Getting Drunk Rationally–College Life Edition

Let’s just put this up front: Excessive consumption of alcohol and alcohol addiction are bad. It’s even more bad when those involved are underage college students (or even younger). Okay? Okay.

Now, we can debate what the threshold of “underage” is (currently, 21 years in the United States) versus what it could be (18 in most of the rest of the world). If we adopted the global standard, there would be very few US college students who are underage. Problem solved, right? I doubt college administrators would agree (but maybe they should…see below).

While drinking is a hallmark of the US college experience, it is a problem–whether students are underage or not. According to a recent survey of students here at the University of Missouri (MU), 86% drink alcohol regularly; 38% of underage drinkers drink to get drunk, and 68% of Greek students binge drink (ban the Greeks! no, not those Greeks). Binge drinking is defined as 5+ drinks in two hours for men, 4+ for women. Despite these numbers, fewer than 1% of students were arrested for a DUI and almost no students ran afoul of campus administration. But the numbers reflect a lot of irresponsible and illegal drinking, so the University has launched an effort to reduce the incidence of underage drinking and high-risk drinking.

One of the proposals, which has been embraced by other universities, is to increase the number of Friday morning classes. A 2007 study showed MU students with no Friday morning classes drank twice as much on Thursdays as those who had classes. Now, this fact doesn’t take into account the self-selection by students to take Friday morning courses–presumably, those who are less worried about drinking are more likely to choose the Friday courses. But if we take it at face value (as the administration would have us do), it means students are drinking responsibly when they have incentive to do so. Students rationally respond to the expected consequences of getting hammered on Thursday morning and having to be up early (and hung over) for classes on Friday.

I believe the proposal for Friday classes, while it might have some effect, is actually a pretty bad idea. And it’s not because I prefer to teach Tuesday/Thursdays so that I have longer weekends (though it is nice to have the flexibility for traveling and not missing class). Continue reading

Legal and Illegal Cartels in Europe

There’s what looks to be an interesting workshop next month (10 September) in Belgium  on the organization and behavior of cartels in different legal environments. From the workshop webpage:

Economists and policy analysts know very little about the conditions under which cartels are formed in different legal environments, how they behave against outsiders, how they behave against deviating insiders, and how they react to changes in the economic environment. This event will provide a space to discuss these aspects, based on two projects funded by SEEK.
One of the projects studies cartel organization – a topic on which there is little information to date – through the lens of legal cartels. While such cartels did not have to fear detection and prosecution, they faced the same internal organizational challenges as illegal cartels. The focus is on comparing empirically, in specific sectors, the organizational forms of legal cartels in countries with different legal regimes. The project has collected data on Austrian, Finnish, Norwegian, Swedish and American legal cartels.
The other project has developed new theoretical insight into the anatomy of hard-core cartels and combined it with a rich data set on the recent German cement cartel. The results of this project will be presented to the audience attending the event. The private data set comprises about 340.000 market transactions from 36 customers of German cement producers and encompasses most of the period during which the cartel was functioning, as well as a period after the collapse of the cartel.

The conference is jointly sponsored by Bruegel and SEEK. For more details on speakers or if you’re close enough to be able to attend, check out the website for details.

Costs, Benefits, and Bad Tax Proposals (MO Amendment 7)

One of the most fundamental concepts in modern economics is the idea of marginal analysis. If the marginal benefit of doing something (i.e., the benefit you couldn’t otherwise obtain) is greater than the marginal cost of doing it, then a rational maximizer should do it.

A related idea is that those who benefit (the most) from something should be the ones to pay (the most) for it. Obviously, if you value something less than I do, then my marginal benefits of having or using it are greater and the marginal cost I’m willing to pay are likewise greater.

Herein lies the economic principles behind Missouri’s Amendment 7, which would impose a “temporary” 3/4-cent sales tax to fund road construction: Who should pay for road and transportation infrastructure? Those who drive on the roads (as has been traditionally the case) or consumers who purchase non-food consumables? The economic logic is pretty clear: those who directly benefit from the transportation infrastructure.

Not only does it make sense from a simple benefit perspective, but taxing those who use the roads for road improvements creates more efficient incentives throughout the entire economy. Here’s why:

If you simply slap on a sales tax, then end-consumers are stuck paying those taxes whether the products they purchased used the roads extensively, or just a little bit. Opponents will also argue that the sales tax is more regressive. While that’s true, it’s also a pretty weak argument–even if you care about regressivity. If the cost of driving products to the store goes up, the costs to consumers will go up–and it will still be regressive.

However, this is where taxing the transportation directly is critically important. Taxing road-intensive transportation more for road improvements will change the relative cost of transporting by roads. Higher road transportation costs will encourage shippers to seek alternate, more fuel-efficient means of transportation. Competition at the transportation stage will limit how much of the cost increase gets passed onto consumers, making the cost less regressive. It would also reward consumers (and producers) who choose less road-intensive products.

