EEP100 - Lecture 17

Let's get going. It's lecture 17 as we roll along in the fun part of the semester. The
videos are caught up more or less. Again, there was an error. The 12-minute video is
gone. It's been replaced by the full one hour and ten minutes of exciting economics.
I have office hours today; I've got to cut them short a little bit. But after class until
1:15. Any openÉand I'll talk about the briefing
at the end of class, because I'll hand out the
briefing and the materials, and the lecture today will prep you for the briefing in a
sense, okay? It will be due November 10, which is
2 weeks from today. So I will discuss that at
length at the end of the class.
Are there any open questions from anybody about anything?
No? The world is at peace? Everything's good. Okay. We'll keep talking.
If someone asks you a question on the blog are you required to respond?
You are not required to respond. You'll have to investigate whether you want to respond.
I have a flame war going on with a guy right now, who is more famous (And definitely in
his own mind is more famous than me). And I broke the rules of common courtesy by
recording his public talk with twice as big of an audience by putting it on my blog. That
was a scandal. I've taken it downÉwhatever. So much for the public discourse. If you
want to reply...if somebody flames you on your blog post and says, "You suck." Then
you can say, "You suck more." If you want to.
But there's a lot of constructive criticisms, and because your briefing 2 is going to be
based on your blog posts...did I mention that? Did you guys here that? Okay. let me tell
you right now what that is. So your blog postsÉthey're going until about November 10.
So the next weeksÉwe have about 30 more posts going up. So your blog post is going to
be the basis of your second briefing, which is 10 points of your grade, right? So now
the blog post is worth twice as much as you thought
it was worth. So instead of beingÉohÉa correction to my blog post...you're
going to (essentially) have a chance of rewriting your blog post. So the one that
went up on the web was your draft. And then you'll be rewriting it for your second briefing,
and then grading each other in terms of the quality of your economic analysis. I'll speak
more to peer grading later on in the class. But just be prepared. When I started to mention
thatÉwho's the one that did the opium post? So you went and found more sources from
the office of control of drugsÉorÉyeah, that long acronym. Five letters.
So that, in a sense would be the kind of thing you want to include in your briefing,
right? So in a sense, you've already done some work towards your second briefing. So
when I mentionedÉyeah, you can just forget it. Who cares if my blogpostÉ.it's
done. But when youÉif you want to cut and paste your blog post into your briefing two,
that's fine. You'll be graded on that. But if
there's something you want to improve or correctÉlanguage, spelling, punctuation
especially?
Somebody got destroyed on their grammar. And it wasn't me who wrote that comment.
That was brutal. And if you want to actually cut and paste, go ahead. You'll probably
get a very bad grade. But if you want to take the opportunity of improving your blog post
for your second briefing, then you will have that opportunity. At the moment, that's due
on December 1st, but I'll make it more formally announced later on. So that's what's
going to happen with the second briefing. I have another question.
Yeah. We're all about questions. You know how Starbucks keep raising their
prices, and they say that the world price of
coffee is like 12 cents, does the majority of their profits go to Starbucks?
So Starbucks is raising the price of their coffee. And they're complaining that the
wholesale price of coffee is going up? No, I was just wondering.
About coffee prices? Just talk about that? Okay. so the price of coffee is notoriously
low. You go to Starbucks and you buy a coffee. They charge you what? Two bucks for
a cup of coffee now? What's the cost? I get lattes and cappucinos all the time. What's
the cost of coffee at Starbucks? 1.75, right? So the price of the raw material in thereÉthe
water's free, there's energy, and the coffee itself (out of 1.75) is probably 10 cents.
So is it a $1.65 profit? What else goes into the price of a cup of
coffee at Starbucks? Labor, rent, cup, marketing, water (we got
that one)Émore? Unbelievable monopoly profits, right? Starbucks
is making a killing, right? Why are you nodding? How many coffee shops are next the
Starbucks downtown in Berkeley (besides the Starbucks that's next to the other Starbucks)?
But there's Starbucks, there's Peet's, there's wherever elseÉCoffee's a hypercompetitive
business, and I don't know (this would be a good question to ask yourself and
go and do some research) but I would be curious to see what their profit margin is.
If you look at their annual report, simple questionÉwhat's the gross sales? What are
their net profits? I would have to say that it's less than 10%. So out of that $1.75 cup
of coffee, less than 10% is 17 cents of profit .
So there's a whole bunch of other costs I'm confused that you said it's a competitive
business. And I see that, for example, selling coffee on the world market costÉthere's
perfectly competitiveÉthere's also the other products (it's not just coffee) like
let's sayÉjeans, cars, whatever. I mean many people think...there's only one Starbucks,
and there's many coffee shops, but there's only
one Starbucks. And Starbucks is, for some reason, better, cooler than anything else,
so there is, in a way, monopoly powerÉ
There's market power, but there's not monopoly power. Market power, right? So you're
right. There is market power. And here's a good example. When you go to Starbucks in
Berkeley and you pay $1.75 for a cup of coffee, and then you go for Starbucks at the
Oakland airport, or the San Francisco airport, and you pay $2.50 for a cup of coffee, that
is monopoly power. Because there are no other coffee shops in the airport. Well
sometimes there are, sometimes there aren't. So when they get an exclusive concession,
then you see the price jack up. And it may reflect the cost of the rent. But that is
aÉso that's the monopoly profits being passed monopoly
profit from the airport, right? Because the airport is charging a higher rent
to get to the Starbucks in there. So the fact is thatÉby definitionÉStarbucks
is not a monopoly because there's more than one place to buy coffee. And there are
substitute goods for coffee, if you go to the
teashop next door. But they do have market power. And a lot of their market power is
actually based on their brand name. So that's the value of Rolls Royce, the value
Levis, the value of the bandÑif U2 comes to town, they can charge more for concert
tickets than U2 Revival Group. Because maybe U2 Revival Group has all the same singers,
all the same guitar skills, or whatever, but they're not really U2. So this is where
you get, what are called, monopoly rent, or return on your brand name. But the brand name
took a long time to invent; to create. And so that's what's going on as far as that's
concerned. So that's the difference between monopoly
power and market power. Monopoly power is just one version of market
power. It's a subset. Market power and monopoly power. Almost every business has
some sort of market power. But monopoly power just essentially means that they're
a monopoly. And that meansÉthis is a better definition of a monopoly powerÉis that there's
no entry. That mean's that nobody can enter the business and compete with you if
you have monopoly power. The United States Postal Service has monopoly power over the
delivery of mail to your slot of the door. Starbucks has no monopoly over anything. Microsoft
has no monopoly over anything. You can enter into the software business.
People can choose, right? The United States government has monopoly over use of force
in this country. Or whatever. Something like that. Some kind of definition of what
they're monopoly power is. But it's very unusual that you actually have a monopoly
for a private business that is not getting some
kind of government right, government concession. So monopoly power is merely a
subset of market power. Market power will ebb and flow according to essentially how
many competitors you have, how well your advertising campaign is going to beÉ
Apple just made the most crazy profit in the last quarter. They made a big profitÉI don't
remember what it was. Billions of dollars. Relative to their market cap, they did very,
very well. But they're making a big profit because of why?
