A Cartoon for the Pigou Club

Asness on Buffett

Warren may be a great investor, but he really doesn't cut it as a policy wonk.

Limit gas price changes to once a day?

For some reason that is unclear to me, fuel for cars is in most countries the most flexible price, sometimes changing several times a day. As demand is rather inelastic and the raw commodity supply comes from politically volatile regions, the price also fluctuates over a wide range. And this wide range leads to a lot of grief, especially when prices go up, with calls from the public for politicians to do something about it. The latter then usually do something stupid, and they are never short of ideas.

One recent innovation comes from Austria: in the belief that higher prices come from frequent changes, gas stations have been limited to one price change a day. Martin Obradovits analyzes this policy and comes to the obvious an obvious answer: it is a stupid policy. For one, it is not like gas companies are bound by fixed increments and this would reduce fluctuations. Second, it introduces new frictions in the market that go to the detriment of the consumer: you get the same profits and the same expense for the same quantities, there is only some intertemporal rejuggling that inconveniences the buyers. I would add that if prices end up too low during the day, gas stations may simply close and ration out buyers until they can adjust prices. Ah, politicians...

A New Way to Reduce Our National Debt

Sell Alaska.

Five years of blogging

The Economic Logic blog is now five years old. At every anniversary, I reevaluate whether it is worth continuing in this effort. After all, there is little reward in blogging anonymously, rather the opposite, and writing here competes with my real world duties. And it has become more difficult since I took on some new responsibilities (some readers may have noticed that my posts were sometimes a bit short). However, readership has been steadily increasing and I have some sense of duty to keep posting. Stopping now cold turkey would definitely leave me empty. But I may consider skipping days here and there when my real world duties keep me away from my "second life."

So, I will keep posting for another year. There is still a lot of interesting research going on in Economics. And there is still a lot of papers that may not get published in the best journals but merit mentions because they have interesting implications. And sometimes there are some really bad papers that need to be pointed out before they do more damage.

Traditionally, I have pointed out with posts were the most read during the last year. For a variety of reasons, I can only find the three that were posted during 2012. By far the most popular was a very recent post, "How to make your children intelligent". The two next were "The Harvard Economics Department's Nobel problem" and "Mathematics, Econometrics and top economists' career outcomes".

I hope you will read Economic Logic for another year. I will be there.

Complicated auctions are more proftable

There was a time where auction theory limited itself to studying very simple auction, where the subtleties were whether the first or second price should be paid (or the first less an increment). Now, auction theory looks at much more complex mechanisms, for example where bidders may or may not reveal their bids, or whether they are bidding, or where bidding comes with a fix price. Not all these mechanisms try to obtain a surplus maximizing outcome. Some maximize the profits of the seller, sometimes by confusing or even misleading the seller. The most extreme example are penny auctions, about which I posted before (I, II).

Andrea Gallice discusses a variation of the Dutch auction where the current winning bid price remains hidden but can be observed against a fee. This so-called price reveal auction has an additional twist: paying that fee makes the winning bid fall by a predetermined amount. An auction so complex must be designed to maximize someone's surplus. It is the seller. And his profits are even higher if he manages to keep the number of bidders secret. This is not unlike penny auctions, where the profits come from the fees, not the winning bid.

OK, this maximizes profits, but I do not think this maximizes overall well-being. Obfuscation is not likely to be beneficial, and I am quite surprised the author does not address this. Until convinced of the contrary, I am going to assume that such obfuscation is detrimental for society and should be outlawed. And with rules so complex, it would not surprise me that bidders would have a hard time behaving rationally.

Feldstein on the Fiscal Cliff

Marty offers his recommendation.