Economics →
- 29 May 2008
- Working Paper Summaries
Some Neglected Axioms in Fair Division
This paper considers allocation and bargaining problems, and introduces conditions that one might expect fair procedures to satisfy. However, not all conditions one might hope for can be satisfied simultaneously. Furthermore, some apparently plausible and widely proposed axioms and procedures have consequences whose undesirability clearly goes far beyond what can be excused in this way. Thus pitfalls lurk in the field of fair division. Key concepts include: The first condition, "nondiscrimination," asserts that, in an allocation problem, if two agents receive probability shares of the same item and no chance of any other, then their shares should be proportional to their entitlements. The remaining, "monotonicity" conditions apply to two agents and assert that a change in the feasible set that increases the utility cost to one agent of providing any given utility gain to the other should not hurt the first agent, or at least the solution should not change. Closed for comment; 0 Comments.
- 10 Apr 2008
- Working Paper Summaries
Where Does it Go? Spending by the Financially Constrained
Despite widespread interest by academics, businesspeople, and policymakers, much is unknown about the financial behavior of low-income individuals, particularly those who rarely or ever use banks. Do credit constrained consumers spend money more quickly than less constrained consumers? Do they spend the money in different manners (card-based merchant transactions versus cash ATM withdrawals)? Do credit constrained consumers have different spending patterns than the less constrained—do they buy different goods and services? This working paper provides preliminary data on spending patterns by over 1.5 million refund recipients, all of whom used either a loan or a settlement product to receive refund money faster than the IRS processes would have otherwise allowed. The results should inform the view of policymakers, financial service professionals, scholars, and consumer advocates. Key concepts include: The conclusion that a material fraction of funds was used to pay for necessities suggests that the federal Earned Income Tax Credit program is central to the lives of the poor. Loans tended to be used to obtain necessities, especially funds spent in the first few days of the loans. Consumer advocates who seek to ban settlement products should consider how a ban would affect households' ability to smooth consumption. Similarly, businesses that are pricing and marketing these products should be mindful that the products are not a luxury for the users. These findings document the fairly rapid speed of spending of refunds, which may help policymakers think about the economic stimulus impact of tax refunds and rebates. Closed for comment; 0 Comments.
- 07 Apr 2008
- Research & Ideas
The Debate over Taxing Foreign Profits
Corporate tax policy has suddenly become a hot topic in the U.S., including the issue of whether current tax laws encourage American firms to outsource jobs to other countries. Harvard Business School professor Mihir Desai makes a case for exempting foreign profit from taxes if proper safeguards are put in place. Key concepts include: The United States is increasingly an outlier in its taxation of corporate income earned on foreign soil. Critics argue the ability to defer U.S. taxation until profits are repatriated provides an incentive to ship jobs overseas. On the other hand, the current worldwide system is often derided as making American firms uncompetitive relative to their foreign competition. An alternative may be to exempt foreign income from taxes paired with safeguards against an overly aggressive use of tax havens. Closed for comment; 0 Comments.
- 24 Mar 2008
- Working Paper Summaries
Optimal Deterrence when Judgment-Proof Agents Are Paid In Arrears—With an Application to Online Advertising Fraud
It is commonplace for large entities (both advertisers and ad networks) to enter into relationships with numerous small agents such as Web sites, blogs, search syndicators, and other marketing partners. For example, one well-known affiliate network boasts more than a million affiliates promoting offers from the network's hundreds of merchants, and Google contracts with numerous independent Web sites to show Google's "AdSense" ads. Although these advertising agents are often small, they can take advantage of technology to claim payments they have not earned. In practice, the legal system cannot offer meaningful redress to an aggrieved advertiser or ad network. This paper argues that delayed payment offers a more expedient alternative—a sensible stopgap strategy for use when primary enforcement systems prove inadequate. Key concepts include: Online advertising markets are one of many markets where agents may be effectively unreachable through the legal system. Online advertising contracts presently lack any institution by which the payment structure can enforce good practices. Improving detection technology remains the preferred deterrent of online advertising fraud. Appropriate selection of a payment delay can achieve the benefits offered by contingent payment in other markets. Closed for comment; 0 Comments.