Market power. Market power, good. What kind of market power?
What kind of good does Apple sell that people want to pay more for?
iPod iPhone. iPod. iBook. MacBook. Whatever, right?
All these things. And AppleÉand when they spin it out, they spend a whole
bunch of money adding intellectual property now that they're making profits. Google is
the exact same thing, because everybody goes to Google to search. But that could erode
next year. If the android phone destroys the iPhone, then that's going to fall apart, right?
And if you're a phone geek, you're like, "Ooh, ooh. Neat. Competition." But then that's
serving who? Us, right? That's the whole point of creative destruction. Which
is what I was mentioning awhile ago. Okay. from coffee to Apple. Any other questions?
No? Okay. We'll go right along. At some point I mentioned the term homoeconomicus.
What does that mean in English? What does it mean? It's a contrived neologism
from Latin. What does it mean? Come on science buffs.
Is it like a rational thinker? But literally, what does it mean? Come on
guys? What does homosapiens mean? ManÉkeep going. Hombre. Homo means man. Anything
else? Has anybody taken a biology class? Is this like creative design
here? Wise human?
Thinking man. It could be wise. "Sapave" is to know, right? SoÉthe man who knows.
And this one means what? Economic Man. That's why it's so obvious, because
someone just took economic and made it into a Latin word. Homoeconomicus, right?
That's not that hard. So here's the thing. What defines homoeconomicus? Somebody
said it already. Say it again. Self interest?
Self interest. Acting in your own self-interest. Rational self-interest. I'm only writing
this down because you have to know this if you're going to be an economist. You have
to know that homoeconomicusÉ Number 1: Acts in your own self-interest in
a rational way. Him or her. Now the problem isÉI was talking about the
trust game last class. I was, right? I'm a little bit confused. I've been talking too
much to too many different people. What happened in the trust game?
Mister A has got $10, and he sends Mr. B, say he sends Mr. B $10.
Number One: if Mr. B is homoeconomicus, what's going to happen in terms of passing
back? Zero.
Right? And if Mr. A understands that Mr. B is homoeconomicus, what's he going to
pass? Zero.
Zero. That's backwards induction. This is step one, and that's step two. This is very
important. So if you take any game theory classes, this is critical, right? Upper division.
Your next class. An A grade, right? Write that down. So through backwards induction,
you know that 2 homoeconomici will pass zero dollars back and forth.
They'll both end up with a payment ofÉthis guy will end up with a payment. He'll keep
the 10 bucks, and this guy will get nothing, right?
But what actually happens? When people play this game? I told you in the last lecture,
or did I not? Yes? What actually happens when real peopleÉwhat happens when
homorealitus, or homoÉpeoples play this game? They pass the money?
How much money did they pass? 10, or 5, or whatever. More than zero, though
right? That's the key number. So here's the thing. ActuallyÉlet's just stick with
homosapiens. Not my stupid phrase. Homosapiens (who are us), when they play the
trust game, they do not act like homoeconomicus. That is a very important point.
When you're take your classes, your professors are going to be doing homoeconomicus
this, and homoeconomicus that. And you'll be saying, "Oh yeah, I'm learning economics."
But you're not, in a sense, that this produces results that do not appear in the real world.
And what turns out to happen is when people act in their rational self interest, which
is basically true (it's not hard to defend that
assumption) they actually will share money in
the trust game. Because the simple version of homoeconoimics is not self-interest but
selfish. Self-interest and selfish are not equal.
Now the Nobel Prize this year was awarded to Lynn Ostrom because she figured out that
people will cooperate with each other to solve collective action problems without
requiring the privatization of property rights. Collect common pool goods. People will
cooperate together to solve those collective action problems, which is not taught in
economics classes, except this ones, and other ones. But not generally. If you look at a
textbook, it's very unusual that the textbook will explain how to solve a commons
problem, common pool dilemma, without private privatization of property rights. This is
likeÉheads up. And here's the thing. Well you don't have
any choice, really. If you are interested inÉthere's a scientist, and he came up with
a theory of falsification. Does anybody know who this guy is? He wrote in around the
1930s, 1920s? Does anybody remember his name? It's okay, I don't either.
The whole idea of falsification is that you will be able to create a testable hypothesis.
What does that mean, a testable hypothesis? What does it mean?
It can be repeated? It can be repeated, yeah,
It can be verified by others? VerifiedÉor more importantly, it can be falsified.
So what it means, is this. So this is essentially how all of science works. You
have a hypothesis and you say: my hypothesis is thatÉwhen I put on my sunglasses, it will
rain. If I put on my sunglasses and it doesn't rain, that has been falsified. That
has been rejected, right? That is falsifiable. If I sit there and I sayÉwhen you guys all
think about rain, it will rain, that can't be
falsified, because I can't really get into your head. I can't know what's inside of your
head. Especially, I can't know what all of you are thinking.
If one person says they're thinking really hard, but another person says, "I'm thinking."
But they aren't, you can't invalidate that hypothesis. You cannot reject the null
hypothesis. This is extremely important if you do any kind of empirical work as a
scientist. But in economics, it's especially important if you do this in econometrics,
right? If you ever do econometrics, which I think
you have toÉdo you have to? Yeah. If you do econometrics, you will have null hypotheses,
and you must be able to reject your null hypothesis. If you can't reject it, because
you're likeÉthe worst thing you can say isÉmy finding is consistent with the null
hypothesis. You can't say that. All you can do
is reject it or not reject it. now why does it all matter? It matters because the trust
game has rejected the null hypothesis of selfishness.
This is the null hypothesis. People pass zero. Zero and zero. Homoeconomicus? Right,
fine. They'll pass zero. And what ends up happening is that people pass more than
zero. So you reject that hypothesis. So homoeconomicus is an imaginary figure that
does not exist in reality. It does exist in economic textbooks, but you have to be very
careful about where you apply it. You certainly can't apply it blindly or religiously.
It's super critical for this class, and super critical for briefing number one that you
understand this concept. Why aren't those two the same?
Selfish and self-interested? We usually define self-interest to mean that if I have $10,
and I'm asking if I can share it with you, or if someone asks if I could share it with
youÉif I'm selfish, I don't care about you. If I am self-interested, I might care about
you because maybe it's in my self-interest. It
might just sound like words to you, but there's differences in meanings. Put it in a sentence;
it'll work out. If you look at economics as more than strictly
monetaryÉor beyond the scope of having to deal with moneyÉor the social aspectÉwould
they still be acting in rational self interest, and therefore acting like homoeconomicus?
Well, that's the question, right? If homoeconomicus is this person here, right? It
depends on how you want to define homoeconomicus. If you want to say
homoeconomicus is rational self-interest, then karma could fit in, social cooperation
could fit in, but if you actually define it as selfish, and when we talk about the prisoner's
dilemma, what you do in the prisoner's dilemmaÉit's likeÉI should defect. I should not
cooperate. Or I should not protect my partner in crime. But it turns out when people play
the prisoner's dilemma, or, more importantly, when they play the trust game, which is a
much clearer situation, that theyÉif you want to call them homoeconomicus, go ahead.