Taxing consumers at the point of sale does nothing to encourage more efficient use of our transportation system and it eliminates any competitive pressure between modes of transportation that would reduce the costs consumers pay for all the products they consumer. Little wonder the trucking industry is behind this proposal.

But the amendment is even more devious than that. It would prohibit any increases in fuel taxes for the duration of this “temporary tax” and would also prohibit any attempt to move toward toll-roads in the State. Ultimately, toll roads are the most efficient funding mechanism for road construction and improvements, since the road is paid for by the people who actually use it. Prohibiting even an experiment of toll-funded roads anywhere in the state for an indefinite length of time (sure, call it 10 years if you believe it will end then) is cutting off even the chance of a more efficient future that would benefit everyone–except the heavy roads users.

The construction industry (all those “stimulus” jobs!) and the emergency first responders (“we’ll be able to save you better with this tax”) would benefit the same from road construction no matter the funding source. Ultimately, this amendment is a little more than a special interest bone for the trucking industry. If we’re serious about funding roads responsibly, we should demand better of our State legislature than Amendment 7.

Why MO Amendment 1—And Its Opponents—Are Wrong

When I taught my first agricultural economics class, it happened to be at the peak of the 1998-99 hog industry crisis. I told my students, “Your parents don’t have a Constitutional right to raise hogs.” It was true then, is now, and should continue to be. But largely not for the reasons opponents of Missouri Amendment 1 claim.

You see, a Constitutional right implies an obligation, either positive or negative or both, on the government. For instance, the right to vote requires the government to make it possible for every adult to vote (a positive obligation) and prohibits the government from doing things that impede persons’ rights to vote (a negative obligation). The US Constitution’s 1st Amendment rights to religious freedom, free speech, etc., and the 2nd Amendment are expressed in the Constitution as negative obligations; e.g., “Congress shall make no law…,” or “the right of the people to keep and bear arms shall not be infringed.” But ultimately, the role of the Constitution is to put limits on what the government can, can’t–and must–do.

The text of Constitutional Amendment 1.

The text of Constitutional Amendment 1.

CONSTITUTIONAL AMENDMENT #1
Section 35. That agriculture which provides food, energy, health benefits, and security is the foundation and stabilizing force of Missouri’s economy. To protect this vital sector of Missouri’s economy, the right of farmers and ranchers to engage in farming and ranching practices shall be forever guaranteed in this state, subject to duly authorized powers, if any, conferred by article VI of the Constitution of Missouri. – See more at: http://www.mofb.org/KeepMissouriFarming.aspx#sthash.fca5gKo6.dpuf

The first problem with Missouri Amendment 1 is that it is not clear what obligations it imposes on the government, whether positive or negative. Opponents have argued, with rather disingenuous scare tactics, that the Amendment creates a negative obligation that would prohibit the State from regulating the agriculture industry in any way, leaving agricultural producers with free rein to abuse the animals they produce and the land and watersheds they work. Not only is that a grossly unfair and inaccurate characterization of the agriculture industry, it is also clearly not true. As with any other Constitutional right, the ability to exercise those rights is balanced against the public welfare interests of the State. Yes, the standard is higher in considering what limits are appropriate, but the State clearly would still have a role in prohibiting the Armageddon-like outcomes opponents warn against.

What has not been asked is what positive obligations Amendment 1 creates. If farmers and ranchers have a Constitutional right to engage in farming and ranching practices, what is the obligation of the State to affirmatively protect that right? Does it mean the State must further subsidize farmers and the farm industry, which is already one of the most heavily subsidized industries in the US? Does it mean the State must guarantee that farmers can continue to be farmers no matter what economic conditions might dictate? Does it mean contracts to foreclose on farming operations would become unconstitutional? Is it an individual right entitling each specific farmer to be a farmer forever, or is it a group right that protects farming as a productive operation. The language of the amendment itself provides no clear answer.

And what would be the consequences of the kinds of protections possible under the proposed amendment? Opponents have focused on anti-corporate bigotry and xenophobic scare tactics. However, more meaningful questions could be raised about the consequences for innovation in agricultural practices that improve food quality and supply but that might disrupt or challenge current practices and threaten to displace some producers. Or about the incentive for the agriculture industry to be innovative in its environmental practices and technologies—not in the sense that waterways would become toxic, like opponents suggest, but that there may be less incentive to developing new technologies and practices that do an even better job than current practices. Or about the incentive of the agriculture industry—and individual producers—to be sensitive and responsive to neighbors’ (and voters’) interests and concerns.

