Monday, June 9, 2008
Re: Religion and Economics
I agree with your lack of rationality assumption, but that does not really mean that economically you make a good case for church. First of all your comment on people go to church once a week is exactly in line with my rationality assumption. What I mean is that faced with a non enforcible contract people choose to not deliver fully on their side (such a living a life of pious adoration of God). Second, you cannot allow for an infinite pain solution as that would create a bubble solution, which we know is not sustainable in any model. One needs to assume a non-Ponzi solution for the model to be solvable, which would suggest that people as rational actors would not engage in such a contract.
Thursday, May 22, 2008
Re: Religion and Economics
Although I suppose you are correct in some of what you say. We might assume the cost to be small throughout a lifetime: even if you go to church every Sunday, suppose and contribute a few dollars a week to the collection basket. I guess that what people are doing is twofold. On one hand they are buying insurance against what they believe to be an infinite amount of pain and suffering, such as in the traditional notions of Hell. A small price to pay, just in case it exists. On the other hand, they are also buying peace of mind. That's pretty valuable. Finally, I would add that the main problem is that this is an area in which the rationality assumption goes out the window as religios folks play to the emotional side of people's personalities.
Saturday, May 3, 2008
Tuesday, April 22, 2008
The Role of Government and Market Failure--Part 1 of many
Over the past two years there has been a lot of back and forth between Tom and I over the role of the government and the appropriate size of the government. While I can't safely label any of us as pro large government or not, I do believe that we both agree that governments serve a very important purpose. This is not the purpose I am going to discuss in this post, since I do not want yet to bring into the discussion the role of property rights and contract enforcement. What I want to talk today about is the role of government is smoothing economic crises.
By and large I am looking at the impact of the current oil crisis on both the US and European countries. I think we can all agree that the US has been suffered much more from the rapid increase in oil prices than European countries have. The average citizen now pays a significantly larger chunk of their monthly income on gas, and a lot of the income is spent on gas that is used for rather basic needs with highly inelastic demand curves, such as driving to and from work. The impact on the European worker is significantly lower.
There are many explanation, and the pending baking crisis in The US is but one of them. What I want to focus on is the importance of governments and their role in providing semi-public goods in smoothing out such crises. When it comes to the private market and driving your own car there are many places in the US where the alternatives are virtually inexistent. With few exception, public transportation in the US lacks coverage and fails to provide a significant substitute to driving one's own car.
In contrast, most European countries have significantly better developed public transportation networks. This implies that when oil prices skyrocket people where governments tend to be larger and provide more public good, even if these goods are subsidized, have alternatives and can switch to substitutes, thus avoiding a blow to their monthly balance sheets.
In the following days I will add a simple model that discusses the situations when the existence of semi-public goods as substitutes to purely private goods ends up being beneficial. Until then, I am merely trying to make the point that current events prove that larger governments may add to people's ability to smooth their consumption over time and avoid stochastic shocks. Considering that research shows that most people are risk averse (except maybe very religious people as I mentioned I an earlier post and those who gamble or play the lottery), one could conclude that it is in their best interest to support larger governments who can provide them with this quasi-insurance from unexpected crises.
By and large I am looking at the impact of the current oil crisis on both the US and European countries. I think we can all agree that the US has been suffered much more from the rapid increase in oil prices than European countries have. The average citizen now pays a significantly larger chunk of their monthly income on gas, and a lot of the income is spent on gas that is used for rather basic needs with highly inelastic demand curves, such as driving to and from work. The impact on the European worker is significantly lower.
There are many explanation, and the pending baking crisis in The US is but one of them. What I want to focus on is the importance of governments and their role in providing semi-public goods in smoothing out such crises. When it comes to the private market and driving your own car there are many places in the US where the alternatives are virtually inexistent. With few exception, public transportation in the US lacks coverage and fails to provide a significant substitute to driving one's own car.
In contrast, most European countries have significantly better developed public transportation networks. This implies that when oil prices skyrocket people where governments tend to be larger and provide more public good, even if these goods are subsidized, have alternatives and can switch to substitutes, thus avoiding a blow to their monthly balance sheets.
