This homework is about coordination failure and coordination mechanisms. The last two worksheets coincide with material from M&R. Chapter 2 pages 43 - end of chapter on the medical intern matching program. And all of Chapter 3. Transfer pricing starts on page 79.
If you have a question about the homework, please post it as a comment to this post.
Tuesday, September 20, 2016
Opportunism and New Markets - Sometimes the Combination Lowers Social Welfare
Given our discussion in class today, I thought students might find it interesting to consider the market for cheating on college courses, which has always been there, but which has been going through some innovation as of late. Consider this little thread from a chat session with an agent at https://www.takeyourclass.com/. (I got this off a thread on a listserv I participate in on campus. The person who was in this thread used to be a colleague of mine.)
And here is a full article about the general issue from the Chronicle on Higher Education. This piece hits where it hurts.
Monday, September 19, 2016
I thought this was interesting - it's written by a student at UNC.
This piece is pretty frank and it is written by a student at a peer institution. Perhaps there is nothing new there for you, but I will ask tomorrow if the undue stress that students are under is at least partially at root regarding the performance problems in class I have described in the last couple of posts.
Sunday, September 18, 2016
Opportunism and Economic Inefficiency In Econ 490
This Monday marks the start of the fifth week of the semester. A student who is doing well in the class should begin to have a good picture of what the class is about. I am afraid, however, that most of the students do not because so far they have been merely going through the motions. These failures are a shared responsibility to correct. For my part I need to alert you to the issues, encourage you to adjust your behavior for the rest of the semester so the course is more meaningful, and provide whatever motivation I can for you to up your game so you can get into taking a mindful approach to the coursework. For your part I hope that you rise to this challenge and encourage your classmates to do likewise.
Let me review the recent past that prompted this post. I will make reference to three things where the under performance was considerable: (1) The blog posts on opportunism. (I have now read through all that have been submitted so far. If you haven't done so yet but get your post in today I will read that as well and comment on it.) Below I will describe the issue with these. (2) The in class experiment done last Thursday. I've written a previous post about that so won't discuss it further here. (3) Class attendance. Last Thursday we fell below 50%, with 12 students out of 31 when the class started and one more student arriving about a half hour later. I will offer up some conjectures about why attendance has never been very good and has fallen off as of late.
I do plan to discuss these issues in class on Tuesday. If you would prefer to comment online about what I say in this post or do so as a way to move the in-class discussion along on Tuesday, that would be very good. I am striving to keep this post at a high level with a positive tone, in spite of the recent subpar performance. I hope you can do likewise.
------
Here is the definition of opportunism:
The definition includes an ethical dimension. The opportunistic individual benefits at somebody else's expense. If your blog post didn't include the ethical dimension in some way, shape, or form then you weren't writing to the prompt. Many students wrote about opportunities foregone, perhaps an interesting reflection in itself, but otherwise not related to the course.
Just to give one concrete example of such opportunistic behavior, so there isn't any doubt as to what we're talking about, consider this piece from 5 years ago about a Law School Dean at the the U of I misreporting test scores of entering students to boost how the U of I did in the Law School ratings. Other examples of opportunistic behavior, which are definitely not as egregious but are opportunistic nonetheless include: cutting in line in front of a person who is waiting but not paying attention, not reporting cash income on your income tax form because there is no record associated with the transaction, and driving over the speed limit but then slowing down when a police car comes into view to avoid getting a ticket. To a certain extent we are all opportunistic in some of these ways. The real issue is how egregious is the ethical failure and what might be done when that failure is rather serious.
In the case where you don't write to the prompt but then produce a blog post that requires some effort, this is clearly inefficient as far as advancing course goals. But if it was only the author who was harmed there wouldn't be an ethical dimension. Our process, however, has others read your posts and comment on them. Those others are me and your teammates. It is causing these others to dissipate effort in an essentially unproductive activity where the ethical dimension lies. So each student has responsibility to write to the prompt or, if they choose to write something else, which is their prerogative to do, then to establish a connection between what they write about and course themes.
There is then the matter why so many students made the error of confounding opportunities with opportunism and whose responsibility it is to prevent such an error from happening. It may occur to some of you, for example, that I should have posted the definition of opportunism in the prompt. This would get the students off the hook and put the ball squarely in my court.
