Saturday, December 31, 2011

Bargaining over Sentinels

Xan poses and provides an answer to an interesting question:
Now, if you were Iran, why would you tell America how you captured its drone, instead of keeping it a secret and perhaps capturing a few more or at least delaying America's progress in developing countermeasures? Maybe Iran cannot resist bragging about its conquest, like the stereotypical comic book villain. But might there be another reason?
Click through to find out why self sabotage on Iran's part might be a good idea.

Hint: the reasoning is related to why an army would prevent itself from retreating by burning a bridge before entering battle (the pictures are broken in my link, but as an exercise, see if you can draw the game tree with the right payoffs).

Friday, December 30, 2011

Raising Taxes to Raze the Rockies

Don Boudreaux at Cafe Hayek has two interesting posts about the burden of debt in response to a series of posts by Paul Krugman on the matter. Here is an excerpt from his latest.
Suppose Uncle Sam hires only American workers and buys only American-owned resources to raze the Rockies. Suppose further that Uncle Sam finances this program exclusively by raising taxes. An extra $10 trillion in taxes is raised, and every cent is spent successfully leveling the Rockies.

According to Krugman, because “we” received every cent that “we” paid to level the Rockies, the net burden to “us” as a group of leveling the Rockies is zero! The program is costless! But clearly that conclusion is incorrect.

Massive quantities of valuable, real resources are used up to raze the Rockies. The workers and resource owners didn’t pay for these resources to be used in this way (as these workers and owners voluntarily contributed, for pay, to the effort). Taxpayers paid; and the cost can be reckoned in the foregone value of whatever it is those workers and resources would have produced had they not instead been used to raze the Rockies. The net cost to Americans of razing the Rockies clearly is $10 [trillion] – a cost that doesn’t disappear simply because the tax payments by some Americans of $10 [trillion] were received fully as income payments by other Americans.

Here are some other readings on the topic. Krugman 1, 2, 3. Mankiw (pdf with some macroeconomics). Boudreaux 1, 2

To the point of why I decided to come out of hiding to write this post, Boudreaux's choice of policy in his analogy (leveling the Rockies) is scarily wealth-reducing. If you haven't done so in your lifetime, take a road trip through the Rockies and you'll experience abundant consumer surplus from the beautiful scenery.

Wednesday, December 7, 2011

Irony Chef: When to "stir the pot"

Sandeep at Cheap Talk has a delicious scoop that is one part economics, one part risk and one part delicious entertainment:
Next Iron Chef is much better than Iron Chef. The latter almost always has Bobby Flay matching his Southwestern style cuisine against some hapless contestant who usually loses. Next Iron Chef has more uncertainty, some new faces and some better chefs. Last night’s episode had fun twists and turns coming out of the mechanism design and a tragic-comic outcome.

First, the chefs had to “bid” for ingredients in a Dutch auction with time allowed for cooking as the “currency”. There were five chefs and five ingredients. The lowest bid won for each of the first four ingredients. The chef who “won” the last ingredient was by the rules of the mechanism left with a cooking time of the lowest bid on the first four ingredients minus 5 minutes.

I love Sandeep's take on the show. I'd like to add one observation on the actual outcome of the bidding (mild spoiler alert). Here's what happened. While bidding on the fourth item (tuna jerky), Chef Alex had the option to bid 20 minutes on it after Chef Elizabeth had already bid 25 minutes. Alex did not bid, essentially taking the "mystery ingredient #5" for 20 minutes, giving Elizabeth 25 minutes to cook something amazing with tuna jerky.

You might question why it stopped there (or whether it was optimal to stop there). Given the rules of the auction, Alex was guaranteed to have 20 minutes or less to cook whatever ingredient she won. If she didn't bid 20 minutes on tuna jerky, she got "mystery ingredient #5" for 20 minutes (5 minutes less than the lowest bid). If she did bid, she put the ball in Elizabeth's court, essentially saying "You have 15 minutes or less to cook whatever you win." If Alex put Elizabeth in this position, would Elizabeth bid 15 minutes on tuna jerky? Isn't there a situation where it would be optimal to bid 5 minutes (forcing the other chef into the bottom two)?

I think a lot depends on the chef's willingness to "stir the pot" by sabotaging another chef and the chef's confidence in beating the other chef in round two. Five minutes with tuna jerky might lead to a passable salad or it could lead to a rematch in the secret ingredient showdown. If I were in Chef Alex's shoes, I'm not sure what I would prefer.

Sunday, December 4, 2011

Not on Sundays

We saw this sign at an Indiana Costco.



Prohibiting the acquisition of alcohol on one calendar day out of the week strikes me as strange, but I am glad that Costco put out the signs. If Walmart had the same policy as Costco, I might have been saved the embarrassment of being denied the purchase of a six pack of Blue Moon at the register. I guess I'll have to stock up on Blue Moon (for me, buy a six pack) another day.

Saturday, December 3, 2011

Spare Change: No pennies, no nickels, no problem?

We have a change basket full of pennies at home. Even with that basket full of pennies, it isn't yet worth the hassle to bring the basket to the bank for the pennies alone -- the accumulation of nickels, quarters and times will probably make it worth the trip. In light of our basket of coins, this (old) argument by Greg Mankiw makes a lot of sense:
Indeed, I would advocate this even if the penny were free to manufacture, as I argued earlier this year in the Wall Street Journal. The purpose of the monetary system is to facilitate exchange. The penny no longer serves that purpose. When people start leaving a monetary unit at the cash register for the next customer, the unit is too small to be useful. It is just wasting peoples' time--the economy's most valuable resource. The fact that the penny is costly to make only adds force to the argument.

Maybe we should get rid of the nickel, too. We can then round all prices to one decimal rather than two.
There are several issues with this no penny/ no nickel scheme. For example, how do you round with a percentage sales tax? Also, what do you do with all the quarters if prices are rounded to the nearest 10 cent increments? Freakonomics had an interesting related discussion a couple of years ago.

(HT: Greg Mankiw's post today)