But the prediction that they'll give zero is violated in terms of people. Peoples' behavior,
right? So either you redefine homoeconomicus to include, within self-interestÉsome
concern about other peopleÉor you throw away the homoeconomicus. So you have to
decide. In some ways it'sÉit might sound pedantic, right? But the problem is that a
lot of times, the definition of this is that your
utility function of an individual equals the consumption of goods to you and that's it.
If you sit there and you sayÉXi, Xy, and that's everybody else, then okay. Your utility
function has that. You're acting in your own self-interest. Then you might share. You
might cooperate. And maybe that's still economic. But you have to able to distinguish
what's going on in that utility function. Does that make sense? So
I guess, as a clarification, I'm not sayingÉlet's just
say it this way. The simple black and white version of homoeconomicus, which is actually
assumed, and why is it assumed? It's assumed because then the math is easier. Right?
It's like that. That's it. really. Because if you sit there and you sayÉpeople
are going to be something in between getting zero and ten dollars, then there's
no math. You can't make a prediction, right? That's why the math economists hate the experimental
economists because there's no math involved in experimental economics. So
if you go over that limited version of homoeconomicus, then you're going to be wrong.
If you say, "Well, it goes into the utility function. Then I can include everything
that falls under self-interest." Then you're back on track, but that means almost anything
can happen. Which is tough. So then you can include in your utility function,
for example, a good that is happiness of another person. [Absolutely, yeah] So if you
include that, then your mathematical model will break down. [That's right.] But it will
still be under self-interest because the other person has to be happy to make your utilityÉ
Right. So here's the wayÉthe counterpoint is likeÉit's like in my self-interest to
take care of someone I care about. If I hate that
person, should I give them stuff also, right? Or if I don't know who that person is. Sometime
people (this is interestingÉinternational aid)ÉPeople are
happy to donate money to aid, but when you ask themÉdo they care about how that money
results in the reduction of poverty, they're like, "No." but they just want to put $10
in the envelope and send it off to somewhere. But if it gets lost in the mail slot, they
don't care. They feel happy because they justÉthey sacrificed something. They don't
care if it actually helps somebody, which is
kind of sucky, but that's the way it works. That's how self interest works out.
Another handÉwas there a hand up here? I had a question about behavioralÉIs experimental
economics similar to behavioral economics?
Behavioral economics and experimental economics. Behavioral economics is like
psychology, and experimental economics is the idea that you could have testable
hypothesis that will be repeated in experiments over and over again.
Who's done the auctions in section already? That's experimental economics; it's not
necessarily behavioral economics. The trust game is behavioral and experimental. So
behavioral, again, is a subset of experimental. What do they mean by rational? How can you
say that everyone is rational, and how do you define that?
Rational isÉbasically, if you're given a set of choices, the same set of choices, not
adding and subtracting choices, that you will be consistent in what you are choosing at
a given time.
So if I say to youÉI say, "Do you want coffee or coke to drink right now?" Right now.
Then you will choose coffee. And if I ask you again, you'll say yes, coffee. And if
I ask you again, you'll say yes, coffee.
If I say, what about your second or third cup, you can switch. That's still rational.
If I add another option here (Tea) you can also
switch. If I ask you tomorrow, you can switch. The only thing is you're basically
assuming that what you're choosing right here, right now, between your choices is what you
really want. Which is kind of ridiculous to make that huge definition for that little
obviousness. But that's what we mean. It's essentiallyÉyou thinkÉyou know what you
want, and you ask for it. Another question?
There are other assumptions that are used for mathematical purposes that go beyond this,
that actually fail on real people. That's a hypothesis, so that can never be
proven, right? It can only be rejected. You can never prove
something with a null hypothesis. That's the whole idea. So of course what you do is
you just write it in the right way, so you can
reject it, which is one of those rhetorical slips/tricks. It's like taking the natural
log of Copp-Douglas or a Lagrangian. Anything else?
Okay, so that's a clarification. And I'm banging on this because I want you guys to be
forewarned and fore-prepared, not because it's going to pop up on the test later on,
but because if you take the stuff that you're
learning for your tests later on, and you go out
into the real world, be careful that it matches reality, or at least your experience in life.
Because the one thing that people always sayÉI say, "I'm an economist." Oh,
economics is tough. I'm like, "No, you do economics every day."
When you go out in the supermarket, and you buy groceries. You are acting in your
rational self-interest against your budget constraint, choosing a bundle of goods that
will serve you the best. It's just like that. It's
not more complicated than that. The fact that I
can't understand what you're doing does not matter. That's where economists go crazy.
But consumers know what they're doing, generally speaking.
Okay. Good enough? Yes. I'm sure we'll come back to that more often.
NowÉauctions. Here's the deal. There's a little experiment that's going to be going
on in this classroom on Thursday. And as part
of my Fall cleaning, because I'm leaving the country for a little while, I'm getting rid
of a lot of books. And I'm going to auction some of these books to you guys in this class
on Thursday. So this is what's going to happen. I have
about 8 books here. What I'm going to do is I'm going to hold them up, and I want to see
a show of hands if you're interested in bidding for this book on Thursday. The four
most popular books will be put up for auction at 25 cent increments. So if they
sell for less than $5, I'm happy. This is not
break the bank time, okay? The most popular four will be sold in different auction
mechanisms, and I will describe all of them on Thursday. So probably the whole class
will not auction, but you will earn something there, hopefully. So we need to find out
which are the four, and which are most important. So here's my littleÉthis is like late night
TV: Wordly Philsophers: The Lifetimes of Great
Economic Thinkers. The Principles of Political Economy and Taxation.
David Ricardo. 1820. I thought so. Wisdom of CrowdsÉJames Surowiecki
Wait, what is it about? The Wisdom of Crowds? It'sÉwhy the many are
smarter than the few, and how collective wisdom shapes businesses, economies,
societies, and nations. Very good book, actually. I have to say. Oh, I should do my
own little star ratings. This is a 5 star, this is
a 5 star, this is definitely a 2 star. Hernando de SotoÉThe Other Path, a very famous
book on private propertyÉ "the economic answer to terrorism"Éhe actually helped
break apart terrorism in Peru in the 1980s. Anyone? Anyone? Kind of? Okay.
Shoveling Fuel for Runaway Train: Errant Economists, Shameful Spenders, and a Plan
to Stop them AllÉthis is about sustainableÉsteady-state economies and sustainable
ecology. Why GDP sucks as a measure of economic output. So this is like a Éforget
what you guys sayÉthis is like a 5 star book also. Okay so this is a 4 starÉanyone?
Hands? We'll do second round if we don't get clear.
The Koran, in English. Small edition, right? The Communist Manifesto. Anyone heard of it?
Marx? 22 pagesÉ50 pages of rhetoric. Maybe?
Oh look! Tomas Schelling: Micromotives of Macrobehavior. Anyone, anyone?