In fact, this is what I did. During the first few minutes on Thursday, before we ran the experiment, I finished up our overview of transaction costs by giving a pretty hokie demonstration of the holdup problem, followed by a brief discussion of the problem more generally. I then described this week's blog post as getting at some of the issues with the holdup problem from the prior experiences students have actually had. Whatever can be done to prevent holdup from occurring is a transaction cost, maybe the most important type of transaction cost. I discussed this in the context of vertical integration, where a firm would be merged with its own input supplier.
So I gave a fairly rich explanation of opportunism as it applies in the context of our course, but did this in class. Some of you seem to be operating as if this is a totally online course with optional face to face sessions. That's not how I see it. In any event, if you choose to miss class, for whatever reason, it is your responsibility to make that up. So the responsibility of understanding the difference between opportunism and opportunities, an important distinction, is on those students who missed last Thursday.
------
Let me turn to the attendance issue itself and my diagnosis of what is at root here. It speaks directly to course themes. The core issue issue is that rather than view their job as making good meaning of course themes, many students take an accountability approach, not just to my class but to all their classes. By this I mean that students pay attention to where course credit is earned (in our class that's Excel homework, blog posts, etc.) but ignore everything else that comes in between, especially where the connection between the course credit stuff and the other stuff is not self-evident. And with the course credit stuff the students then satisfice in a way to get through the course. I'm afraid this a learned behavior that has hardened into habit and is largely a consequence of the excessive testing that students in your generation have had to go through. I truly regret that my generation opted for that approach instead of an alternative type of education that is more nurturing of learning.
The accountability approach can't work in our class and I believe it largely doesn't work in most college courses. One clear reason why it can't work is that I can't assess you nearly enough for you to produce a meaningful understanding of course content. I'm already maxed out with the way we are doing things now and there would need to be a lot more work that is assessed if it all came through that door. The other reason, equally or even more important, is that you must keep a skeptical eye to what you are learning. If what we cover doesn't jive with your experience, you should push back at it. You need to become an independent learner on your own and not be my stooge just because I'm the professor and you are the student. But to be an independent learner, you have to drive your own learning to a great extent.
There is then that following the accountability approach in this way tends to promote mindlessness, which is what we've been experiencing recently. We want you to make a mindful approach to the subject matter and indeed to all your studies. I strongly encourage you to read this essay by Ellen Langer on Mindful Learning. Among other things, it will show that what I am encouraging you to do has a strong basis in psychology research.
And then there is that my absolute favorite model for our course is Akerlof's model of Labor Contracts as Partial Gift Exchange, which I covered on the second day of class and which I've mentioned multiple times since. I believe you have to walk the walk if you are going to talk the talk. So I really would like students to experience gift exchange in our course. I've already discussed this above with regard to the blogging. There is a section of the Syllabus about attendance. You might look at that again from the point of view of gift exchange and commitment to work. This is a different sense about walking the walk, one that might not have previously occurred to you. In contrast, if you follow the accountability approach in all your classes, then your effort from class to class bounces up and down based on wherever the next deadline is coming from. And as we near midterms you have to stop paying attention in those classes that don't have pending obligations.
------
Let me wrap up. As I said at the outset, my intention with this post is to encourage students to up their game. Nevertheless, I can imagine that many students reading this will want to know, what will be the consequences for me grade-wise if I don't do that and just continue as I've been doing? Can I still pass the course by doing that?
Please understand that there is moral hazard for me in addressing this question, because this is an outcome I really don't want to see. But I will try to give a straightforward answer here. You definitely can't earn and A or B that way. The syllabus says I don't like to give a grade of D, which is true. So there is the issue of where to draw the line between a C- and and an F. That's a judgment call. I will make the judgment as I see the overall class performance. However, I encourage you now not to flirt with that boundary and indeed to take the full message of this post to heart and then act accordingly.
Let me review the recent past that prompted this post. I will make reference to three things where the under performance was considerable: (1) The blog posts on opportunism. (I have now read through all that have been submitted so far. If you haven't done so yet but get your post in today I will read that as well and comment on it.) Below I will describe the issue with these. (2) The in class experiment done last Thursday. I've written a previous post about that so won't discuss it further here. (3) Class attendance. Last Thursday we fell below 50%, with 12 students out of 31 when the class started and one more student arriving about a half hour later. I will offer up some conjectures about why attendance has never been very good and has fallen off as of late.
