Posted by Marc Hodak on October 31, 2007 under Unintended consequences | 
Yep, it was a boy playing with matches that led to 38,000 acres going up in flames. Because, you see, when something horrific happens, it’s great to find someone to blame.
In the case of the California fires, most of them were started by similarly random events, or what conservationist call human ignition. Human ignition is, basically, people being around nature for enough time.
So, if an adult places a Ming vase on a wobbly stand in the middle of the entranceway of a crowded Manhattan hotel, does the kid who knocks it over get the blame for breaking it? If conservationists prevent people from managing their environment the way they think best, e.g., by clearing the combustible underbrush that is tinder for these fires, is a boy playing with matches near this tinder to blame?
Posted by Marc Hodak on October 29, 2007 under Unintended consequences |
At least when it comes to their prospects for finding work. Ohio’s state’s Civil Rights Commission now requires companies with four or more employees to grant women up to 12 weeks of paid or unpaid maternity leave.
Well, shouldn’t women get some time off when they have a baby? Sure. And women get it, including in Ohio. In fact, Federal law already requires that employers with more than 50 workers provide 12 weeks of unpaid maternity leave for women who have worked more than a year. The Ohio law simply extends that to very small companies, and regardless of the amount of time those employees have worked. And it’s not as if Ohio law had previously ignored even this group of women; it currently requires that all employers give women a “reasonable period of time” off to care for their new babies.
So, if you own, say, a small bakery in one of those Ohio strip malls, and you’re no longer allowed to decide for yourself what is “reasonable,” and a pregnant woman comes looking for a job, how are you going to defend yourself? Let’s say she’s just a little obese (you’re not allowed to ask if she’s pregnant)? What if you own one of those little gift shops in a quaint Ohio town, and you have a choice between a fertile young woman, or someone more matronly, or a young man? Folks, these policies have real world consequences.
It would be a difficult study to conduct, but I would bet that unemployment among young women is about to go up in Ohio faster than the overall average, including at those employment law firms that will, no doubt, be the only beneficiaries of this law.
Posted by Marc Hodak on October 27, 2007 under Practical definitions |
John Edwards released a statement giving some details about how he would erode our liberty. In the introduction alone, he mentions “social compact/contract” seven times, which should give you an idea of how he bends in the trade-off between individual rights and collective obligations. I’ve already provided a practical definition of social contract, which sounds all pleasant (social) and legal (contract):
“Social contract” – Those with political power telling everyone else what to do.
Contrast with this:
“Brute-force collectivism” – Those with political power telling everyone else what to do.
Today, I want to highlight one of the groups Edwards wants to empower–regular workers. Here is what he means by that:
“Regular worker” – Union member, or someone who isn’t a union member, but should be.
Edwards clearly believes this is a potent constituency:
Unions helped ensure that regular workers were part of the social contract in the last century, but today the right to unionize is poorly enforced and routinely violated by employers…The share of workers covered by union contracts has fallen by nearly half since 1978. To help the 60 million workers who would join a union if they could, Edwards will pass the Employee Free Choice Act to let workers unionize when a majority of them sign cards… He will also ban the permanent replacement of strikers to give workers the leverage to demand their fair share of rewards for their work
Here is where delusion might do him in. Edwards may be able to convince himself that this “60 million” number is real. Or, even if he knows its bogus, he may be able to convince the unions that he deserves their support with statements like this. Among non-union workers, no doubt, many of them would like to join a union. They should be free to do so in non-coercive elections. But if he thinks that he won’t alienate the 55 percent of workers that would rather slurp freshly wretched bile than join (or remain in) a union, then he is in for an even bigger loss than he’s already courting.
Posted by Marc Hodak on October 26, 2007 under Self-promotion |
Forbes added the first and last line of this article. The rest was (mostly) what I wrote last weekend. For those of you taking my “History of Scandal” class, this is your first reading. Enjoy!