- 11 Mar 2008
- Working Paper Summaries
Finding Missing Markets (and a disturbing epilogue): Evidence from an Export Crop Adoption and Marketing Intervention in Kenya
Why do farmers continue to grow crops for local markets when crops for export markets are thought to be much more profitable? Answers may include missing information about the profitability of these crops, lack of access to the necessary capital to make the switch possible, lack of infrastructure necessary to bring the crops to export outlets, high risk of the export markets, lack of human capital necessary to adopt successfully a new agricultural technology, and misperception by researchers and policymakers about the true profit opportunities and risk of crops grown for export markets. Ashraf and colleagues conducted an experimental trial with DrumNet, a social enterprise of Pride Africa, a nongovernmental organization, to evaluate whether a package of services can help farmers adopt, finance, and market export crops, and thus earn more income. This experiment was motivated by a recent push in development to build sustainable interventions that help complete missing markets. Key concepts include: Researchers found positive but not overwhelming one-year impacts from DrumNet. DrumNet leads to more farmers growing export crops, increasing their production and lowering their marketing costs. While there was no statistically significant impact on income for the full sample of farmers, first-time growers of export-oriented crops experienced a statistically and economically significant increase in income. The epilogue to this project is more dismal. Due to DrumNet's lack of compliance with European export requirements, farmers were forced to undersell and thus default on their loans. The implication is that farmers may not be adopting export crops because of the risk of the export market. Closed for comment; 0 Comments.
- 03 Mar 2008
- Research & Ideas
Marketing Your Way Through a Recession
In a recession, consumers become value oriented, distributors are concerned about cash, and employees worry about their jobs. But a downturn is no time to stop spending on marketing. The key, says professor John Quelch, is to understand how the needs of your customers and partners change, and adapt your strategies to the new reality. Key concepts include: Brands that increase advertising during a downturn can improve market share and return on investment. Early-buy allowances, extended financing, and generous return policies motivate distributors to stock your full product line. In tough times, price cuts attract more consumer support than promotions. CEOs must spend more time with customers and employees. Closed for comment; 0 Comments.
- 06 Feb 2008
- Working Paper Summaries
On Best-Response Bidding in GSP Auctions
Keyword auctions have become a critical source of revenue for Google and Yahoo!, among others. This new form of advertising has provided a new way for advertisers to reach customers. But advertisers also face the complex task of optimizing bids to increase their exposure while avoiding unnecessary costs. HBS professor Benjamin Edelman and colleagues analyzed a class of bidding strategies that attempt to increase advertiser utility under limited assumptions about other players' behavior. Under a strategy they call Balanced Bidding (BB), advertisers converge to the advertiser-preferred equilibrium—achieving stability of bids and reducing advertisers' costs relative to other possible outcomes. Key concepts include: Sponsored search advertisers should consider others' responses when deciding how much to bid. If all players follow the BB strategy, it is possible to determine the expected time to convergence. Closed for comment; 0 Comments.
- 09 Jan 2008
- Working Paper Summaries
A Resource Belief-Curse: Oil and Individualism
Capitalism is not as widespread as economists would hope. Data from surveys of public opinion, as well as on the distribution of political parties, confirm the idea that capitalism doesn't flow to poor countries. In some countries, anti-market sentiment has increased in recent years, a period where the price of oil and other primary commodities have soared. This combination of anti-market sentiment and high oil prices has led to renegotiations of oil contracts and even nationalizations in some countries such as Bolivia and Venezuela. It is tempting for economists trained in the theory of political capture to argue that this is just another instance where special interests exploit the circumstances to make an extra dollar. Given that these nationalizations are often popular with the majority of voters, however, the researchers resist this temptation and ask if there are explanations where a positive correlation emerges between voter anti-market sentiment and dependence on oil. Key concepts include: Antipathy toward markets has become particularly acute in Latin America. In Bolivia, Venezuela, Ecuador, and Argentina, policymakers have focused their anti-market energies and attention on natural resource companies, in several cases even renegotiating their contracts. A connection between dependence on oil and receptivity to populist rhetoric is both natural in economic models and has some support in the data. Closed for comment; 0 Comments.
- 15 Nov 2007
- Working Paper Summaries
The Dynamic Interplay of Inequality and Trust: An Experimental Study
Trust makes economic agents more willing to engage in interactions involving the risk of being deceived. Like a lubricant, trust may positively influence efficiency and economic growth, and at the same time affect the distribution of wealth within an economy. However, trust is difficult to measure on both the microeconomic and the macroeconomic level. Survey data frequently discover individual attitudes toward trust, but cannot easily identify to what extent such self-reported attitudes reflect economic behavior, and how trust interacts with the dynamics of efficiency and distribution. This paper complements empirical and survey literature on the relationship between inequality and trust with the help of experimental games, which systematically investigate the dynamic interplay of trust, efficiency, and distribution. Key concepts include: In an experimental economy that started with equal endowments, trust was relatively prevalent at the beginning, maybe due to low social distance as measured by initial wealth comparisons. With increasing inequality, subjects started to condition their behavior on the opponent's wealth. Consequently, trust rates went down, and growth was attenuated. In an experimental economy that started with unequal endowments, trust levels remained stable, allowing for considerable efficiency gains. Results suggest that there might also be value in studying the dynamics of inequality within countries, as well as the interaction of trust and procedural or jurisdictional fairness perceptions. Closed for comment; 0 Comments.