I do plan to discuss these issues in class on Tuesday. If you would prefer to comment online about what I say in this post or do so as a way to move the in-class discussion along on Tuesday, that would be very good. I am striving to keep this post at a high level with a positive tone, in spite of the recent subpar performance. I hope you can do likewise.
------
Here is the definition of opportunism:
The definition includes an ethical dimension. The opportunistic individual benefits at somebody else's expense. If your blog post didn't include the ethical dimension in some way, shape, or form then you weren't writing to the prompt. Many students wrote about opportunities foregone, perhaps an interesting reflection in itself, but otherwise not related to the course.
Just to give one concrete example of such opportunistic behavior, so there isn't any doubt as to what we're talking about, consider this piece from 5 years ago about a Law School Dean at the the U of I misreporting test scores of entering students to boost how the U of I did in the Law School ratings. Other examples of opportunistic behavior, which are definitely not as egregious but are opportunistic nonetheless include: cutting in line in front of a person who is waiting but not paying attention, not reporting cash income on your income tax form because there is no record associated with the transaction, and driving over the speed limit but then slowing down when a police car comes into view to avoid getting a ticket. To a certain extent we are all opportunistic in some of these ways. The real issue is how egregious is the ethical failure and what might be done when that failure is rather serious.
In the case where you don't write to the prompt but then produce a blog post that requires some effort, this is clearly inefficient as far as advancing course goals. But if it was only the author who was harmed there wouldn't be an ethical dimension. Our process, however, has others read your posts and comment on them. Those others are me and your teammates. It is causing these others to dissipate effort in an essentially unproductive activity where the ethical dimension lies. So each student has responsibility to write to the prompt or, if they choose to write something else, which is their prerogative to do, then to establish a connection between what they write about and course themes.
There is then the matter why so many students made the error of confounding opportunities with opportunism and whose responsibility it is to prevent such an error from happening. It may occur to some of you, for example, that I should have posted the definition of opportunism in the prompt. This would get the students off the hook and put the ball squarely in my court.
In fact, this is what I did. During the first few minutes on Thursday, before we ran the experiment, I finished up our overview of transaction costs by giving a pretty hokie demonstration of the holdup problem, followed by a brief discussion of the problem more generally. I then described this week's blog post as getting at some of the issues with the holdup problem from the prior experiences students have actually had. Whatever can be done to prevent holdup from occurring is a transaction cost, maybe the most important type of transaction cost. I discussed this in the context of vertical integration, where a firm would be merged with its own input supplier.
So I gave a fairly rich explanation of opportunism as it applies in the context of our course, but did this in class. Some of you seem to be operating as if this is a totally online course with optional face to face sessions. That's not how I see it. In any event, if you choose to miss class, for whatever reason, it is your responsibility to make that up. So the responsibility of understanding the difference between opportunism and opportunities, an important distinction, is on those students who missed last Thursday.
------
Let me turn to the attendance issue itself and my diagnosis of what is at root here. It speaks directly to course themes. The core issue issue is that rather than view their job as making good meaning of course themes, many students take an accountability approach, not just to my class but to all their classes. By this I mean that students pay attention to where course credit is earned (in our class that's Excel homework, blog posts, etc.) but ignore everything else that comes in between, especially where the connection between the course credit stuff and the other stuff is not self-evident. And with the course credit stuff the students then satisfice in a way to get through the course. I'm afraid this a learned behavior that has hardened into habit and is largely a consequence of the excessive testing that students in your generation have had to go through. I truly regret that my generation opted for that approach instead of an alternative type of education that is more nurturing of learning.
The accountability approach can't work in our class and I believe it largely doesn't work in most college courses. One clear reason why it can't work is that I can't assess you nearly enough for you to produce a meaningful understanding of course content. I'm already maxed out with the way we are doing things now and there would need to be a lot more work that is assessed if it all came through that door. The other reason, equally or even more important, is that you must keep a skeptical eye to what you are learning. If what we cover doesn't jive with your experience, you should push back at it. You need to become an independent learner on your own and not be my stooge just because I'm the professor and you are the student. But to be an independent learner, you have to drive your own learning to a great extent.
