...and while we're taking offence

Why so much outrage about Steven Landsburg's thought experiment, but so little about Jeff Ely's excellent prelim question? [note, I'm not at all outraged]

Jeff puts up a video from the wife-carrying competition, then asks:

The model:  At date 0 each of N husbands decides how fat his wife should be.  At date 1 they run a wife-carrying race, where the husband’s speed is given by some function f(s,w) where s is the strength of the husband, and w is the weight of his wife.  The function f is increasing in its first argument and decreasing in the second. The winner gets K times his wife’s weight in cash and beer.  Questions

1. If the husbands are symmetric what is the equilibrium distribution of wife weights?
2. Under what conditions on f does a stronger husband have a fatter wife?
3. Derive the comparative statics with respect to K.

The solution to the problem is left as an exercise for the reader. Or for Seamus, who may wish to put it on his exam in Econ 203.

In praise of price gouging, revisited

There are no laws against price gouging in New Zealand. Nevertheless, there really wasn't very much of it when it really really was needed - after the Christchurch earthquakes.

With the New York hurricane, price gouging is again making the rounds of the Econ blogosphere. Michael Giberson summarises things. Jeff Ely has concocted a scenario in which he thinks gouging worsens outcomes. I'm going to disagree with specific reference to the Christchurch experience.

Ely argues that we can have cases where supply is effectively fixed. Consequently, the only gains we get via gouging are in ensuring that goods are allocated to their highest valued use; we don't get increased supply. In that case, we weigh the gains from improved allocation against the losses to inframarginal consumers who have to pay more. Now, Ely's effectively ignoring producer surplus; he says producer surplus should only count when it can bring forth more supply. The better argument would simply specify that producers have lower marginal utility of income so the transfer is utility decreasing. I don't see why we otherwise would want to say that consumer surplus is so much better than producer surplus.

But, the Ely scenario really doesn't fit hurricanes. You get tons of prior warning for hurricanes and the opportunity to price gouge can bring in plenty of new supply. Not like an earthquake. And so let's go back to the Christchurch earthquakes.

After the February 2011 earthquake, we were in a zero-supply-elasticity world for a few goods, most notably petrol. More petrol was coming, but it wasn't going to be here for a few days. All of the petrol stations on the east side of town were out of commission due to power outages; it was very hard to figure out where you'd be able to find a petrol station with power if you lived in the east. Worse, because everyone knew that petrol was scarce, everyone panicked. If you had a car with half a tank, you filled it up. If you had two cars, you made sure both tanks were full. If you had empty jerry-cans, you filled those up too. A student this year told me that he was working as a security guard at one of the petrol stations after the quake. People were filling up barrels with petrol to keep in the garage. Eventually, the station started enforcing some rationing.

What radio reports we could get in the east noted very long petrol queues at the working stations in the west, with some selling out. We were in South Brighton, no power, a quarter tank of fuel [getting home post-quake took 5 freaking hours in traffic], and absolutely no clue whether our quarter tank would be enough to get us to a working station on the west side of town when we bugged out for a house with working sewerage, water and power.

EVERYBODY KNEW THAT PETROL WOULD BE BACK IN A FEW DAYS.

There were no laws against price gouging. But the petrol stations knew that every single customer would hate them if they were the only station to let prices rise such that supply and demand came back into equilibrium. And so because the stations didn't gouge, we were in a terrible equilibrium where everyone's rational response to the below-clearing price was to hoard, because there was real risk that the stations would run out of fuel. And there was real risk of running out of fuel because of the hoarding. Breaking the hoarding equilibrium would have required a coordinated price hike that both allocated fuel to its highest valued uses and told everyone that there would be fuel available for them in an emergency if they really really needed it. That latter part is crucial - it kills the incentive to hoard.