In the following days I will add a simple model that discusses the situations when the existence of semi-public goods as substitutes to purely private goods ends up being beneficial. Until then, I am merely trying to make the point that current events prove that larger governments may add to people's ability to smooth their consumption over time and avoid stochastic shocks. Considering that research shows that most people are risk averse (except maybe very religious people as I mentioned I an earlier post and those who gamble or play the lottery), one could conclude that it is in their best interest to support larger governments who can provide them with this quasi-insurance from unexpected crises.
Monday, April 14, 2008
Religion and Economics
Last night I watched a completely useless forum where the candidates for president discussed their faith. As an economist, the private beliefs of a candidate are not that important to me as their ability to make rational decisions. However, realizing that religion, abortion and all other issues are significantly important in selecting a president, and that the policy direction implemented by a president can have significant impact on the welfare function of the entire population, I soon realized that right now religion may be an extremely significant economic factor. However, I will address the impact of religion on the economic welfare of the population at a later time. The post today will be about an economic view of religion.
To keep it simple, I would like to claim that people who are religious and follow closely the prescripts of their church should be risk loving. This view, I know disagrees with the general view, that people who are very religious tend to be risk averse.
Let's just analyze what it means to be religious from an economic perspective. Assuming rational behavior as well as keeping to some extent to the constraints of Christianity (mainly because I have no experience with any other religion) I will try to prove my claim.
To begin with, being religious, belonging to a church and following all that is required is rather like engaging in a contract. One makes sacrifices today (i.e. pays the price for the good) in order to receive salvation at a later time (i.e. obtain the good). Thus we are looking at intertemporal utility maximization, with the objective function being maximized after the agent dies. Many people view this as insurance, as I have said. I tend to view it in a different way. These people engage in a contractual agreement in lack of an established market for the product. Additionally, the pseudo market that exists (church) tends to be very monopolistic (I know that there are many religions and even more churches, however each of them claims that they are THE ONLY ONE who can guarantee your salvation). This in itself is irrational because there is no guarantee that the contract is enforcible. In other words people who are religious and accept the reduction in utility stemming from following the dictates of their religion, engage in a non enforcible contract where property rights are at best fuzzy. This increases the probability that the contract will not be delivered upon, hence it reduces their expected payoff. This in turn results either in them not being as strict as they should in following the contract, or in them getting utility from the increased risk resulting from this contract. To date there is little evidence, if any, that the contracts are enforced, as the delivery of the product is virtually impossible to observe.
So then the question remains, why do people choose to buy this insurance if the enforcement of the contract is uncertain? I do not claim to have an answer, or at least not an answer that is better than "because people also play the lottery, even though their expected return is ALWAYS negative." I think religion is the ultimate proof that people are risk loving. After all, it's like buying insurance at a high premium today for the space shuttle you MIGHT own in the future.
To keep it simple, I would like to claim that people who are religious and follow closely the prescripts of their church should be risk loving. This view, I know disagrees with the general view, that people who are very religious tend to be risk averse.
Let's just analyze what it means to be religious from an economic perspective. Assuming rational behavior as well as keeping to some extent to the constraints of Christianity (mainly because I have no experience with any other religion) I will try to prove my claim.
To begin with, being religious, belonging to a church and following all that is required is rather like engaging in a contract. One makes sacrifices today (i.e. pays the price for the good) in order to receive salvation at a later time (i.e. obtain the good). Thus we are looking at intertemporal utility maximization, with the objective function being maximized after the agent dies. Many people view this as insurance, as I have said. I tend to view it in a different way. These people engage in a contractual agreement in lack of an established market for the product. Additionally, the pseudo market that exists (church) tends to be very monopolistic (I know that there are many religions and even more churches, however each of them claims that they are THE ONLY ONE who can guarantee your salvation). This in itself is irrational because there is no guarantee that the contract is enforcible. In other words people who are religious and accept the reduction in utility stemming from following the dictates of their religion, engage in a non enforcible contract where property rights are at best fuzzy. This increases the probability that the contract will not be delivered upon, hence it reduces their expected payoff. This in turn results either in them not being as strict as they should in following the contract, or in them getting utility from the increased risk resulting from this contract. To date there is little evidence, if any, that the contracts are enforced, as the delivery of the product is virtually impossible to observe.