There is then that following the accountability approach in this way tends to promote mindlessness, which is what we've been experiencing recently. We want you to make a mindful approach to the subject matter and indeed to all your studies. I strongly encourage you to read this essay by Ellen Langer on Mindful Learning. Among other things, it will show that what I am encouraging you to do has a strong basis in psychology research.
And then there is that my absolute favorite model for our course is Akerlof's model of Labor Contracts as Partial Gift Exchange, which I covered on the second day of class and which I've mentioned multiple times since. I believe you have to walk the walk if you are going to talk the talk. So I really would like students to experience gift exchange in our course. I've already discussed this above with regard to the blogging. There is a section of the Syllabus about attendance. You might look at that again from the point of view of gift exchange and commitment to work. This is a different sense about walking the walk, one that might not have previously occurred to you. In contrast, if you follow the accountability approach in all your classes, then your effort from class to class bounces up and down based on wherever the next deadline is coming from. And as we near midterms you have to stop paying attention in those classes that don't have pending obligations.
------
Let me wrap up. As I said at the outset, my intention with this post is to encourage students to up their game. Nevertheless, I can imagine that many students reading this will want to know, what will be the consequences for me grade-wise if I don't do that and just continue as I've been doing? Can I still pass the course by doing that?
Please understand that there is moral hazard for me in addressing this question, because this is an outcome I really don't want to see. But I will try to give a straightforward answer here. You definitely can't earn and A or B that way. The syllabus says I don't like to give a grade of D, which is true. So there is the issue of where to draw the line between a C- and and an F. That's a judgment call. I will make the judgment as I see the overall class performance. However, I encourage you now not to flirt with that boundary and indeed to take the full message of this post to heart and then act accordingly.
Thursday, September 15, 2016
An Analysis of the Bargaining Experiment We Did in Class Today
In part because I was perplexed by the outcome, I did an analysis of what happened. This is for the first round, which I called incomplete information, where buyers had the information about their values but not about the sellers' costs, and likewise sellers had the information about their costs but not about the buyers' values. One team did share that information, but they said they did that only after they were done bargaining, to check that they had done okay.
There were 12 students who participated in these experiments (6 pairs of buyers and sellers). I had planned for 18. So some of the scenarios that I had planned for were not used. That helps to explain the numbering in what was reported. The scenarios we did use were: Cases 1 and 2, which are essentially the same but where in Case 2 demand and supply have been shifted up by $5, Cases 4 and 5, where demand was downward sloping but now supply was taken to be perfectly elastic and the same sort of shifting between Case 4 and Case 5 by shifting everything up by $5 occurred, and finally Cases 7 and 8, where it is now demand that was perfectly elastic.
You can see the analysis here. The preview is sufficiently good that you don't have to download the spreadsheet. I color coded things so that as long as you are not colorblind you should readily recognize everything in the table. Focusing on the column called Social Surplus, all the scenarios had social surplus maximized with 3 units being traded. The puzzle that the experiments provided is that only one group reached this outcome, and no group had fewer than 3 units traded. All the other groups had excess trading, where trade produced negative surplus and one or both of the parties were harmed by the trade.
My prior going in is that many groups would have only 2 units traded. There was ample surplus to get that far, but not much surplus for the third unit, so I thought in haggling over that students might reach an impasse. This is especially true under incomplete information where it was not possible to tell whether the other side was bluffing or not, unless the two sides did share their information.
But this prior intuition didn't predict what happened at all, so in looking back at this I want to focus on those possible explanations of what happened.
The first possibility is that students didn't understand what they were asked to do. I did say at the outset that consumer surplus was such and such and likewise for producer surplus and your goal was to maximize your own surplus. But just because I gave the instructions doesn't mean they were understood. This parallels something we talked about in the last class when boots on the ground communicates with command and control, though in this case it is command and control sending the message. It may be the message gets garbled.
The other possibility is that students didn't care so they didn't act to maximize the surplus even though they understood the message. If you look at the results, there are a couple instances where each trade netted zero surplus to one side of the bargain. Doing this made it easy to conclude the negotiation, but it surely didn't show effort in trying to attain surplus produced by that negotiation. Students sandbag in a variety of circumstances. If that was happening here, the results don't tell us anything about what would happen in a real negotiation.