Finally, does it make sense to single out one profession or one sector of the economy as being worthy of Constitutional protection? Especially when there are already laws that provide the kinds of protections proponents of Amendment 1 want? Why is farming special compared to nursing, teaching, childcare, or any number of “socially valuable” industries (as if other professions are any less meritorious)? Proponents of Amendment 1 will rightly argue that agriculture has been under attack by special interest groups that take advantage of a voting public that lives in romanticized ignorance of the industry that produces their beloved burgers and bacon. However, the solution to that problem is not to further insulate the industry from the voting public, but to be more vigilant in educating the public and State officials in the face of anti-farming interests.

The Missouri Constitution is not the place for industries or professions to hide from competitive pressures—whether economic or ideological.

The Costs of Rent Seeking and Crony Capitalism — Tesla edition

Last week I posted at Truth On The Market about an attempt by some Missouri legislators and the Missouri Auto Dealers Association to sneak by language in an unrelated bill to effectively ban Tesla Motors from selling their cars directly to Missouri consumers. Never mind that Tesla already invested in a service facility in St. Louis and claims to have plans for one in Kansas City, creating at least a couple dozen jobs or so. Using the standard Missouri legislature economic multiplier, and that’s got to be worth at least another 1,000 jobs created! (just kidding)

In my post, I wrote that the auto dealers’ ploy “is classic rent-seeking regulation at its finest”. A reporter from Law360.com asked me what I meant by rent-seeking. There are various definitions, but it all boils down to seeking or taking advantage of political privilege or regulatory favoritism to generate extra profits (typically at the expense of disadvantaged competitors or consumers). In this case, it’s seeking regulations that would eliminate competition from automakers selling directly to consumers, thereby forcing the automakers to use independent dealers who could then take their cut from the sale of the vehicle…and, in all likelihood, increase the cost of new cars (and therefore, used cars as well) to consumers.

But the costs of rent-seeking go beyond just the increased cost to consumers due to reduced competition. It has a much more pernicious effect. When policy makers (legislators or bureaucrats) dole out rent-creating laws and regulations, it creates even more demand from other companies or industries that want their own political perks, tax breaks, subsidies, and other such regulatory favoritism. In other words, it creates a whole culture of crony capitalism–where policy makers sell and businesses buy laws and regulations that tilt the capitalist playing field to benefit the favorites, rather than letting market forces sort out the most efficient, most productive, and most desired by consumers.

As political humorist P.J. O’Rourke quipped, “When buying and selling are controlled by legislation, the first things to be bought and sold are legislators.”

Regarding Tesla, my colleague from the MU Law School and fellow TOTM blogger, Thom Lambert, and I published an op-ed in the Kansas City Star this week calling out the Republican-dominated Missouri legislature to live up to their claims to support innovation and entrepreneurship in the state and to put a stop to the rent-seeking crony capitalism. Check it out.

Could the Financial Crisis Happen Again?

That will be the topic of a seminar featuring Dr. Randy Kroszner this Friday here at the University of Missouri-Columbia. Randy is the Norman R. Bobins Professor of Economics at the University of Chicago Booth School of Business and he served as a Governor of the Federal Reserve System from March 2006 to January 2009.  While on the Federal Reserve Board, he served as chair of the committee on Supervision and Regulation of Banking Institutions. Consequently, he has first-hand knowledge of why and how the Fed sought to address the unfolding financial crisis, and some inside perspective on how the regulatory monstrosity known as Dodd-Frank–elements of which are still being sorted out and implemented–may or may not help prevent a recurrence of the financial crisis.

The seminar will be in the Moot Courtroom of the MU Law School (ground floor of Hulston Hall) at 3:00PM Friday, April 4. The seminar is going to be a kind of “fireside chat” format to open, followed by a time for Q&A from the audience. There will be a public reception afterward. The talk is hosted by the MU Liberty & Justice Colloquium. If you’re in the Columbia area, you may want to check it out.

Open Letter On New Jersey’s Tesla Distribution Ban

Geoff Manne, one of my colleagues at Truth On The Market, spearheaded an open letter explaining why New Jersey’s ban on direct distribution of automobiles (specifically, in this case, Tesla Motors) is bad public policy. The letter is signed by over 70 economists and law professors, including yours truly.

I’m no fan of the industrial favoritism Tesla has received via it’s government bailout or consumer subsidies (like so many other alternate-energy car makers). But two wrongs don’t make a right. And while Tesla Motors is the immediate target of this ban, the ban is really on a business model that threatens traditional auto dealership networks. As we explain in the letter, shutting down consumer access to innovative automotive products as a protectionist measure for brick-and-mortar dealerships is simply bad policy.

Head over to TOTM to see Geoff’s post and to read the full letter.