OkayÉkind ofÉ The Logic of Collective Action. A book everybody's
reading? Yes? Except they already bought it, right? That's the problem. I should've
done this at the start of the quarter. The Economic Naturalist, anyone?
Watchmen. Oh! $20! A Beautiful MindÑJohn Nash. Sylvia Nasar.
A great book on John Nash kind of going crazy or whatever. He's the guy that likeÉmade
game theory happen. If they don't go on auction, can we just buy
them from you? That's possible.
Okay, so this is not happeningÉso here's our runoff. We've got Wsidom of Crowds,
Worldly Philosophers in. And we've got 6 more books, and we've got to get them down
to two. So we've got Soto. We've got the Koran. Shoveling Fuel for Runaway Train.
That's more. Okay. Communist Manifesto. Watchmen? No. Beautiful Mind?
I think it should be the Communist Manifesto You think it should be The Communist Manifesto?
You're like one vote though. This is a democracy. OkayÉbetween these two? Who
thinks this one? Who thinks this one? Alright. Here you go.
Alright, so we will do this on Thursday. I will have change (as in quarters). Bring singles
if you want to bid. I'm serious. These will sellÉI know you guys are all going to be
really cheapskate. That's fine. If this sells for $1.25, I'm happy. We're going to do the
auction mechanism. That's what matters to me. So it'll be these four. That's that.
Let's go on to (and those of you who are in section on Wednesday will be doing more
auctions). Go ahead. Can you email us the titles?
Yes I can. You can see on Amazon and check the actual value, yeah. I know this
homoeconomicus. Remember shipping costs though and immediacy. You can have it
right now. With all my notes in it. This guy's an idiot!
You write in your book? Yeah. Actually, these guys don't have very
many notes in them. But there was this famousÉhas anybody heard of Fermat's Thereom?
No? Yeah? So there's this guyÉhe's a French noble. He was a tax collector.
This is how it used to work. You would be a tax collector, and you would just
likeÉgo collect taxes, keep a piece of the action, and send the rest to the king, right?
It was a pretty easy job. And he was kind of
a dilettante except he was very smart. He was reading a book, and I don't even
remember what the math wasÉhe was reading a book, and someone saidÉ"Hey, I
wonder"ÉI think it was like findingÉit wasn't finding the biggest prime, but it was a
factoring problem. Something that was complicated. And Fermat wrote in the margin of
the book. He said, "Oh, I can solve this problem, but I don't have the space to write it
here." And he died. And back when this happened, it was like 1600 or 1700, what they
would do actually is they would republish a book that an intellectual had owned, with
his margin notes in it.
So people would say, "Ooh look, it's Fermat's notes on The Wisdom of Crowds. And
someone started reading it and was like wow, I wonder what his theorem was. Fermat's
last theorem. That's how it got the name. It took 300 years or more until they actually
foundÉ"they" was likeÉit was the combined efforts of like 10 different mathematicians.
Actually, I think the guy at BerkeleyÉhe was the oneÉhe had a key contribution
to solving it. And his proof of Fermat's last theorem was like 180 pages.
It wasn't actually going to stay in the margin. So basically Fermat was full of it. But they
did end up proving, I think, that he was right. So there's nothing so wise in here.
So let's go back to principle agent stuff and spend a lot of time on that, because that
also matters for your briefing.
So you've got your principle, and they hire an agent. And the first problem of a principle
agent relationship is what? As far as information is concerned?
What is the category of an information problem called?
Asymmetric Information. So there's two types of Asymmetric Information. What's the
first type? Ability?
Ability. What's the jargon. Adverse selection. So adverse selection is about ability,
right? You don't know if that agent is good at his job, and the job that he is doing for
you (The principle). The other problem with asymmetric
information is what? Moral hazard. What does that mean?
Effort? Right. And you would hope that we would make
it simple and say ability and effort, but we
don't. So these are the two things that the principle
cares about. And the traditional solution for adverse
selection is what? What is one means of solving that problem? You want to find out if the
person has ability or has no ability. What do you
do? Signaling?
Use signaling? What does that mean? Put that in a sentence. What does it mean, tell me
what it means?
Like when your real estate agent drives a fancy carÉ
What does it mean? Don't talk about real estate agents. Tell me what it means.
Well in the past, if you've done a good job, there are certain signs that you put out that
signals that you do a good jobÉ
So if you're the agent, you're going to signalÉyou're going to do a good job.
And you can also do repetition? That's a different thing. I don't want to
talk about that right now. But signalingÉgo ahead?
I guess the principle could determine whether an agent is good or not based on certain
characteristics that you feel that a good agent will have? Or certain schema that you
have about an agent that performs well?
S o the principle can figure out if an agent can do his job, based on some kind of signalÉthat's
some idea...but the point isÉhere's an important pointÉis thatÉwhat the principle is trying
to figure out is a person's ability. There are
certain signals of ability. One signal of ability might
meanÉmight be that the real estate agent has a flashy car because he's earned money
from his commissions.
If a real estate is merely the son of a rich person, that signal fails. Another signal
is that you have a diploma. What if that diploma comes from
an online university for $88 with a credit card? Bad
signal. Has to be a good university. So you want to have some signal of ability. The signal
must be costly for the agent to transmit. Has to
be costly. Would a resume count?
Absolutely not. Resume is an act of fiction. If you've gone to one of those resume
workshopsÉuse active verbsÉtalk aboutÉtalk aboutÉI've read resumesÉ "I work at Cisco.
I made Cisco happen." It's likeÉyeah. Thank
god I went away from the resume world. My resume was likeÉoh my god, I'm amazing. Because
then what happens? It's like a resume arms race. And you're sitting there goingÉoh yeahÉand
I saved that child, and I rescued a whale, and
then I solved climate change. And the person who's trying to filter these out are likeÉHoly
Cow. Where did they go to school? And of course, the problem is, they actually
lie about that. There's people that have been working
for years at a job, and then they get promoted to higher position, and someone says, I wonder
if they really do have a PhD?" And it turns out
they made that up like 20 years before when they
got their job. And they get canned. This has happened a lot. LikeÉ20 and 30 year career
people that are getting knocked right out of their
entire career because they had lied about their education
that much earlier. Don't the usually request their diploma?
That's if the HR department is doing their job. Go back to that principle agent problem,
right? Oh, yeah, Harvard, fine. Okay, so come on
in. They just want to hire you. They don't have to
work with you. They're HR. that's why they don't pick up the phone, ever.
Why hire them? OhÉactually, you know what? That's the best
question ever. It's likeÉwell clearly she wasÉthere was a woman in particular that
had. It's likeÉeverybody loved her, and they're firing her for not having a degree that no
one cares about anymore? It's like an ethical lapse.