So then the question remains, why do people choose to buy this insurance if the enforcement of the contract is uncertain? I do not claim to have an answer, or at least not an answer that is better than "because people also play the lottery, even though their expected return is ALWAYS negative." I think religion is the ultimate proof that people are risk loving. After all, it's like buying insurance at a high premium today for the space shuttle you MIGHT own in the future.
Re: Moral Hazard with Auctions
Interesting experience you had there, but I think that there a a number of reasons why it didn't play out the way you think it did. Also, what I find interesting is that again we found out that people are irrational, rather than rational. Here is a very quick rundown of how I see your problem.
First, you assumed irrationality from your bidders. You posted the ad as a first price sealed bid. That should have resulted in bids that are close to people's valuations. You assumed it did not (hence you assumed irrationality) and decided to turn it into a second price sealed bid auction, which resulted in an increase in your profits.
Second, you introduced signals into the equation. By offering the two top bidders the chance to increase their bids, you allowed them to get signals, which turned the auction from a sealed one into an open one (rather close to an English style auction). This also changed the dynamics and should have allowed you to extract as much surplus as possible, but still end up with a second best solution. However, you introduced another constraint by limiting the number of bids you would accept from your top two bidders. This cut into your surplus, because now you gave them information that allowed them to determine that your reservation price has long been met, and also that you follow a less than rational path in your decision making.
All in all, I think you reduced your potential profit by showing eagerness to conclude the deal. Additionally, you reduced your profit by engaging in an auction style that resembled more an open auction rather than a closed one. Open auctions never yield the best outcome. I think, if we return to the assumption of rationality (which was clearly violated by your bidders) that you can achieve the first best solution from your perspective with a model that follows something like this:
--announce the auction
--contact your top two bidders, let them know what the highest bid right now is and ask them to turn in a single bid, sealed and the winner of the bid takes the tickets
--get the bids and give the tickets to the highest bidder.
This way you circumvent the problem of irrationality in the first bid to a certain extent. While people may be irrational in their first bid, by limiting the bidding war to a single second step you maintain the bid as a closed one, and thus you can extract their valuation. Continuing to accept small incremental changes (or even large) would result in a second best solution.
However, removing the rationality constraint and allowing for incomplete information inclusive of one's own valuation, your solution may be more appropriate. I think this may be an interesting research case in which we allow signals/changes in information sets to affect our valuation, thus the result of an English auction may yield more surplus to the seller than a sealed auction.
First, you assumed irrationality from your bidders. You posted the ad as a first price sealed bid. That should have resulted in bids that are close to people's valuations. You assumed it did not (hence you assumed irrationality) and decided to turn it into a second price sealed bid auction, which resulted in an increase in your profits.
Second, you introduced signals into the equation. By offering the two top bidders the chance to increase their bids, you allowed them to get signals, which turned the auction from a sealed one into an open one (rather close to an English style auction). This also changed the dynamics and should have allowed you to extract as much surplus as possible, but still end up with a second best solution. However, you introduced another constraint by limiting the number of bids you would accept from your top two bidders. This cut into your surplus, because now you gave them information that allowed them to determine that your reservation price has long been met, and also that you follow a less than rational path in your decision making.
All in all, I think you reduced your potential profit by showing eagerness to conclude the deal. Additionally, you reduced your profit by engaging in an auction style that resembled more an open auction rather than a closed one. Open auctions never yield the best outcome. I think, if we return to the assumption of rationality (which was clearly violated by your bidders) that you can achieve the first best solution from your perspective with a model that follows something like this:
--announce the auction
--contact your top two bidders, let them know what the highest bid right now is and ask them to turn in a single bid, sealed and the winner of the bid takes the tickets
--get the bids and give the tickets to the highest bidder.
This way you circumvent the problem of irrationality in the first bid to a certain extent. While people may be irrational in their first bid, by limiting the bidding war to a single second step you maintain the bid as a closed one, and thus you can extract their valuation. Continuing to accept small incremental changes (or even large) would result in a second best solution.
However, removing the rationality constraint and allowing for incomplete information inclusive of one's own valuation, your solution may be more appropriate. I think this may be an interesting research case in which we allow signals/changes in information sets to affect our valuation, thus the result of an English auction may yield more surplus to the seller than a sealed auction.
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