Free Trade and Democracy

Xuepeng Lui and Emanual Ornelas have a rather interesting paper in the current issue of American Economic Journal: Macroeconomics (Vol 6, No 2) examining the relation between participation in free trade agreements (FTAs) and the sustainability of democracy. Using hazard and duration models, and accounting for endogeneity of the dynamics, they find that participation in FTAs is positively related to democratic stability. The authors’ findings suggest the bi-lateral nature of FTAs, rather than just a unilateral free-trade regime, make credible the rent-dissipating effects of free trade and reduce incentives to subvert the democratic regime. The authors further show that the adoption of FTAs does not appear to be influenced by how democratic trading partners are, but FTAs do appear to be used as defensive measures by less stable democracies. It’s a thoughtfully done piece that illustrates the interactions of socio-political and economic institutions. The abstract follows:

We study the relationship between participation in free trade agreements (FTAs) and the sustainability of democracy. Our model shows that FTAs can critically reduce the incentive of authoritarian groups to seek power by destroying protectionist rents, thus making democracies last longer. This gives governments in unstable democracies an extra motive to form FTAs. Hence, greater democratic instability induces governments to boost their FTA commitments. In a dataset with 116 countries over 1960-2007, we find robust support for these predictions. They help to rationalize the rapid simultaneous growth of regionalism and of worldwide democratization since the late 1980s.

The Blockbuster Lesson for Higher Education

I currently have the…pleasure?… of serving on a campus committee that’s charge ostensibly is “to advise the vice chancellor for Administrative Services on the facility needs of the campus.” This is my second year (of a three-year term) on the committee. At one of our meetings last year, as we were being briefed on several planned construction and remodeling projects, I raised the question, “Has anyone considered that we may be acting like Blockbuster in an age of Netflix? Given trends in higher education, with increasing use of online technology, does it make sense to continue investing so much in brick-and-mortar facilities?” Few seemed to understand (or appreciate) my question, and it went largely unaddressed.

Earlier this week, I ran across an article by Clayton Christiansen and Michael Horn in the New York Times arguing that online education is going to be an agent of transformation in higher education. They argue that most traditional higher education institutions are, at best, reacting to online education in the same way sailing ship companies reluctantly adopted steam engine technology by just supplementing their sailing vessels with a steam engine, rather than embracing the new technology and replacing their sailing ships with steamships. Yes, that is precisely the way most universities–including mine–seem to be reacting to online education. I sent a link to the article to my fellow committee members, reminding them of my comments last year about Blockbuster.

It seems that, in the minds of some at least, advising the vice chancellor on the facilities needs of the campus does not include taking into account the potential changing nature of higher education and its implications for the facilities needs of the campus. Such a “bigger picture” is beyond our pay grade. Not surprisingly, I suppose, those observations were shared by administrators who sit on the committee. I was referred to our University’s fairly fresh “strategic plan,” which itself ignores the external higher education environment in which we operate. Point made.

But then, the real irony of the story. Within hours of these email exchanges, DISH Network announced they are shuttering the remaining Blockbuster stores in the US and shutting down Blockbuster’s mail-order deliver service. The company that, in its heyday, revolutionized the video rental industry is now dead; a victim of ignoring what it perceived to be an inconsequential technological change. As Larry Downes and Paul Nunes share in their Harvard Business Review blog today, Blockbuster became a casualty of “Big Bang Disruption.”

I doubt my committee colleagues noticed the announcement. If they did, I’m sure most disregarded it as purely coincidental and not relevant to our work–if they even connected the dots. And yet the questions remain for traditional universities and colleges, including mine:

  • Are we ignoring a big bang, disruptive technology in online education? (For a nice piece arguing yes, see Alex Tabarrock’s “Why Online Education Works“)
  • Are we still investing in long-lived brick-and-mortar assets that are likely ill-suited to compete in the future market for higher education?
  • Do we recognize that our market niche, if we are to have one at all, will likely be less about selling higher education than about selling a collegiate experience?
  • What kind of facilities are best suited to serving that market?

But those aren’t questions for me or this committee. Above our pay grade. Not what the kind of question the facilities committee should be asking. I wonder who in Blockbuster was similarly dismissed?

 

Optimal Contract under Moral Hazard and Soft Information

Guillaume Roger has an interesting paper in the current American Economic Journal: Microeconomics looking at the case in which the agent must self-report the ex-post performance outcome. This is a worthwhile extension of the typical principal-agent model, since in many real world cases there is information asymmetry ex post between the agent (who has better information on actual outcomes) and the principal. The abstract follows:

I study a model of moral hazard with soft information: the agent alone observes the stochastic outcome of her action; hence the principal faces a problem of ex post adverse selection. With limited instruments the principal cannot solve these two problems independently; the ex post incentive for misreporting interacts with the ex ante incentives for effort. This affects the shape and properties of the optimal contract, which fails to elicit truthful revelation in all states. In this setup audit and transfer become strategic complements; this is rooted in the nonseparability of the problem.