Marginal Revolution

$4300

It's not so hard to explain:

The conditions under which transactors can use the market (repeat-purchase) mechanism of contract enforcement are examined.  Increased price is shown to be a means of assuring contractual performance.  A necessary and sufficient condition for performance is the existence of price sufficiently above salvageable production costs so that the nonperforming firm loses a discounted stream of rents on future sales which is greater than the wealth increase from nonperformance.  This will generally imply a market price greater than the perfectly competitive price and rationalize investments in firm-specific assets.  Advertising investments therefore becomes a positive indicator of likely performance.

That's Klein and Leffler, JPE, 1981, who shy away from making the prurient explicit.  This is one easy way to get a demand curve sloping upwards, namely you only trust the person if she is receiving lots of money.  But what's the point of preventing shirking if you're going to be self-incriminating?

Why politics cannot be captured by the intelligent, installment #45,869

It seems the Barack Obama campaign is distancing itself from Austan Goolsbee, who is indeed a first-rate economist.  Samantha Powers, who wrote a highly intelligent and heart-rending book on genocide, was dismissed last week for speaking her mind about Hillary Clinton.  Of course no one doubts that such actions may be necessary, given that a Presidency can function only with some amount of message discipline.  But think about the economics of message discipline.  How many people are receiving the message?  300 million, plus some number abroad as well.  What kind of messages do these people desire?  What must be done to make these messages understandable and then to show that the promise behind the message has been met?  Which kinds of advisors will flourish best in a "message consistency" environment?  Independent and critical minds, able and willing to speak the truth to power?

Here is my question for the left-wing bloggers: How good would The Wire be, if it had to appeal to 300 million plus viewers?  While it is obvious that politics is a form of mass culture, this point is not made with sufficient frequency for my taste.

Addendum: Arnold Kling comments.  And Matt Yglesias responds.

Assorted links

1. Surowiecki on microloans

2. Stagnant median income?

3. 1000 years of trade history: globalization is political first, technological second.

4. Blogger House makes the front page of the NYT Style section.

5. Go long on Colombia.

What is the aggregate cost of trying to beat the stock market?

Investors collectively spend around $100 billion a year trying to beat the stock market. That’s the finding of a rigorous effort to measure the total costs of Americans’ efforts to surpass the returns they would have received by simply holding a stock index fund. The huge price tag helps explain why beating a buy-and-hold strategy is so difficult.

Here is much more, and from Felix Salmon.  You can think of this sum as the amount it costs to keep markets relatively efficient, a source of societal fraud and rent-seeking, a Nash equilibrium mixed strategy (no one tries to beat the market on every margin), a donation to the broader social good, or most properly all of the above.  Interfluidity adds comment.

Mad Men

Thomas Schelling showed that it could sometimes pay to be irrational, or at least to appear to be irrational.  If they think you're crazy then in a game of chicken it's your opponent who will backdown.

It's known that Nixon understood the theory but in an frightening article in Wired we learn the insane extent to which the theory was practiced.

Frustrated at the state of affairs in Vietnam, Nixon resolved to:

...threaten the Soviet Union with a massive nuclear strike and make its leaders think he was crazy enough to go through with it. His hope was that the Soviets would be so frightened of events spinning out of control that they would strong-arm Hanoi, telling the North Vietnamese to start making concessions at the negotiating table or risk losing Soviet military support.

Much more was involved than words, at one point nuclear bombers were sent directly towards Soviet airspace where they triggered the Soviet defense systems.

On the morning of October 27, 1969, a squadron of 18 B-52s — massive bombers with eight turbo engines and 185-foot wingspans — began racing from the western US toward the eastern border of the Soviet Union. The pilots flew for 18 hours without rest, hurtling toward their targets at more than 500 miles per hour. Each plane was loaded with nuclear weapons hundreds of times more powerful than the ones that had obliterated Hiroshima and Nagasaki.

The Soviets went nuts but following Nixon's orders Kissinger told the Soviet ambassador that the President was out of control.

Apparently neither Nixon or Kissinger had absorbed another Schelling insight - if you want to credibly pretend you are out of control then you have to push things so far that sometimes you will be out of control.  The number of ways such a plan could have resulted in a nuclear war is truly frightening.  After all, Nixon was gambling millions of lives on the Soviets being the rational players in this game.

Next time you are told how a madman threatens the world remember the greatest threats have come from our own mad men.

Who's Your City?

The always-interesting Richard Florida has a new book out, namely Who's Your City: How the Creative Economy is Making Where to Live The Most Important Decision of Your Life.

The book tells you how to find the city for you (for me it is Los Angeles, but somehow closer to everything else, and with better bookshops) and why the mood of a city matters. 

Is the following true:? The class of city you live in matters less than before, because you can use Amazon or Starbucks in either Manhattan or Chattanooga.  But within a class of city, personality now matters more precisely because people can sort themselves on the basis of personality rather than convenience.

What about me?  I enjoy living in an area which is not totally flat and I also enjoy the feeling that I can drive from one mini-region to another and experience changes; Maryland and DC really do differ from Virginia.  I felt hedged in living in Wellington, New Zealand and in general I don't like having my back to the water.

Last week Robin Hanson and I discussed which would be the best city to live in if a) all your basic needs were taken care of, and b) you could not otherwise spend any money.  Oxford, even with mediocre weather, seemed like a strong pick.  There is a true intellectual community and everything there costs a lot anyway; not being able to spend any money isn't so different from the reality.