Unlike politicians who have affairs and get reelected
Other questions? What kind of situation is this? Is this like
insurance companies? The world. Everywhere. Principle agent problems
exist everywhere. Everywhere there are asymmetric information problems, and you areÉif
you go to a restaurant, and you don't know what's going on in the kitchen. If you hire
a doctor, you don't know what they just did to your
guts. If you ask someone to sell your houseÉif you give your brother the car and say, "don't
mess with the transmission." Or if you rent a car. Rental racingÉhave
you ever heard of that one? So this happens over, and
over, and over again. It happens within markets and without markets. Essentially, there's
some goods that areÉI'll say itÉbut I might be
wrong. Okay, let's do a homework assignment. No,
let's not. I'm going to call it experience goods, credance
goods, consumption goods. Let's look at the different types of goods
for as second. Consumption goods. Using that word,
it's not jargon. I'm just tring to say it's kind of what we're thinking about in terms
of a good. Let's say that these sunglasses areÉlet's
call it a consumption good. What makes this a
consumption good? I go to a shopÉI got these at Walmart or something. I go to a shop, I
try it on, I look in the mirror, I look at the sun,
and you know the properties of these glasses. There's
no "I'm not sure". The glasses are not promising to make you smarter. They're not promising
to make you richer. They're just sunglasses,
right? You know exactly what you're getting before
you buy it. That's important. That's just basically what we think about in terms of
most goods. There are other goods that are much more difficult
to figure out. One of them is an experience good where you buy a ticket to go on an airline,
you pay them all your money before you experience the good, right? And you are basically
going to get on that plane and take that trip. Now if buy a ticket and you show up and they
say, "There's not food on board." Actually there
was this really good spoof on the internet about EasyJet? One of these European flight
airlines? Ryan is ever worse.
Does anybody know Ryan Air? It's like 10 times worse than Southwest. Southwest
is likeÉokay. You knowÉ you get some peanuts, they give you a drink. You go to Ryan AirÉit's likeÉoh, do you have
a bag? Give us $10 more. Oh, you want sit down? Give us $10
more. Oh you want a drink? That'll be $5. And
they had this spoof. It's like...do you want a seatbelt? We'll sell you that for $5. Do
you want the thing that actually lets you get out of
the seatbelt? That's another $10. Ryan Air is crazy on terms of nickel and diming
you on these charges. So essentially, when you
buy that Ryan Air ticket, you don't actually know what you're getting, in a sense, until
you experience it. You could consider this the
same thingÉgoing to movie is an experienced good.
you buy a ticket, you walk in, and you decide that the movie is either worth your money
or
it's a waste of your money. And if you get 30 minutes
through your firm, and it's a waste of money, what should you do?
Leave. Right. That's a good example of sunk costs
are sunk. Do not invest an hour of your life watching
crap. That's an experience good: movie. Sunnies. A credence good isÉyes?
What happens if you buy sunglasses on the internet, and you know exactly how much you
have to pay?
ThatÉit's definitely not this if you haven't seen it already. It's not exactly what I talked
about in terms of a credence good, it'sÉat this pointÉnoÉif
you're buying sunglasses on the internet, maybe the ad on the internet is completely
accurate. But you just don't know your head sizeÉor
whatever. Or you don't know how those lenses work. You might just kind of say wellÉI have
this range of expectations about what I'm going to get, and if it falls in that range,
then that's okay. It's much worse if you buy those glasses,
and the person's just lied to you. They're selling
you counterfeit. I actually know somebody who sells counterfeit glasses, but he says
counterfeit, right? Because people want to buy Gucci without
paying for Gucci, right? So... I'm not quite sure what to call that one.
It's certainly not this because you know what you're
getting ahead of time...this is not a strict hierarchy. This is kind of off the top, that
I'm giving you these definitions. But it's something
around experiencedÉ What if you go to see a play or a movie, and
you don't understand it. And you go back a second
time, andÉ Well that's like reading Shakespeare 12 times,
you know? If you're still into it, then that's cool.
But if you're saying, "This sucks." I just watched transformers this weekend. Besides
the whole Megan Fox thingÉI had to know. But man, the
script sucked in that film. That was likeÉyou knowÉfor 6 year olds. And I was feeling a
little bit talked down to. But I had to watch the
special effects What are credence goods? So if you want to
go to a film twelve times, go right ahead. Credence
goods are when you essentially have to take on trust with what you're actually getting.
You can't experience it. When you walk into the film,
you're likeÉI see the film. But a credence good is
like taking medicine. Or I had the surgery, and they're like, "Hey, the surgery went well."
And I'm likeÉI hope so. But if you're taking
medicine against malaria, for example, and you don't
get malaria, you don't know if that pill protected you from malaria, or you just didn't get malaria.
You have to trust. You have to trust the person who's selling it to you. Medicine.
And as you go from one to two to three, you have to have more and more trust for the person
that's selling you the good. Are there any examples of that that are not
health related? Of a credence good? Who has an example of
a credence good that's not health related? Could a car be one?
Go ahead. Like a used car salesman tells you a carÉ
That's more of an experience good. But you have to trustÉ
But you can also test all these things out. You buy the car, and you go in the car, and
you panic, and you can run the whole thing down. And
besides stuff that no one can find, which, by
definition, no one knows about, the car is basically an experienced good.
A credence goodÉyou can never prove or disprove it's working. Yeah?
Maybe an SAT course prep course? You pay for a prep course, and maybe you're just really
smart, or maybe it's something else. Right, an SAT course.
LikeÉthey give you like a 200 point guarantee. But you might try hard. There's an interesting
thing calledÉI just spend 500Éhow much do those things cost? Those things cost a lot
don't they? It's a $1000. So you spend $1000Éit's like dude. I better do well on this test.
And you're not going to sit there, and it's like oh
SATÉyou don't sleep on the book. You work hard because you want to get your money's
worth, even though there might not be anything there. So it's hard to disentangle, but I
think that theÉI'm not sure about that oneÉI doesn'tÉI
don't know how to do that one. What about Dr. Scholl's?
YeahÉin terms of your feet not stinking or what?
LikeÉit helps out your back pressureÉ Right. In a sense because you don't have your
counterfactual. But the reason that it's an interesting concept is because of the whole
idea of doing a double blind testÉdoing the sugar
pills. Placebo tests. If you can't run placebo on yourself, which by definition you can't,
then you're not exactly sure about what you're
getting. I think another industry apart from health
is anything that involves Tarot cards or good luck
charms, where people sayÉ Yeah. I read my horoscope, and it said I was
going to have a great day, and I had a great day.
It's amazing. It worked. Except I read Virgo, and I'm really a Libra. But yeah, that's another
one. Like a psychic says, "I am taking care of your future. Give me some money."
Would insurance be a credence good? What kind? No, I don't think so. Because insurance
is almost a kind of contract called: we'll take care of certain expenses that might happen
to you. Insurance is obviously a principle agent
model. But when you buy insurance, you have an agreement. If you break your leg, you're
going to get your leg fixed. The doctorÉor fraudulent
insurance is a different problem. I'm saying that you're paying for something
that you're not sure if you're going to get covered.