- 04 Oct 2007
- Working Paper Summaries
Fair (and Not So Fair) Division
"Fair" could be defined as what people of good will would want to be. This does not constitute an operational definition, however. This paper provides a specific procedure to calculate what could be considered fair and reasonable for various situations that require a fair division. A simple example would be a family that has inherited objects of artistic and/or sentimental value and wants to divide them up fairly while taking into account differences in taste. Laymen, mathematicians, and economists all have their own proposals for creating a fair division. Pratt suggests a procedure that, when put to the test of a range of examples, produces outcomes that accord with our intuitive sense of what is fair and desirable while previously proposed procedures do not. Key concepts include: The procedure measures the value of each object in terms of its desirability to the various participants. It allocates the objects so that the participants receive the same total value (or value proportional to their entitlements if they are unequal), without envy or waste ("money left on the table"). Randomization is used if needed to accomplish this. Many procedures work well on average problems. Indeed, all reasonable procedures are much alike in near-symmetric problems. It is the lopsided examples that test the procedures, especially with more than two participants. Participants are not penalized for receiving objects of no value to anyone else or for being honest about their values for such objects. Closed for comment; 0 Comments.
- 12 Sep 2007
- Op-Ed
Building Sandcastles: The Subprime Adventure
The early days of the subprime industry seemed to fulfill a market need—and millions of renters became homeowners as a result. But rapidly escalating home prices masked cracks in the subprime foundation. HBS professor Nicolas P. Retsinas, who is also director of Harvard University's Joint Center for Housing Studies, lays out what went wrong and why. Closed for comment; 0 Comments.
- 06 Sep 2007
- Working Paper Summaries
The Excess Burden of Government Indecision
Virtually all U.S. policymakers, budget analysts, and academic experts agree that the United States faces a very serious, if not a grave, long-term fiscal problem. Yet few policymakers will publicly say how or when they would fix it, perhaps because they fear being the bearer of bad news and getting voted out of office. Delaying the resolution of fiscal imbalances incurs two costs, however. First, it leaves a larger bill for a smaller number of people to pay. Second, and of primary interest to this research, it perpetuates uncertainty, leading economic agents to make suboptimal saving, investment, and other decisions, and reducing welfare. This research identifies and measures this "excess burden" of government indecision and finds that it is economically significant. Key concepts include: Whatever policymakers gain from delaying bad news, delay fosters and exacerbates economic uncertainty. As individuals wait to learn the level of future Social Security benefits, the fact of having to wait materially affects their consumption, saving, and portfolio decisions. Most important, it reduces welfare. The result of government indecision, in this instance, can exceed more than .5 percent of individuals' resources, a significant amount. The excess burden is highly sensitive to the degree of risk aversion, the number of years one must wait to have the policy uncertainty resolved, and the size and probability of policy changes. People experience sizable welfare gains from learning early about future changes in benefits and tax rates regardless of their attitudes toward risk or the uncertainty they face about their own labor earnings. Closed for comment; 0 Comments.
