaanites were in the land. [7]Then the LORD appeared to Abram and said, "To your offspring I will give this land." So he built there an altar to the LORD, who had appeared to him. [8]From there he moved to the hill country on the east of Bethel and pitched his tent, with Bethel on the west and Ai on the east. And there he built an altar to the LORD and called upon the name of the LORD. [9]And Abram journeyed on, still going toward the Negeb. [10]Now there was a famine in the land. So Abram went down to Egypt to sojourn there, for the famine was severe in the land. [11]When he was about to enter Egypt, he said to Sarai his wife, "I know that you are a woman beautiful in appearance, [12]and when the Egyptians see you, they will say, 'This is his wife.' Then they will kill me, but they will let you live. [13]Say you are my sister, that it may go well with me because of you, and that my life may be spared for your sake." [14]When Abram entered Egypt, the Egyptians saw that the woman was very beautiful. [15]And when the princes of Pharaoh saw her, they praised her to Pharaoh. And the woman was taken into Pharaoh's house. [16]And for her sake he dealt well with Abram; and he had sheep, oxen, male donkeys, male servants, female servants, female donkeys, and camels. [17]But the LORD afflicted Pharaoh and his house with great plagues because of Sarai, Abram's wife. [18]So Pharaoh called Abram and said, "What is this you have done to me? Why did you not tell me that she was your wife? [19]Why did you say, 'She is my sister,' so that I took her for my wife? Now then, here is your wife; take her, and go." [20]And Pharaoh gave men orders concerning him, and they sent him away with his wife and all that he had. (ESV)
the king is the Pharaoh of Egypt, and in Genesis 20 [+/-]Genesis 20 [20:1]From there Abraham journeyed toward the territory of the Negeb and lived between Kadesh and Shur; and he sojourned in Gerar. [2]And Abraham said of Sarah his wife, "She is my sister." And Abimelech king of Gerar sent and took Sarah. [3]But God came to Abimelech in a dream by night and said to him, "Behold, you are a dead man because of the woman whom you have taken, for she is a man's wife." [4]Now Abimelech had not approached her. So he said, "Lord, will you kill an innocent people? [5]Did he not himself say to me, 'She is my sister'? And she herself said, 'He is my brother.' In the integrity of my heart and the innocence of my hands I have done this." [6]Then God said to him in the dream, "Yes, I know that you have done this in the integrity of your heart, and it was I who kept you from sinning against me. Therefore I did not let you touch her. [7]Now then, return the man's wife, for he is a prophet, so that he will pray for you, and you shall live. But if you do not return her, know that you shall surely die, you and all who are yours." [8]So Abimelech rose early in the morning and called all his servants and told them all these things. And the men were very much afraid. [9]Then Abimelech called Abraham and said to him, "What have you done to us? And how have I sinned against you, that you have brought on me and my kingdom a great sin? You have done to me things that ought not to be done." [10]And Abimelech said to Abraham, "What did you see, that you did this thing?" [11]Abraham said, "I did it because I thought, There is no fear of God at all in this place, and they will kill me because of my wife. [12]Besides, she is indeed my sister, the daughter of my father though not the daughter of my mother, and she became my wife. [13]And when God caused me to wander from my father's house, I said to her, 'This is the kindness you must do me: at every place to which we come, say of me, He is my brother.'" [14]Then Abimelech took sheep and oxen, and male servants and female servants, and gave them to Abraham, and returned Sarah his wife to him. [15]And Abimelech said, "Behold, my land is before you; dwell where it pleases you." [16]To Sarah he said, "Behold, I have given your brother a thousand pieces of silver. It is a sign of your innocence in the eyes of all who are with you, and before everyone you are vindicated." [17]Then Abraham prayed to God, and God healed Abimelech, and also healed his wife and female slaves so that they bore children. [18]For the LORD had closed all the wombs of the house of Abimelech because of Sarah, Abraham's wife. (ESV)
it is the king of Gerer. In both stories, Abraham acts despicably. It’s natural to suppose that the compiler of Genesis wrote in two versions of the same story.