Oh like US insuranceÉno. I think thatÉI wouldn't worry about one. That's like a contractual
problem. It's not a credence good. Maybe like carbon offsettingÉ
Totally. Yeah. I just bought a bunch of carbon offsets. I boughtÉor I sent my money to the
aid to [inaudible] International, and they sent
me a picture of a kid back. Or the hook-up ads on
Craigslist. It's likeÉohÉso and so wants you. It's likeÉwow, look at her, she's cute.
Except it's a photo of someone else, or it's a guyÉwhatever.
And then you can keep going with that one, right? So yeah. Carbon offset is a total
credence good. Yeah. In fact we're all going to
sacrifice so much for our lives in order to just save the world. And if all thatÉwe're
notÉthen we're really upset about it, right? That's
why there's this big debate. I had a question about the signals?
Hold on a second. Anybody on the credence whatever? These goods? So let me just finish
up on that, and we'll come back to your question.
The importance of these goodsÉas you move from one to three, your trust is going up
in terms of who you're buying the stuff from. NowÉif
I'm going to buy pillsÉthis what was going on in high school. Hold on, I have three hands
backed up. In high school I had a friend that like really wanted to do drugs. It was a shock,
I know. But heÉthis other guy said, "Oh yeah!"
I don't know what he saidÉwhat he claimed to
be selling himÉbut he actually sold him nutmeg powder. I don't know what it was supposed
to be. Heroin or something like that? And it
was like nutmeg powder. That was a credence good.
Or it was actually an experience good because he ended up having a very nice smelling room.
What was your question about? I was going to say thatÉyou wouldn't take
medicine that you don't knowÉlike you wouldn't take
medicine.., I do know.
Because they come from pharmaceutical companiesÉI mean likeÉyou wouldn't buy it off the
street. Totally not. Never! Never buy drugs from the
street. Education? Would that be considered a credence
good? EducationÉwell it is credence in a sense
that you have noÉit's like Standford/Berkeley, Stanford/Berkeley. And it's likeÉoh dude.
You're going to be so successful in life because you
go to Stanford. And Berkeley saysÉpeople say the same thing, except it will save you
whateverÉ50 grand a year. But then you have no counterfactual. So that could be a credence
good. What about time...because I feel like with
increase of trust, you're signing up for more of thisÉ
The big commitmentÉyou're making a bigger commitment. So you have to have trust. And
that's why brand names matter. You have to beÉto get back to your drug thing, actually,
I mean illegal drugs, which was what I was joking
about, right? That's why drug dealers are not only
interested in their reputation. I'm going to give you a freebieÉthat's the whole joke
about gateway drugs or whatever. But they also have
brand names on illegal drugsÉon ecstasyÉactually on heroin they have Bolt,
which I don't deal with. Or anything actually. It's
likeÉthey have brand names. So it's like really crazy because you're trying to have
a brand name on something when you don't have any
intellectual property protection because it's a black
market item. But on the legal drug industry, they don't want you to know that drug that
you're paying a lot of money for actually doesn't
do anything. So there's this controversy about texting
by doctors. Like the whole restless leg type of thingÉ
What is that? There's like all these commercials about how
your legs are restless, and you need a drug. What's thatÉit's called female sexual dysfunction.
Did you here about that one? I don't know what the terms were. It's something like Pfizer
trying to sell Viagra to women. What was the acronym for it? Female Sexual DysfunctionÉthere's
some doctors that are diagnosing all these women. And it's likeÉoh you need this Viagra.
And this is creating something out of nothing. This is whatÉin a senseÉthe wholeÉ "Do
you feel nervous, worried? Do you sleep well at
night?" it's likeÉis your life going well? That's that they're doing. They're selling
you drugs. It's kind of like a pre-examÉthey ask people
ethical questions. Wouldn't education also be like an experience
good? Yeah I think thatÉhere's the thing. Remember
that with principle/agent problems, the way to
solve them is repetition, which is what was mentioned earlier. So trust is going to be
a one shot game, in a way. You go to that movie once,
but once you goÉif you go to a movie with so-and-
so the directorÉand that director has another movie. Or that star shows up in another movie,
it's like oh, I know that person. I'd go to that
movie again. That's the repetition. And in education,
you knowÉeven hereÉI'll be like here for four or five years. But if your first year
sucks, you're like "I'm going to transfer to somewhere else."
SoÉor you're taking multiple classes, and you
can switch between divisions. So repetition is what will save you from these problems.
So there's a little bit of trust going in, but
the more often you can get repetition, the better off it is.
So in that sense, coffee is a really goodÉso coffee, in a way, is an experience good. If
you pay $1.75 for a cup, and it's good you come back
again. If it sucks, you go switch coffee shops. And
so in some ways, coffee shops can't really rip you off. Because consumers learn very
quickly that the coffee shop sucks. Coffee shops,
food, TV showsÉI mean there's a number of things
that you can talk about. But the bigger amount of trust, or the bigger amount of money that's
at stake, and if you can only do it that one
time, that one shotÉsay that you're a refugee, and you're
sitting in Geneva, and they say, "What country do you want to go to?"
Do you want to go to the USA, Australia, UK, or GermanyÉwhateverÉand the refugee's like
wellÉUSAÉokayÉthey have American Idol, and they have LevisÉin the UK, I have an
uncle there, and I didn't like that uncle. And in
Germany, they have Mercedes. So they're trying to
figure out how to make a decision based on very, very strange heuristics. Rules of thumb.
But essentially, I need to figure out what that
experience good is going to be. That country they show
up in. Because it's hard if you're a refugee and to hop around the word, right? By definition,
you can't very easily. So thatÉin a sense, repetition
really, really matters for solving this problem. So if I'm talking about this all the time,
how does that relate to principle agent? It wasn't one of
those crazy tangents; it's actually directly central. What does it mean? Let me say it
a different way. Who's the principle, and who's the agent?
Is the agent the good? The agent is not the good. The seller's the
good. The consumer's the agent. Oh. Other way
around. Oh my god. None of that made sense. The seller's the agent. The consumer's the
principle. You're passing your money to your agent, and your agent is delivering a good
to you. Just the same as a real estate agent is doing
service to you. You know that the side effects of a gateway
drug is increased gambling? Increased gambling problems? Those drug disclosures
are absolutely insane. It has the picture on the frontÉI get the National Geographic,
and they have the little angels dancing around, and
the back says, "You might die. You're going to have endless diarrhea, you're going to
haveÉ" It's like whoa. Yeah, drugs. Avoid those drugs.
Bad news. Weird. Just be healthy. So you have to think about these issues when
you're doing principle agent problems. You're trying to solve these things.
Now how doesÉyou can solve the principle agent problem essentially through repetition.
You can solve it byÉthe principle will be doingÉthey'll
be using filters ,which is the same as signaling. We'll be looking at signals for
adverse selection. But for effort, they're going to be
doing what? What does the principle do to reduce the cost of moral hazard?
Reputation? No.
Monitor? Monitor, right? Just watch the person, right?
If you hire the dude to mow your lawn, you say,
"Hey how many peoples' lawns do you mow in the neighborhood."