Posted by Marc Hodak on October 24, 2007 under Self-promotion |
I haven’t been that into baseball since I was a kid, when I was really into baseball; I could tell you the stats of every player in the league. But, since we have family in the game tonight, there’s someone to root for. And it looks like a pitching duel!
Posted by Marc Hodak on October 22, 2007 under Executive compensation |
Instead, I’m disgusted.
Since I’m an expert on executive compensation, I guess I ought to comment on this stuff. However, I’m a little late to this story, in part because I no longer subscribe to the NY Times. Frankly, I can get rags for free from the worn out clothing generated by my growing kids. Nocera’s column on CEO pay is typical of the reason for my dropped subscription. (Please don’t encourage them; here is an ungated version.)
Nocera is pretending to debate Watson Wyatt’s Ira Kay about the social value of CEO pay, as if they are on the same intellectual plane.
I’ve heard Kay make this point before – and even debated him on it. He really does seem to believe that all of the great economic benefits enjoyed in the United States during the past two decades or so can be traced back, in no small part, to the way chief executives are paid.
I, on the other hand, believe he’s got the cause and effect exactly backward: that it was the rising market that made the lucky fellas running America’s corporations look like geniuses – and made them richer than they’d ever imagined, thanks to the shift to stock options as the primary way to reward executives.
Nocera is basically arguing his feeling against Kay’s experience. He goes on to admit as much: Nocera just doesn’t like the idea that CEOs make as much as they do, regardless of the reason. He doesn’t believe that their pay is the result of market forces, regardless of any evidence (amply provided by Kay). This is what passes for social commentary. Nocera finishes with one of the most disingenuous statements I’ve seen in a long time:
If it turned out that in a real market for CEO pay, their compensation remained in the stratosphere? I might not like it, but I could live with it.
Of course, it’s been a long time since I read the NY Times.
Posted by Marc Hodak on October 18, 2007 under Economics |
Franklin Allen, Elena Carletti, Robert Marquez raise the age-old question, “Shareholders or stakeholders?” in this study. When finance and economic professors resurrect this popular dichotomy, they invariably blur a much more useful distinction: short-term vs. long-term. From their study:
A surprising finding is that “some companies may choose to become stakeholder-oriented because it increases their value and benefits shareholders,” according to Allen.
I live in two worlds. In the academic world, we can create artificial distinctions like “stakeholders,” and show how concern for stakeholders actually improves shareholder welfare, as this study seems to show. We can show, as these authors do, that over three-quarters of managers across countries actually claim that “a company exists for all stakeholders,” and think that’s surprising or meaningful.
In my other world, the real world, I have to tell managers what to do day-to-day. (Actually, I create incentives to encourage certain behavior.) And I know that managers, like all of us, have this inherent limitation–we can have many objectives at one time, but we can only maximize according to a single rule when they come into conflict. So, when a conflict arises between the interests of the shareholder’s and those of, say, the workers, how do we decide what to do? One has only four choices:
1) Maximize for the shareholders
2) Maximize for the workers
3) Sometimes maximize on (1) and sometimes on (2)
4) Maximize according to some objective function that accounts for both according to some decision rule or formula
Read more of this article »
Posted by Marc Hodak on October 16, 2007 under Regulation without regulators |
For my Canadian readers, you can check me out on B1 of your Globe and Mail. The author did a good job of representing me. She may have slightly overstated things to say that my “consulting business (is) based mainly on applying mechanism design theory,” (it’s more broadly about using incentives to minimize agency costs and improve decision making), but frankly I don’t know of anyone who incorporates mechanism design theory into actual, internal corporate practices to the extent I do. The author seemed thrilled, in fact, to find someone who actually applied this theory to real life business problems rather than another professor to provide theoretical solutions to hypothetical problems.
