Eric Rasmusen’s Weblog

How would we quantify the amount of racial discrimination going on? Let’s take admission to colleges as an example. Suppose that we are in 1950, and a black student with a test score of 900 is rejected, while 80 white students with test scores of less than 900 are admitted. We could measure discrimination in terms of number of people in two ways. We could say that 1 person was discriminated against, or that 80 were discriminated in favor of. (We could look at the size of the test score discrepancy too, but let’s put that aside for now.)

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At the Law Lunch yesterday we had another great discussion. We spent the whole time on the subject of various articles of Professor Fairfield (who was absent): virtual-world property. Here is the question:

Suppose Bigfirm sets up a computer game in which customers pay to be able to create monsters and other characters and to build their own houses. Bigfirm includes a clause in the contract saying that Bigfirm will own copyright in anything created, and can at any time kick out any player and destroy anything he creates.

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Suppose Thief has stolen Owner’s car and the car is now in Thief’s locked garage. The law does not let Owner break into the garage and retrieve his car. This seems wrong. Why not let Owner break into the garage? We could add that Owner might have to pay Thief damages. He would not have to pay for the damaged lock, since that is the minimal harm needed to undo the effect of Thief’s crime. But Owner would have to pay for the Thief’s garage wall, perhaps, if Owner used a bulldozer to knock it down to get the car.

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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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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…)

I just realized that instrumental variables could be useful in a context
without endogeneity or large samples: to add datapoints.

Suppose

y = beta X + U, t= 1,…T

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A friend told me he was benefiting from the non-prescription drug 5-Hydroxytryptophan, which works a bit like an SSRI, except it isn’t a serotonin reuptake inhibitor, but is supposed to help produce more serotonin. This is an interesting drug from a regulatory point of view. From Wikipedia: (more…)

Somebody asked me about Wald tests, and I thought I’d write up my answer as a weblog entry, so someone can correct me if I’m wrong. Here’s some STATA output: (more…)

I tried out the latex hyperref package for my article on auctions at the BEPRESS Advances in Economic Theory online journal that will appear soon. It works wonderfully in miktex. (more…)

One reason why managers and why owners would like to diversify across products and countries is to take advantage of profit opportunities. Another reason is to complicate accounting so as to be able to fool other people. Let’s think about the implications. They may help explain the idea of “core competency”. (more…)

People think housing is a safe investment, which is one of the reasons I’m skeptical that it is. They then buy at high prices, thinking that the house isn’t worth that much but they can always resell it.

But suppose that the price of a house never falls. Does that mean it’s a safe investment?

No, not if you take into account the trouble of selling it.

Let’s leave aside the simple transactions cost— the 6% fee to the brokers. Think about the time your capital is tied up while you are selling the house. Suppose it takes 6 months, and that a house with a price of $300,000 would rent for $30,000 per year, something over $2,000/month. Part of that $30,000 is for taxes and maintenance, so the service return from the house might be about $20,000 per year, but I think the $30,000 rent is what is relevant for present purposes. By leaving the house vacant for 6 months, you have lost $15,000 in value, 5% of the value of the house. Thus, you have a 5% loss if you owned the house for a year. Of course, if you owned the house for 5 years, the loss is something less than 1% (because of discounting), but it is still a loss.

The idea of risk aversion is that people like to keep their consumption at a steady level rather than up and down. They prefer to consume $50,000 per year rather than $10,000 one year and $90,000 the next.

The conventional way to represent this is with a strictly concave utility function, such as

(A) U = log(C)

If the utility function is concave like this, then from any starting point a loss of $1 hurts more than a gain of $1 helps.

For decades it has troubled many economists that this theory doesn’t perfectly fit the facts of people’s behavior. No other theory of risk aversion has proven useful enough to be remembered, though, despite the hundreds of articles written on how to improve the theory. (more…)

I see that the Republicans are gaining the polls as the election gets closer, the pattern I describ ed in past posts about presidential elections. Maybe I should write that paper after all, and include midterm elections too. If someone else wants to, though, go ahead– just please cite me, and let me know if you’d like comments.

The idea of risk aversion is that people like to keep their consumption at a steady level rather than up and down. They prefer to consume $50,000 per year rather than $10,000 one year and $90,000 the next.

One caveat is that when I say “$50,000″ I mean $50,000 in constant dollars. It is obvious that we need to adjust for inflation. If all prices double, then I need to have twice as many dollars to maintain my consumption at the same level. What might not be so obvious is that we need to adjust for changes in *relative* prices. If the price of housing goes up, and that is what I consume most, then it doesn’t help me that the price of everything else has gone down. I need more dollars than before to maintain my consumption at the same level. (more…)

From NRO is another reminder that voting is valuable—on the order of $50-$80 per vote in this particular case in Rhode Island. (more…)

Project Gutenberg has a very good write-up of the law of copyright and reprints. Here are some tidbits: (more…)

I just realized something about censoring in econometrics: it has two varieties,
one like a corner solution and one like a narrow window of observation. (more…)

Professor Bainbridge has a post on Professor Bebchuk’s latest: a proposal to make corporate law federal instead of have competition among state statutes. It seems Prof. Romano has a book on how badly the federal government does securities law, and people talk about a “boom- bust-regulate” cycle. On the other hand, the federal government has economies of scale, and generally does things better technically. The best example I know of that is the writing of income tax instructions– the federal booklet is a marvel of clarity compared with Massachusetts, Illinois, Indiana, and California. (more…)

In The Blind Watchmaker, Dawkins gives a theoretical support
for slow-
increment evolution (against creationism, intelligent design,
punctuationism, Lamarck, and all comers). At one point, he makes fun of
an English bishop who uses what Dawkins calls the weak Argument from
Personal Incredulity. “It seems implausible to me…. I cannot believe
that… Could it possibly happen that…” Dawkins does a good job of
making fun of it.

My first thought was that the Argument is nonetheless okay. What we
often do is to describe a situation and then say, “I don’t think that’s
plausible.” It, of course, can’t really be just an argument from
Personal incredulity. Rather, we are trying to share our doubts. And
this is a rational argument, that can be refuted. The opposing view can
try to present explanations or evidence that will overcome the
doubts.

My second thought, though, was that Dawkins relies on a very similar
argument, but one that sounds even worse. What he relies on is the
Argument from Personal Credulity. His answer to the bishop is “It seems
plausible to me, … I believe that,… It could easily happen that… ”
And, of course, that is an equally legitimate argument. It can be
refuted by evidence or explanation that undermines Dawkins’s beliefs.