"I'm mowing 80% of the lawns in this neighborhood." That is called signaling. It's a way of solving
the adverse selection problem. And then you sayÉI don't trust you anyway because you
sit on the porch and you watch the kid go back and
forth, and back and forth. You say, "Oh you missed some." Right? Monitoring.
Use that example. You will never fail thinking about the kid with the lawn mower. That's
fine. You saw the question.
What if you look at somebody else's lawn? That is an advanced form of signaling. In
some waysÉof course, the kid might lie. So they get
to goÉit's like checking a person's diploma. Mr. SmithÑdid so-and-so mow your lawn? No!
He's a liar. It's likeÉoh, alright. You don't hire them. And that's in some ways why repetition
really matters because once you get burned as a fraud or a liar, likeÉBernie Madoff
is not going to be doing any investments for a while because
he's in jail for a hundred and eighty years, right?
If you are fired because you're a liar or a thief, unless you're in politics, you're
going to be out of the job. OkayÉso this is the traditional
way of solving it. Now how does this relate to intrinsic/extrinsic
motivation? If someone hasÉI'm not going to
getÉwell, extrinsic motivation for yourÉif you're the principle, the extrinsic for your
agent is a wage. You could make the wage contingent on
the delivery of the good The real estate agent is paid before the house
sells, not after the house sells. The lawn mower
kidÉyou'll say [if he] did a good job or not. I heard this from girls before. Who's
paid $100 for a haircut and the haircut sucked? No? Yeah?
I heard that before. But then do you get a freebie
after that? Or do you likeÉnever go back again? Never go back again, right? And tell
all your friends to never go back again, or something
like that. So there's money before and after. There's
testimonials, there's telling your friends, there's
asking your friendsÉthat's why a vast majority of peopleÉyou show in town, and you meet
the people. It's likeÉwho do I go toÉthe dentist?
The doctor? Who else? Who else do you reallyÉdon't know?
Car Mechanic? Car mechanic, that's a huge one. What else?
Optometry, babysitters? Step-dad, right? That's a
new film that's coming out. A step-dad who kills every family he marries in to. So you've
got money, you've got talking, you've got Yelp.
Yelp is apparently running some sort of extortion racket against the business that were being
rated. If you buy advertising, we'll take those
negatives. But if you don'tÉsorry! They might write some. So these are ways of solving the
principle agent problems. What about intrinsic motivation? How does that relate to the principle
agent problem? If someone has an intrinsic motivation to
do a better job, are theyÉis that the person you want as
your agent? Yes or no? Yes.
So when they come to the interview, they say, "I really want this job. I'm going to do such
a good job." Is that what you mean? I meanÉkind
ofÉyou have to be able to check against it, right?
You said the resume doesn't really count. Doesn't the resumeÉisn't a sign of how much
effort you want to put into that, like intrinsic
motivationÉeffort that you are willing to put into
yourÉwhatever. In a sense. So if your resume says that you
spent three years in a jungle rescuing orphan gorillasÉ
I don't mean what is on the resumeÉ How it looks.
How it looks, right. Like whether you just put a piece of paper and a listÉor if it's
obvious that you spent 2 days designing and thinking about
what you put on your resume. Right. That's an interesting question. So,
if you spend 2 days designing a resume that's fictitious, are you more likely or less likely
to get a job than if you spend 1 hour designing a
resume as a winner of the piece prize? So it was content versus presentation, or
something like that, right? And it definitely depends on
whatÉbecause the people who are filtering resumesÉwhen there's a hundred applicants
for every job, they're going to look at likeÉspelling
errorsÉspelling errors are notorious. If you
have a spelling error, your resume is going to get thrown away.
That's true. That goes together. And lying is not that common. Because the most important
part of your resume is what? References. Because
if anybody comes today, I'm going to be likeÉlooks good, they sound nice, I'm going
to call their references. And find out if their
references are legit. I think actuallyÉwhen the guy writ me off, he actuallyÉbefore he
writ me off, he said, "Call my ex-wife. She'll vouch
for me." And the ex-wife was in the game! It
burned me insteadÑit was really sad. So referencesÉhe went to jail though, so it was cool. That
was the power of blogging. I gotÉfor a rental deal in Washington DC.
It was sad. But I got him put in jail, so that was cool.
Fraud in DC. Oh yeah, we don't have problems with fraud in DC, right?
The point though isÉyou want to go straight to the repetition thing. And the higher the
ranking of the reference person and their reputationÉso
say that so-and-so was giving you a referral, and
they lied, and now their reputation is burnt. Because anybodyÉwho's a fan of ESPN? You
see this thingÉthis sex thing on ESPN or on TV?
Some blogger got all pissed off because he got
lied toÉhe like published a whole list of sex scandals, and ESPN is like, "What are
you doing?" He's like, "I don't care. You guys lied to
me." And that is retribution. Because no one is
more upset than the one that is being lied to. And that's
because of this evolutionary psychology, which is cheater detection, which is we don't like
cheaters because back in the day if someone cheated, you'd just kill them. Now we're nice,
we just put them in jail or you give them a bad
reference. But in a senseÉhumans haveÉwe only got here
because we got cooperated. The guys that didn't cooperate, we killed. That's how it
worked. Our tribe killed that tribe. And so if
somebody was cheating in our tribe, you kill them too, you don't need them. That's how
social cooperation evolved, by killing the people
that don't cooperate. That's literally why we're so
hard wired on that. Okay. Let me spend a second on corporate social
responsibility. And I mean a second, because I'm going to ask youÉif you're a shareholder,
and you've got a CEO of a company, who's the principle and who's the agent?
Shareholder's the principle and the company's the agent.
Okay. And the CEO, back in the day, you'd say, "Your job is to maximize profits."
Now you're not quite sure if the CEO is good, but basically you see if so and so is in charge
of the company, or a different company, or was
the Vice President for this many yearsÉthere's a
career that has a track record. So you have a notion of ability. You have a notion of
effort. You're sayingÉI want quarterly reports, I
want to talk to you, I want to see what's going on.
Or effort is forced because of competition. So you have that principle agent relationship.
Now your CEO says, "you know what, we need to do some corporate social responsibility
with your CEO as a profit maximizer. Now your CEO
saysÉwell you know what? We need to do some corporate social responsibility. So we
have to worry about the balance between profits and
society (the world). And then the CEO says, "Well since we've adopted
the CSR model, our profits are down by 20%, but we're really doing well. We have a big
carbon offset program, so you should be okay with
that. Right, principles?" How do you know that your CEO is doing the
best job possible? You look at the profits.
The profits just went down. No, but it is because we're helping the world.
But it's not in the shareholder's best interest. No, but it is, because CSR is good for the
shareholders. Maybe some of them don't feel that way.
That's why I claim that you shouldn't do it. That's my opinion though. I'm asking you how
to resolve this dilemma.
Now let me ask you a slightly different question. What if there are no shareholders, and it's
a family owned business, and they decide to
be corporate socially responsible, and help their
community. Do we have to worry about the balance between profit and CSR?