Alex Tabarrok did an excellent job illustrating the basic concept of mechanism design theory. The author mentioned two of my business applications (executive incentives and corporate investment decisions), but those are fairly complex, and reading what Alex wrote inspired me to think of a simpler example of an application I’ve implemented. So, here is one:
I some situations, one manager has to transfer an asset (say, real estate) to a particular other manager. There is no possibility of competing buyers or sellers. Manager A must sell it to Manager B. At what price? A simple negotiation would quickly break down. The seller would ask for too much; the buyer would offer for too little; neither side has an incentive to provide an honest valuation. Agreeing to split the difference wouldn’t help–in fact, it would simply polarize the bid and ask prices.
So I overlaid an additional rule to this negotiation. I said that if the two managers couldn’t agree on the price, we would set aside their respective best and final offers, and go to a third party appraiser with some experience with that asset (real estate, in this example) and provide an estimated value. The appraiser wouldn’t even see the offers. We would then open up the best and final offers of the two managers, and the offer closest to the appraised value got their price. Think about how the dynamics are changed with this rule, and why the managers, in fact, were generally able to quickly come to agreement, almost never needing an appraiser to actually get involved.
I didn’t mention to the reporter the fact that I was also a professor.
Posted by Marc Hodak on October 15, 2007 under Self-promotion |
For the longest time, my most downloaded paper on SSRN has been my contribution to mechanism design. My paper on the Enron Scandal submitted last June, however, has been downloaded at a rapid clip (it was #5 among “new papers” in the Management Research Network)–a trajectory that would make it my #1 paper sometime next month. Maybe with the publicity of the Hurwicz, Maskin, and Myerson Nobel, my ingenious mechanism may see a surge!
My mechanism, a corporate cost allocation method, was praised at the time of publication (ten years ago) as extraordinarily clever. It was adopted by some very large, complex organizations, and succeeded in getting their managers to reveal reservation prices (a key objective of mechanism design) on major investments, with the effect of significantly improving their corporate returns.
Unfortunately, over the last decade, corporate cost allocations have come to be driven almost entirely by tax considerations rather than internal economics. The impact on organizational efficiency of this sorry trend is incalculable. Imagine E-bay auctions organized by the IRS.
Posted by Marc Hodak on October 11, 2007 under Revealed preference |
The WSJ had an article about the difficulty certain communities face in continuing efforts at school integration. It was suggested that the integration debate was driven as much by the politics of test scores as the politics of race. It turns out that the mostly black schools significantly under-perform the predominantly white schools, even where the average income of the black families appears to be fairly high. So, black parents are eager to get their kids into the predominantly white schools because they have a reasonable expectation that their kids will get better educations there. Conversely, white parents don’t want their kids to go to predominantly black schools because…well, they’re racists. Or at least that’s a sentiment that the story writers appear willing to promote.
Ms. Horan says she moved her family to Milton from Boston 10 years ago seeking open-minded neighbors, only to be confronted by the same prejudices that she had hoped to leave behind. “Hurtful as it is to admit, racism is alive and well and living in Milton,” she says. Mr. Lovely, the board chairman, denies any racial tension.
The race card is an unfortunate draw, here, because Occam’s razor provides a perfectly simple and eminently reasonable explanation for why the white families don’t want their kids displaced into predominantly black schools, an explanation that has nothing to do with racism, even if racism exists (which it surely does). If the predominantly black schools were outperforming the white schools, who doubts that 80 percent of the white families would be clamoring for their kids to get into those schools? One can make the case that many of the other 20 percent might be racists, and they’d have a point, but it would have no more bearing on the discussion than pointing out that a similar fraction of blacks are probably racists, too.
I’m fine with the demise of the “separate but equal” doctrine. I think that most people (80 percent of us, anyway) would protest government-enforced segregation. But very few of us (especially those of us who made the tough, personal choices to position ourselves to make useful trade-offs for our kids) see the sense in government-enforced desegregation. Both doctrines treat individuals as tools of the state, trying to coerce a certain social outcome.
Unfortunately, much of this issue is a consequence of the collectivist manner in which most school systems operate. The government is inherently a part of the solution because it is inherently at the root of the problem.
