Economic Logic, Too is posting

The companion blog, Economic Logic, Too that was created last December has started posting. This blog features similar posts to Economic Logic, but submitted by guest bloggers. Two posts are up, one is in the works, and I hope more will be coming. If you are reading this through an RSS feed, consider subscribing also to EL2 (RSS). And if you are interesting in posting, shoot me an email (submission rules).

How much is a Lars Hansen autographed reprint worth?

A student is trying to find out.  He emails me:

I'm a 1st year MBA student at Chicago Booth -- where even the Marketing Professors have a PhD in Economics. 

I'm taking a class this quarter called Entrepreneurial Selling (more info here). One of the coolest assignments is a bartering challenge: Prof. Wortmann gives everybody a simple Chicago Booth pen and we need to barter it for something with larger monetary value, and then keep bartering once a week until the end of the quarter. 

I did my first trade with Prof. Lars Peter Hansen (Economics Nobel Prize 2013). In exchange for my pen, he gave me an autographed copy (he wrote a cool anecdote as well) of his most famous article. I'm now running an auction at eBay (it's OK to trade things for cash): see here.

Why China Holds Upper Hand Over US in Asia for 2014

Or so the Nikkei Asian Review believes. And the reasons for China reasserting its sphere of influence in the region are straightforward. On China's part, it has the bully pulpit in 2014 as the host of the Asia-Pacific Economic Cooperation (APEC). So, member economies' ministers--maybe even the Philippine president the PRC has put in its doghouse--will be trooping to the Middle Kingdom over the course of the year:

Holding the rotating chair of the APEC forum this year, China will host a series of APEC meetings, including those of ministers in charge of trade, energy and finance, in various parts of the country starting in May. The series of APEC events will culminate in a summit of leaders in a Beijing suburb in early autumn, which will be chaired by Chinese President Xi Jinping.

The APEC meetings will cover issues in a wide range of areas, including trade and investment rules and environmental and energy cooperation. By presiding over them, China will try to demonstrate its growing presence in the Asia-Pacific region. "The Xi administration sees the proposed Trans-Pacific Partnership pact, which the Obama administration is actively promoting, as part of Washington's efforts to leave China out and cement the U.S-led international order in Asia," said one source close to U.S.-China relations.

This fear will probably prompt China to try to take advantage of its role as APEC chair this year to regain some of the lost ground in the competition with the U.S. for influence in the region.

OTOH, the United States foreign diplomatic machinery will be stuck in its usual holding pattern due to the midterm elections, set to be held just as APEC gatherings reach their summit:

The odds seem to be against the Obama administration, at least this year. The energy the Obama administration can devote to promoting its Asia policy will be fairly limited as it will have to concentrate on campaigning for the Nov. 4 midterm Congressional elections in early autumn, when the APEC summit will be held.

The quadrennial Congressional elections will be very important for Obama's Democratic Party, which has a majority of seats in the Senate, but not in the House of Representatives. If the Democrats fail to end the divided Congress by wresting control of the House from the Republican Party in November, the Obama administration could lose some steam, with two years left before his term expires.

If Obama becomes an even lamer duck due to electoral setbacks for his party, then he will have even less leeway on the foreign policy front to make a major push towards Asia. 

Are NBA coaches behavioral or neoclassical?

Snnk cost do not matter once spent. Yet, we just cannot help thinking that if we already paid so much for something, we should rather use it, even if it is inferior to something less expensive. With this reasoning, we deviate from neoclassical theory into behaviorial theory. Such attitudes are not well documented, and it is not quite evident how one would put together a dataset to study attitudes towards sunk costs.

Daniel Leeds, Michael Leeds and Akira Motomura found a way, and it is in front of everyone. Professional sports teams sometimes invest or commit considerable resources to recruit players, and a substantial amount can be considered sunk, as it is in the form of a signing bonus, guaranteed pay, or by using an early draft pick for new players. A neoclassical theorist would say that this sunk cost only allows the coach to expand his decision set, but who actually plays on the team should only depend on the players' current performance. This study shows that at least NBA coaches do follow this neoclassical thinking and are not more likely to let under-performing young player stay on the team if they were drafted in the early rounds. Indeed, the data focuses on players in the first five NBA seasons when they all have a uniform contract, thus only draft order should matter. However, there could have been a perfectly neoclassical justification for a bias on the part of the coaches: some players were drafter early because they have potential, and that potential is going to develop with playing time. If there is a puzzle it is thus rather why early draftees get so little playing time.

The Rise and Rise of FDI From the Global South

Much has been made of the protectionism which firms such as those from China have encountered investing in the West. I have called specious arguments on "national security" grounds unvarnished racism, and such discrimination certainly plays a part. Moreover, I have been further vindicated by leaks that reveal massive American spying on its own citizens and those of the rest of world. Who's the real "national security" threat here when one of the largest US tech firms labels its government as an "advanced persistent threat"? You are, quite frankly, a bleeping moron to believe in US security guarantees, especially when it comes to online activity. Internet freedom is effectively unlimited America freedom to spy on you.