The one team who produced the efficient outcome are the students who negotiated Case 2. Let's give a hand to them. And if I were giving a prize for the top negotiator, that would have to go to the seller in Case 2, who earned the lion's share of the surplus. Absent any other information about student's bargaining skills, we'd predict an even division of the surplus. Even in those cases where there were more trades than were efficient, it doesn't look like splitting the surplus happened. If people didn't care, that's an easy explanation for the outcome. But if they did care, that would pose a puzzle.
There were 12 students who participated in these experiments (6 pairs of buyers and sellers). I had planned for 18. So some of the scenarios that I had planned for were not used. That helps to explain the numbering in what was reported. The scenarios we did use were: Cases 1 and 2, which are essentially the same but where in Case 2 demand and supply have been shifted up by $5, Cases 4 and 5, where demand was downward sloping but now supply was taken to be perfectly elastic and the same sort of shifting between Case 4 and Case 5 by shifting everything up by $5 occurred, and finally Cases 7 and 8, where it is now demand that was perfectly elastic.
You can see the analysis here. The preview is sufficiently good that you don't have to download the spreadsheet. I color coded things so that as long as you are not colorblind you should readily recognize everything in the table. Focusing on the column called Social Surplus, all the scenarios had social surplus maximized with 3 units being traded. The puzzle that the experiments provided is that only one group reached this outcome, and no group had fewer than 3 units traded. All the other groups had excess trading, where trade produced negative surplus and one or both of the parties were harmed by the trade.
My prior going in is that many groups would have only 2 units traded. There was ample surplus to get that far, but not much surplus for the third unit, so I thought in haggling over that students might reach an impasse. This is especially true under incomplete information where it was not possible to tell whether the other side was bluffing or not, unless the two sides did share their information.
But this prior intuition didn't predict what happened at all, so in looking back at this I want to focus on those possible explanations of what happened.
The first possibility is that students didn't understand what they were asked to do. I did say at the outset that consumer surplus was such and such and likewise for producer surplus and your goal was to maximize your own surplus. But just because I gave the instructions doesn't mean they were understood. This parallels something we talked about in the last class when boots on the ground communicates with command and control, though in this case it is command and control sending the message. It may be the message gets garbled.
The other possibility is that students didn't care so they didn't act to maximize the surplus even though they understood the message. If you look at the results, there are a couple instances where each trade netted zero surplus to one side of the bargain. Doing this made it easy to conclude the negotiation, but it surely didn't show effort in trying to attain surplus produced by that negotiation. Students sandbag in a variety of circumstances. If that was happening here, the results don't tell us anything about what would happen in a real negotiation.
The one team who produced the efficient outcome are the students who negotiated Case 2. Let's give a hand to them. And if I were giving a prize for the top negotiator, that would have to go to the seller in Case 2, who earned the lion's share of the surplus. Absent any other information about student's bargaining skills, we'd predict an even division of the surplus. Even in those cases where there were more trades than were efficient, it doesn't look like splitting the surplus happened. If people didn't care, that's an easy explanation for the outcome. But if they did care, that would pose a puzzle.
For those with iPhones...
1. When did you get your first cell phone? Did you have a phone before Apple came out with the iPhone?
2. Are you happy or unhappy with the new way to unlock your phone?
3. Does anyone know what year Apple came out with the iPhone? What about the carrier that had the exclusive contract at the time?
2. Are you happy or unhappy with the new way to unlock your phone?
3. Does anyone know what year Apple came out with the iPhone? What about the carrier that had the exclusive contract at the time?
Wednesday, September 14, 2016
Excel Homework Due 9/21 at 11 PM
This homework tries to get a little deeper at the Efficiency Principle that is articulated in Milgrom and Roberts. In particular, if two parties acting independently would produce a joint outcome that is not efficient, and they both know that so they have an incentive to negotiate a deal that would be efficient, does that mean a deal will get done? The homework looks at some simple game theory to consider this question.
Note that we only consider the issue when there are two parties. We don't model what happens when there are 3 or more people who must agree to the bargain. Coordination becomes an issue with larger numbers of people. We will consider coordination question separately in the next homework.
As always, if you have questions about the homework, please post them as a comment to this post.
Note that we only consider the issue when there are two parties. We don't model what happens when there are 3 or more people who must agree to the bargain. Coordination becomes an issue with larger numbers of people. We will consider coordination question separately in the next homework.
As always, if you have questions about the homework, please post them as a comment to this post.
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