- 05 Sep 2007
- Working Paper Summaries
Global Currency Hedging
This article is forthcoming in the Journal of Finance. How much should investors hedge the currency exposure implicit in their international portfolios? Using a long sample of foreign exchange rates, stock returns, and bond returns that spans the period between 1975 and 2005, this paper studies the correlation of currency excess returns with stock returns and bond returns. These correlations suggest the existence of a typology of currencies. First, the euro, the Swiss franc, and a portfolio simultaneously long U.S. dollars and short Canadian dollars are negatively correlated with world equity markets and in this sense are "safe" or "reserve" currencies. Second, the Japanese yen and the British pound appear to be only mildly correlated with global equity markets. Third, the currencies of commodity producing countries such as Australia and Canada are positively correlated with world equity markets. These results suggest that investors can minimize their equity risk by not hedging their exposure to reserve currencies, and by hedging or overhedging their exposure to all other currencies. The paper shows that such a currency hedging policy dominates other popular hedging policies such as no hedging, full hedging, or partial, uniform hedging across all currencies. All currencies are uncorrelated or only mildly correlated with bonds, suggesting that international bond investors should fully hedge their currency exposures. Key concepts include: It is striking that the U.S. dollar, Swiss franc, and euro are widely used as reserve currencies by central banks, and more generally as stores of value by corporations and individuals around the world. Interestingly, the euro, the Swiss franc, and a long-short position in the U.S. dollar and the Canadian dollar are negatively correlated with world equity markets. By contrast, other currencies such as the Australian dollar, the Canadian dollar, the Japanese yen, and the British pound are either uncorrelated or positively correlated with world stock markets. These patterns imply that international equity investors can minimize their equity risk by taking short positions in the Australian and Canadian dollars, Japanese yen, and British pound, and long positions in the U.S. dollar, euro, and Swiss franc. For U.S. investors, currency exposures of international equity portfolios should be at least fully hedged, and probably overhedged. Exceptions are the euro and Swiss franc, which should be at most partially hedged. Risk management demands for currencies by bond investors are small or zero, regardless of the home country of these investors, and regardless of whether these investors hold only domestic bonds or an international bond portfolio. Closed for comment; 0 Comments.
- 04 Sep 2007
- Working Paper Summaries
Why Do Intermediaries Divert Search?
(Previously titled "Designing a Two-Sided Platform: When to Increase Search Costs?") Conventional wisdom holds that at the most fundamental level, market intermediaries exist in order to reduce search and transaction costs among the parties they serve and that they are more valuable the larger the cost savings they generate. This would seem to be true of both traditional, brick-and-mortar intermediaries (retailers, shopping malls, brokers, magazines, market exchanges) and "new economy" ones (Amazon, eBay, iTunes, Yahoo), all of which connect buyers and sellers of goods or services. However, many intermediaries, while providing the relevant information, seem at some stage of the process to do the opposite of reducing search costs—and by purposeful design rather than by accident. Retail stores, for instance, stack the products they carry so that the most sought-after items are hard to find and thereby induce consumers to walk along aisles carrying other products. This paper challenges the conventional wisdom that intermediaries create value by reducing search and transaction costs. It proposes a model that sheds light on the economic motivations that in some contexts may lead intermediaries to make it harder for the parties they serve—consumers and third-party sellers—to find each other. Key concepts include: This paper helps make sense of strategies employed by some intermediaries, which seem to purposefully make it hard for their consumers to find what they want: shopping malls, retail stores, popular magazines, and even Internet portals. When an intermediary derives higher revenues from consumers shopping at lesser-known stores relative to revenues from consumers shopping at more popular stores, it is more likely to degrade the quality of the search service offered to consumers. The intermediary may have an incentive to degrade the quality of search even further when its design decision influences the prices charged by stores. Closed for comment; 0 Comments.
- 30 Jul 2007
- Research & Ideas
Repugnant Markets and How They Get That Way
Repugnance is different in different places and at different times, says Harvard economist Alvin E. Roth in this Q&A. As someone who designs and builds new markets, he marvels at how society decides whether a transaction is "good" or "bad"—even when such transactions are very much alike. Key concepts include: "Repugnant transactions" are transactions that some people don't want other people to engage in. From the point of view of economists, the phenomenon of repugnant transactions can be a serious constraint on markets and market design. When a market is illegal, the versions of it that arise can be quite dangerous. It is difficult to compare how markets operate when they're illegal with what it would be like if they could operate legally. Closed for comment; 0 Comments.
- 22 Jun 2007
- Working Paper Summaries
Proprietary vs. Open Two-Sided Platforms and Social Efficiency
The rising popularity of the open-source software movement has prompted many governments around the world to enact policies promoting open-source software systems at the expense of proprietary systems. Oftentimes, these policies seem to stem from a presumption (shared by some economists) that open software platforms are inherently more efficient than their proprietary counterparts. But is that so? This paper provides a simple model of two-sided platforms that clearly shows how this common intuition breaks down in two-sided markets. Key concepts include: Proprietary platforms may induce higher levels of product variety, user adoption, and total social welfare than open platforms. Proprietary platforms are sometimes more socially desirable than open platforms, which runs against the common intuition that open platforms are more efficient. Analysis of socially desirable benefits in two-sided markets follows a very different logic from that in one-sided markets, and may lead to counterintuitive conclusions. More in-depth research on the subtler aspects of platform governance in two-sided markets (cooperatives, associations, etc.) should inform both policymakers and business practitioners. Closed for comment; 0 Comments.