However, developing countries' efforts to invest elsewhere is largely driving the ongoing controversy. That is, there would be nobody to discriminate against if their firms stayed home. Accordingly, there's interesting stuff in the current issue of Global Finance about the ever-rising amount of FDI originating from poor countries. Otherwise put, these are countries that in the not-so-distant past would have been mere recipients of FDI:

By far the biggest FDI story of the past few years is the rise of developing and transitioning countries as a source of outward FDI, which jumped from $65 billion in 2003 to $481 billion in 2012. Naturally, China is in a league of its own. In 2012 it came in third among the world’s top 20 investor-economies, behind only the US and Japan. Beyond the acquisitions it has been making across OECD countries, China is aggressively developing natural resources and infrastructure from Africa to the Middle East.

For example, in 2013, PetroChina bought a 25% stake in the Iraqi oilfield of West Qurna 1, right around the time construction of the new Mombasa-Nairobi railway line began in Kenya, financed by the Export-Import Bank of China to the tune of $4 billion. But the new FDI landscape does not include just China. FDI originating from emerging markets is multiplying around the world. In 2013 a Chilean bank took over an American one, a Thai energy company made its first investment in Australia, and the largest Coca Cola bottling company in Mexico acquired a competitor in Brazil.

Notably, however, Global South investors do not invest in the same way their Global North counterparts--traditional TNCs--do:

Importantly, developing and transitioning country investors display characteristics that set them apart from traditional developed-world multinationals.

For one, state-owned enterprises and sovereign wealth funds generate the lion’s share of outward investment. This raises concerns about fair competition. “SOEs may have access to lower-interest loans and better financing conditions [than non-SOE competitors],” says Masataka Fujita, who heads the investment trends section in the division of investment and enterprise at Unctad. “SWFs even have a large amount of assets under management, and, like in the case of SOEs, their governance structure is not always transparent.” Their operations are also viewed with suspicion by host economies because a foreign government is behind them.

In addition, emerging markets companies seem to prefer mergers & acquisitions over greenfield investment as a mode of entry, especially when it comes to FDI into developed countries. “They look to OECD countries because these remain the world’s largest markets and because they are interested in the technology found here,” says José Guimón de Ros, associate professor of economics at the Universidad Autonóma de Madrid in Spain. “Since the crisis, many developed-country companies are under stress and therefore cheaper, so now is a good time to buy them.” Partially as a result of this phenomenon, cross-border M&A has held steady in 2013, stabilizing global FDI flows even as investment in new productive assets has declined.

Finally, emerging markets companies are inherently more familiar than their OECD counterparts with how to do business in a developing-country setting. In part as a result, the majority of investment from emerging markets is going to other emerging markets. According to Unctad, in 2011, China exported 70%, and Brazil 40%, of its outward FDI stock to neighboring emerging economies. “Regulations in developing countries are less complicated,” says Du The Huynh, senior lecturer at the Fulbright Economics Teaching Program in Ho Chi Minh City, Vietnam. “The competition is also less fierce.”

The telecom sector illustrates this well. Vietnam’s largest mobile-network operator, Viettel, has successfully established itself in Mozambique, Haiti, Laos and Cambodia, countries that by most OECD investors’ standards are difficult places to do business.

True, the Western media headlines are dominated by South-North FDI. real Yet it's not mostly the formerly colonized investing in the heartlands of the erstwhile colonizers, but poor countries venturing where rich countries dare not--scared off by corruption and other bogeymen for white people. Yes, South-South investment is happening:

to paraphrase Aretha Franklin, Queen of Soul, poor countries are doin' it for themselves.

No need to ban incandescent lightbulbs

It is sometimes difficult for a shopper to understand all the consequences of purchasing choices. Take lightbulbs, for example. The variety in price is large, and so is the variety in expected life or energy consumption. When more efficient lightbulbs came on the market, they were massively more expensive than existing bulbs, yet in the long run worth it thanks to much lower energy consumption. Consumers did not seem to understand that, along with what this entails for pollution, hence the old bulbs were banned. Was this really necessary?

Hunt Allcott and Dmitry Taubinsky exploit two randomized experiments to look into this. The first is computer based and gives participants a budget and different information about lightbulbs. The second is a field experiment at a home improvement retailer where shoppers where given different information and discount coupons. They find that people do not undervalue energy costs that much, meaning that only minor, if any, subsidies were necessary to win them for next-generation lightbulbs. Once more, it looks like a ban is outdone by the nudging that the price mechanism can do with appropriate subsidies or taxes. They also find that there is a large fraction of shoppers that wants to stick with incandescent lightbulbs, indicating a substantial welfare loss from a ban that is similar to standard rationing. One more piece of evidence that bans need to be banned.

All that financial innovation has not lead to more transparency

What is the purpose of financial innovation? I would say it is to find new ways to insure against risk, to finance projects and to allocate funds optimally. We are taught that generally the price mechanism is the best way to do the latter, as long as it is contains all the available information. Thus, a good way to measure whether financial innovation has improved things is to measure whether prices have become more transparent.

Jennie Bai, Thomas Philippon and Alexi Savov take the idea that stock and bond prices should contain information about future earnings. Thus if you regress future earnings on current valuation (and some controls), errors should become smaller over time, because information costs have decreased and we have become more efficient at allocating financial resources. But over the last 50 years, no progress is to report. No matter how you decompose the errors, there is nothing to write home about. That is quite disappointing after all the increased financial sophistication of the financial industry. Or did this sophistication lead to more obfuscation?