I take the Roth stuff on stupidity constraints seriously - we can't assume those away.* Any station doing the right thing would have taken a reputation hit that outweighed the private benefits to the station because customers are resentful idiots who do not understand how prices work. If the stations had gotten together to coordinate it, there would have been massive pressure for Commerce Commission action. The second-best alternative, given consumers who are idiots about price gouging, would have been a temporary very large hike in the petrol tax for Christchurch, with money raised being dedicated to earthquake relief. This, I think, is the right response when supply is perfectly inelastic and stupidity constraints bind. I argued for it as soon as I was again able to blog post-quake.** It should be a standing contingency plan for similar emergencies.

If there are big worries about hardship on poorer communities from the price increases, get a helicopter, get a bag of money, and drop the money over the poorer communities while letting prices rise. A better option, if stupidity constraints of another form didn't bind, would be to give everybody an emergency debit card pre-loaded with $200 that would only activate if a state of emergency were declared. But there's awfully strong odds that the folks who'd most need them would lose them or sell them prior to the emergency.

I really think Ely is underestimating just how much value there can be in getting to the right allocative solution, and how a good dose of gouging can break hoarding equilibria.

* He calls it "repugnant markets", where people view some kinds of transactions as being repugnant. When those kinds of preferences prevent efficient trades, I call them stupidity constraints. Semantics.

** Other posts on price-gouging summarised here.

Dogmatism and memory constraints

Jeff Ely shows how dogmatism can be the consequence rather than the circumvention of rational thinking. We may process information rationally, arrive at a position, discard the workings that got us to the position to save memory space, then move on to the next area for rational deliberation.

So what you optimally, rationally, perfectly objectively do is allow yourself to forget everything you know about A including all the reasons that justify your strongly-held views on A and to just make an indelible mental note that “The right-wing position on A is the correct one no matter what anyone else says and no matter what evidence to the contrary should come along in the future.”

The reason this is the rational thing to do is that you have scarce memory space. By allowing those memories to fade away you free up storage space for information about issues B, C, and D which you are still carefully collecting information on, forming an objective opinion about, in preparation for eventually also adopting a well-informed dogmatic opinion about.

I do this all the time. It's actually one of the reasons I blog: to keep track, in easily searchable and keyword-indexed format, of the reasons that led me to hold positions. It's surprising how often I've found myself searching back through the archive to remind myself of what I'd concluded about something, and how often I curse myself for having arrived at some position before I started blogging.

But I do enjoy that rather a few of you come along for the ride.

HT: @Nonicoc

Assortative mating

I've argued before that people are Lancasterian goods and that we all get the best spouse we can afford given our particular bundles of characteristics.

Jeff Ely finds additional evidence:

I visited the Cowles Foundation at Yale for the winter of 2006, and taught a senior elective course. Seven fortunate students took my seminar in information economics. One impressive woman student — who organized the gay and lesbian social scene — asked whether the shallow view of Becker’s model was so unrealistic. Did babes match with hunks?

We brainstormed on data sources and settled on two new web sites: facebook.com and hotornot.com. Facebook allowed users to indicate with whom they were “in a relationship with”. Facebook was still new, and not yet open to all email addresses. So the student asked her friends at various campuses across America for their logins. And so began our stealth project. Hundreds of photos of matched men and women were downloaded, and then uploaded to HotOrNot, all on the sly. HotOrNot afforded us the average evaluation of about 200 women for every man, and 2000 men for every woman.

The result: Regressing straight men’s or women’s hotness on their partner’s hotness gave a highly significant fit, with a slope of about 0.7 — so that a man rising in hotness from 7 to 8 expects his partner to rise by 0.7 points. But sorting was far closer for gays and lesbians, with a slope for each of about 0.9. As Becker implied, beauty is income in this meat market, and the “richest” men match with the “richest” women.

The fit would be even better if you could adjust for the other Lancasterian characteristics.

I love the gonzo approach to this project. The human subjects review panels there must be more sane or have fewer teeth. Excellent either way.

And Robin Hanson would (and has) asked why we care so much about income inequality when this form of inequality may matter more....