Global Economics and Management

Things I Have Been Reading

1) Joe Henrich's brilliant book on the importance of culture as an explanation for the success of humans as a species. Full of insights for my own research. Here is Tyler Cowen interviewing Joe Henrich, also recommended.

2) Seema Jayachandran's insightful article on how the fertility transition in India partly explains the sex ratio imbalance in favor of boys.

3) Leon and Miguel on the economic value of life in Sierra Leone. I usually mention the economists' view on the value of life in class, and that is often an excuse for a lively discussion on the moral values of economists (or lack thereof). But the opportunity did not arise this year. Consider this a palliative measure!

4) The WSJ on the Parsi community of Mumbai, and the current brawl at the head of the Tata Group. I recently came back from India, where the main subjects of discussion among the economic and business elites were a) the recent demonetization initiative of the Modi government and b) the leadership crisis at Tata.

Nate Silver interviews Michael Lewis

Nate Silver, data guru, interviews Michael Lewis on his new book and on the election of Donald Trump. Highly recommended...

The Power of Incentives: Estate Tax Edition

The Wall Street Journal has a nice article on the Trump Administration's plan to eliminate the estate tax. It turns out that the current exemption for the estate tax is about $5.45 million for an individual and $10.9 million for a married couple (these amounts are indexed to inflation). That means very few pay the estate tax in the US. The Trump proposal seems to be to raise the exemption to infinity (though there are qualifiers associated with the way capital gains would be calculated under the new regime - see the article for more).

These types of legislative changes can have unusual effects on the timing of death. Yes, you read that correctly. In a path breaking paper Wojciech Kopczuk and Joel Slemrod studied past changes in the amount of the estate tax exemption. They concluded:  

"Our central estimate is that, for individuals dying within two weeks of a tax reform, a $10,000 potential tax saving (using 2000 dollars) increases the probability of dying in the lower-tax regime by 1.6%. That there is any effect at all adds to the large body of evidence that taxes affect behavior, and particularly the timing of behavior, including activities such as marriage and childbearing, which are not generally thought to respond to financial incentives. We cannot rule out that what we have uncovered is not a real death elasticity, but instead ex post doctoring of the reported date of death to save on taxes. Even in that case, this exercise provides evidence on how the attempt to collect taxes can engender resource-using avoidance responses that reduce tax revenue."

Now, if only grandpa and grandma could hold on a little while longer...

Price Fixing in the Canned Tuna Market

Almost simultaneously, your classmates Nate Demmy and Phil Dugaw sent me two very interesting article, one from the WSJ and one from CNN, both on a recent case of price fixing in the canned tuna market. This is an oligopolistic market with 3 main players: Bumble Bee, StarKist and Chicken of the Sea. The players are accused of price fixing and the legal standard that applies to this type of case is a criminal standard of "per se illegality". While the WSJ article states that "The Justice Department didn’t say how much consumers might have been overcharged by the alleged price-fixing", the applicable legal standard does not require the prosecution to show harm to consumers. All that is required is to show that the acts were indeed committed - the players explicitly colluded in setting prices - something an SVP of Sales for Bumble Bee has pleaded guilty to doing. Harm to consumers does not enter into it the way it would if the case was examined under a “rule of reason” standard.

Note that the price these companies would have charged absent collusion would be hard to figure out. While we observe the price they actually charged, we don’t know what price they would have charged absent collusion – would they have competed Bertrand ? Cournot? Something inbetween? What role would product differentiation have played in keeping prices different across sellers? These are very tricky questions as we saw in class, but the Justice Department does not need to go there.

Also, the prosecution is going after Bumble Bee, and managed to get one of their execs  to flip and probably to plead guilty and agree to give information on others in exchange for a reduced sentence. Time will tell but I am pretty sure this will not stop here. It takes two (or more) to tango (or, as it were, to fix prices), so more prosecutions are likely.

Moral of the story: Don't engage in price fixing!

The Economics of Gift Giving

To lighten the atmosphere in these times of exam taking, and in the spirit of the upcoming holidays, here are Alex Tabarrok and Tyler Cowen, of Marginal Revolution fame, on the economics of gift giving:

(Hat tip: Professor Ricardo Perez-Truglia)

Activision and Misaligned Incentives

Your classmate Kathryn Corcoran sends me this very interesting Bloomberg article on the new compensation plan of Activision's CEO, Robert Kotick. Apparently the contract includes a clause that rewards the CEO for growing the company through an acquisition that would raise the market capitalization of the company by more than 15%:

Boards sometimes grant executives merger-related bonuses tied to savings and operational goals, but awards linked to future dealmaking are rare. Some experts argue M&A is part of a CEO’s normal job responsibilities and doesn’t warrant additional pay. Most incentives tied to mergers therefore “focus on integration and synergy capture rather than just getting the deal done,” said John Trentacoste, a managing director at executive compensation consultant [at] Farient Advisors.

“The hard work comes after the ink dries,” Trentacoste said. “Transaction-based one-off incentives are becoming a bit rarer in the age of investor scrutiny.”

In other words, Kotick's contract may be rewarding him on the wrong metric...