No, because there's no agent, no principle. All the incentives are combined within one
decision- making group. So in a family-owned company,
it's their decision what to do with their profits
because they work hard to keep the profits. They decide if they want profits, or if they
want to help their employees with job security, or if
they want to support the local football team, or if they want to do carbon offsets. Because
they are getting both the costs and the benefits.
But if you're the CEO, and you tell the shareholders, then maybe the cost of lower profits comes
at a benefit of more invitations to social functions to be given prizes and stuff like
that as the CEO. So the CEOÑyou're likeÉI go to all
these dinners, I get to meet Angelina Jolie, and the
shareholder's are like, "Woah, what happened to our 20%?"
And it's like, "Oh yeah, well that was the cost of doing business."
This is the problem with CSR. And CSR is just another name for community relations, another
name for employeeÉor stakeholders (that was the old word for it). CSR, stakeholdersÉkeep
going back. That problem has occurred over and over and over again in time. And basically,
the CEO is saying, "I want to do something else
for me, can I have some of your money, shareholders?" That is the tension that is
going on with CSR. NowÉif you believe that CSR is a
good idea, go for it. Keep this in mind. Keep it in mind in terms of a draw back to it.
Because no matter what that person promises, the costs
and benefits of that CSR program are being born
by those people. So what I said wasÉis Nikita here? So Nikita sent me an e-mail that
saysÉwhat about CSR? Or something like that. And so the old definition is thisÉtell the
CEO to do his job, give the shareholders the money,
the dividends, the profit, and let the shareholders spend it on carbon offsets and cows and stuff
like that. Community. I was just sayingÉwhat if CSR doesn't necessarily
decrease profit? If it doesn't decrease profits, then you would
have already been doing it already. That's what's
called greenwashing, usually. Ethos water. Who's seen that? Oh, ethos, I
love ethos, here's $4. And some kid in Africa gets a
penny. Maybe. I doubt it. That's the whole thing with Starbucks and the fair trade coffee.
Yeah, we sell fair trade coffee. It's one percent of our coffee volume, but you'll pay
a lot more for [inaudible] coffee because you feel good.
They sell Ethos water at Starbucks. Tell me about it. Yeah. That's the whole joke.
It's more crap from the greenwashing division of
Starbucks. If you took that approach, and the CEO did
it by himself, wouldn't it even itself out by [inaudible]
if they wanted to? If they took that approachÉ
If they took it out of the social welfare and stuff like that by themselvesÉ
If the shareholders do it on themselves, that's their decision.
No, the CEOs. If the CEO does it, then he's defrauding the
shareholders. And if they don't like itÉwouldn't it even
itself out as people sold their sharesÉ They either sell their shares or fire the
CEO. So I'm handing out the briefing plus The Tragedy
of the Commons. I'm making it easy for you; I'm lowering your transactions costs. I already
killed the trees, so you have to read it. Let's go
over the briefing. We will have more and more and more to say about principle agent stuff,
because it turns out that this is the key to a lot of our political economy questions.
Anybody still needing briefings? There should be enough copies going around thereabouts.
So what is the advantage of having anÉit seems that the solution to all of our problems
is to get rid of the stock market and have aÉ
Do everything yourself. Or give it toÉso why do you have stock markets? You have stock
markets because you can raise capital. You have stock markets so you can have gains from
trade and games from specialization.
But then you create principle agent problems. So that's a cost and a benefit. The cost and
the benefit is actually where the rubber hits the road
in terms of leveraged buy-outs and reprivatizations, and companies going public. The guys at
Google didn't want to go public, but they were forced to by their board. They wanted
to keep the control. And the guys at the investment banks
did go public and shifted all the risk to the
shareholders, and take half a paycut. So there's this conflict back and forth, but that's a
good question.
Okay. Briefing number 1. Let's go over that. Okay. You're a junior staffer politician.
You have been asked to write a briefing on the
following topic . Please explain how a leader can promote an environmental program, but
not central interest groups, but still, get reelected.
This is a bitch of a question, okay? What I want you to do is I want you to think very
creatively about how to write a briefing for this politician,
and I'm talking aboutÉthe things that you have
to keep in mind are to deal with these problems that are here. I want to think creatively
about how to I'm not going to try and define ecosystems,
groundwater, greenhouse gasses, offshore drilling. These are all public good problems.
These are the tragedy of the commons. You have
Logic of Collective Action, which hopefully is very fast. Most of you are, at least, started.
True or not true? Who's started it? Good. Who's
finished it? So there's a tragedy of the commons, which
lays out part of the problem. Same era. Logic of
Collective Action was 1966 or something like that. And Tragedy of the Commons was 1968.
This is where the discussion get's going. Lynn Ostrom and her economy. Not allowed to
sayÉwe'll just evolve our society for 50 years and fix the problem okay? That's the
bad news. You can't use the Ostrom solution. You can
discuss things like competition, asymmetric information, principle/agent problems, collective
action, free riding, and special interest. The key
here is that your politicalÉyour person who you areÉyour principle. You are the agent.
Your principle is asking you to write this briefing
to try and figure a way of serving the public, and then
getting reelected against that opponent who will be funded by the special interests who
do not care about the public. It's the old problem
of business as usual in politics. Now if you are
following politics, this happens all the time. If not, this is where you start to learn.
Don't use the jargon, okay?
This was written for a politician who has an elevator worth of time to read your briefing.
That means you get in the elevator, and by the
12th floor, you've got to have a clue. The idea, right?
How to do this. Consider that the person's got 10th grade education. Or 10th grade attention
span. Either one. There's aÉoh back to bootleggers;
I'll get to that on Thursday. Be concise. Now
it's one page. Don't muck around with theÉI'm going to put inÉI'm going to reduce to Courier
in my font. You guys have all done that, or know people who've done that before. Just
make it fit in there, and the whole point is that
you spend enough time on it that you get your message
down to one page. If you have to start with 5 pages and cut it down, that's fine. If you
want to write a paragraph and that works, that's fine.
Now grading, The most important thing. So what kind of politics doÉI mean how many
yearsÉ Stay within two years. This is a congressional
cycle, okay? How can you avoid special interest groups?
That's what you're going to tell me how to do.
Especially for environmentalÉ Woah, woah, woah. That's what you'll tell
me how to do. I'm not answering your question. Okay. I have to get to the end of this, and
I'll get to the last hand. This is going to be peer-grading double blind.
Your assignments are going to come in; it's going
to have the last four digits of your student ID on the upper right hand corner. And you're
going to bring 3 copies of it. If you bring 2 copies,
you will get zero points. Does everybody understand that? Three copies. You're going
to bring in three copies, it'll have your student ID
on there, we will redistribute those copies to everybody else in the class in a random,
that's what I actually have to determineÉthose people are
going to rank your briefing and the other two
briefings they get. The best one is going to get 10 points. It's completely a relativistic
grading system. When you are grading, you only get
to choose one that's best. Alright? And the second
best or the third best. So if you write a crap thing, you're going
to get whateverÉ5 points on your briefing, Okay?
That should be good enough. And if you have a hand up, I'll try and get to it next lecture,
okay?