In a previous post I suggested an interpretation that makes both stories’ reality plausible. But I think I really come down on the side of the two stories being different tellings of the same episode. If I were compiling Genesis, I could see including both versions if I did not know which one was better. And this does not attack the credibility of the Bible. It does not really matter whether Egypt or Gerer is the kingdom. If I were telling a story like that, I would not worry much about that kind of inaccuracy. The point is elsewhere.

This data on monthly deviations from 1961-1990 monthly temperatures may be a bit hard to read, but it is interesting. It shows that the past decade has been warmer than 1961-1990, but it isn’t clear that the world is getting warmer in the 21st century. The source is the IPCC, a group which supports efforts to stop global warming.

The yearly averages are:
Year Average
1996 0.205
1997 0.462
1998 0.817
1999 0.487
2000 0.361
2001 0.553
2002 0.661
2003 0.641
2004 0.612
2005 0.745
2006 0.658

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I’ve been thinking about structural estimation, a style of econometrics in which the analyst builds a model of firms maximizing their profits and consumers maximizing utility and then estimates that very model. The model must allow for heterogenous firms and consumers, since the observed data won’t fit an identical-player model exactly, and it will involve some fixed parameters unobserved by the analyst and some observed variables that results from maximizing behavior given those parameters. The method is to pick some guesses for the parameters (let’s name one of them H), perhaps including Monte Carlo draws from an error distribution with a guess at the variance, then see what endogenous variable values result (let’s call one of them Y- hat, and then see how they compare with the actual observed values (Y). To see how they compare, you need to take a weighted average of the distances between the various endogenous variable predictions and actual values, and this is done with the Generalized Method of Moments by estimating a covariance matrix. There is a “distance” between predicted and actual values, and the analyst sees whether he can get that distance to shrink by picking different values for parameters such as H. He does that by an iterative search on a computer. Eventually, he stops, and uses his results to “bootstrap” some standard errors as a gauge of how accurate the estimates are.

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Larry Kanfer is an Illinois photographer whose work I like. He has online images at http://kanfer.com/galleries.htm.

More sentences from Proust’s The Times Rediscovered:

As to monuments, the destruction of a unique masterpiece like Rheims is not so terrible to me as to witness the destruction of such numbers of _ensembles_ which made the smallest village of France instructive and charming….

Even before the war they [the Americans] loved our country and our art and paid high prices for our masterpieces of which they have many now. But it is precisely this deracinated art, as M. Barrés would say, which is the reverse of everything which made the supreme charm of France. The Chateau explained the church which in its turn, because it had been a place of pilgrimage, explained the _chanson de geste_….

…M. Barrés who alas! has been the cause of our making too many pilgrimages to the statue of Strasbourg and to the tomb of M. Deroulède, was moving and graceful when he wrote that the Cathedral of Rheims itself was less dear to us than the life of one of our infantrymen. This assertion makes the rage of our newspapers against the German general who said that the Cathedral of Rheims was less precious to him than the life of a German soldier, rather ridiculous.

One point of this book seems to be that art is necessary to capture the present, or the past, or any time, and that even the mundane moment is valuable and worth capturing. Maybe it is easier to capture the grand and special moments, and so we should devote more time to them, but that is a different motive from the value of the grandness in itself.

From Proust, The Times Recaptured:

Be frank, my dear friend, you yourself exposed the theory to me that things only exist thanks to a perpetually renewed creation. You used to say that the creation of the world did not take place once and for all, but necessarily continues day by day. Well, if you said that in good faith you cannot except the war from that theory. It is all very well for our excellent Norpois to write (trotting out one of those rhetorical accessories he loves, like ‘the dawn of victory’ and ‘General Winter’) ‘now that Germany has wanted war, the die is cast’ the truth is that every day war is declared anew. Therefore he who wants to continue it is as culpable as he who began it, perhaps more, for the latter could not perhaps foresee all its horrors.

I am not quite sure what to make of this, but it contains some sort of truth. The part about war is easier to understand— the decision to end a war is always open. Later, Proust raises a related question:

How is it that the restitution of Alsace-Lorraine appeared to France an insufficient motive for a war and yet a sufficient motive for continuing it and for declaring it anew each year?

But what of creation generally? Certainly new things arise each days, so there is new creation in that sense. But what of everything? We cannot know, I suppose, whether God must continually keep the world in existence, like the creator of a movie who must keep it going with new frames continually lest it freeze in one frame or go blank.