- 21 Jun 2007
- Working Paper Summaries
Merchant or Two-Sided Platform?
With ever more sophisticated logistics and the rise of information technologies, intermediaries and market platforms have become increasingly ubiquitous and important agents in the digital economy. While market intermediation is not a new phenomenon, the digital economy has revealed that there can be two polar types of intermediaries: "merchants," which acquire goods from sellers and resell them to buyers, and "two-sided platforms," which allow affiliated sellers to sell directly to affiliated buyers. As examples, retailers like Walmart.com and Amazon.com are (mostly) merchants; eBay is a pure two-sided platform; and Apple's iTunes digital music store exhibits both merchant and platform features. This research is a first pass at delineating the economic tradeoffs between the merchant and two-sided platform modes. Key concepts include: Economic tradeoffs are affected by several fundamental economic factors: indirect network effects between buyers and sellers; asymmetric information between sellers and the intermediary; and investment incentives, product complementarities, and substitutability. This analysis holds true for a monopoly intermediary. With competing intermediaries, more subtle strategic issues may arise that are beyond the scope of this research. Closed for comment; 0 Comments.
- 08 Jun 2007
- Working Paper Summaries
Poverty, Social Divisions and Conflict in Nepal
More than 70 civil wars have occurred around the world since 1945. Understanding what causes such violent conflicts to begin and then fester is a topic of increasing research interest to economists. In Nepal the conflict known as "the People's War" began in 1996 and spread to all parts of the country, resulting in the deaths of more than 13,000 people. Do and Iyer considered a wide range of economic and social factors that they hypothesized could affect the likelihood of violent conflict, and econometrically examined their relationship with conflict intensity. These factors include geographic conditions (mountains and forests), economic development, social diversity including linguistic diversity, and government investment in infrastructure. Do and Iyer's nuanced approach allowed them to examine the spread of a single conflict across different parts of the country and over time. Key concepts include: In the initial stages of the conflict, total deaths caused by Maoist insurgents and government forces were higher in areas with greater poverty. Yet this relationship with poverty changed over time: As Maoists gained control of the poorest areas, the highest intensity of conflict shifted to places that were somewhat better off. Conflict intensity was higher in areas with geographical characteristics that favor insurgents, such as mountains and forests. There was no significant relationship between conflict intensity and linguistic diversity. The relationship with caste polarization was slight. The changing relationship with poverty suggests that researchers need to consider a conflict's prior evolution in their broader analyses. Closed for comment; 0 Comments.
- 01 Jun 2007
- Working Paper Summaries
Firm-Size Distribution and Cross-Country Income Differences
Country-to-country differences in per-worker income are known to be enormous. Per capita income in the richest countries exceeds that in the poorest countries by more than a factor of 50. The consensus view in scholarly literature on development accounting is that two-thirds of these variations can be attributed to differences in efficiency or total factor productivity (TFP). Emerging research, however, suggests other possibilities. Alfaro and coauthors, applied a monopolistic competitive firm model to a new dataset of more than 20 million firms in nearly 80 developing and industrialized countries. They then calculated the extent to which differences in the misallocation of resources (as well as differences in the amount of physical and human capital resources) explain dispersion in income per worker. Their results suggest that misallocation of resources is a crucial determinant of income dispersion. Key concepts include: Particular sources of inefficiency, such as credit market imperfections, macroeconomic volatility, defective bankruptcy procedures, or a malfunctioning regulatory environment, drive country-to-country differences in firm size distribution. Misallocation of resources is a crucial determinant of income dispersion. Closed for comment; 0 Comments.
Financial Development, Bank Ownership, and Growth. Or, Does Quantity Imply Quality?
Government ownership of banks, a common phenomenon, is among the most important policy tools used to influence financial development. But what is the actual effect of such ownership on the financial development of a country? This paper uses a policy experiment in India to evaluate the effect of government ownership of banks on development. Key concepts include: Had the Indian government required bank expansion into rural areas and set lending targets, without nationalizing banks, rural areas might have achieved the same, or better, outcomes. Despite a substantial increase in agricultural credit, there is no evidence of improved agricultural outcomes in markets with nationalized banks. Bank nationalization may have slowed the growth of employment in the more developed sectors of trade and services. Closed for comment; 0 Comments.