If you've finished exams or are looking for a diversion...

...I thought you might be interested in these posts.  They are my take on what students do outside the classroom for a course.

This first one was written six years ago.  It represents an ideal I'd like to see approximated. It's called, How do students play at their schoolwork?

This second one was written just a few weeks ago.  It is grimmer in describing the environment, but more realistic.  It's called Measuring Attendance and Knowledge Transfer.

I hope you have a great summer.  If it occurs to you, in six months or a year drop me a note to let me known what you're up to and whether anything from our class stuck with you.

Prof. Arvan

Grades Posted in Moodle

If you go into the class Moodle site you will find a new discussion forum which has your course grade in it and a little summary remark.  Also, if you go to the Grades link on the left you will see all your component scores to show how your grade was determined.

I'll put the grades in Banner in a bit.  Good luck on the rest of this week.

A little video for tomorrow's class

From the movie The Paper Chase.

Tidbits for Tuesday

• I will bring donuts for our last class session/review of the semester.  If you want coffee or some other beverage, that's on you. 
• There are blog posts due in advance of the session (preferably by tomorrow evening, which is the scheduled time).  Comments are not required this week, since we don't have a Thursday class.  But if you read somebody else's post and want to react to it by all means do.  
• I will also go over how I will determine final course grades.  
• This is not required but you might find this piece on Stanford from the most recent issue of the New Yorker more than a little interesting, and perhaps quite a contrast to your own college experience.  

For Our Last Class Session Next Tuesday

I'd like to talk about the following piece in conjunction with a tiny bit on the organization as a culture and our wrap up.

The Creative Monopoly - NYTimes.com via kwout

Links/Issues for Tomorrow's Class session

"No one can earn a million dollars honestly."
       -- William Jennings Bryan

Historical Fortune 500
Kevin Hallock paper on Interlocking Directorates
David Larcker presentation on Executive Compensation

What is happening in the product market to enable a firm's stock to experience high growth rates?

When this happens was the stock undervalued earlier?

What about CEO risk aversion?
Disruptive Innovation

A couple of videos to watch before class on Tuesday

We're talking about Executive Compensation on Tuesday.  I encourage you to watch these videos to make the topic more real for you.  This first one is from Forbes.  It's about CEO pay in the 500 largest companies. The video is in the middle of the page.  One obvious fact that emerges from this is that the bulk of the pay is from the cashing in of prior accumulated stock or stock options.   Some of these CEOs take very little in salary.   Another interesting thing is how Forbes measures company performance - by growth rate in stock share value over an extended period.  This makes sense if the market evaluates the company's balance sheet accurately.

The other video is from the NewsHour last Wednesday, about Citigroup Shareholders rejecting a pay package for their CEO.  This is news worthy because of its novelty.  Indeed, M&R says this can't happen, that it's the Board that sets CEO compensation, the shareholders having no say in the matter.  But that has changed recently as a consequence of Dodd-Frank regulation.  It's certainly interesting to ask whether this new form of governance will have a retarding impact on CEO compensation, particularly at companies that don't perform well by the Forbes metric.

On the personification of power and what it means to be a good writer

This is a featured piece on Robert Caro, a Pulitzer Prize winning author and autobiographer of Lyndon Johnson.  Johnson, while in the Senate was the practitioner of power par excellence.  That's power as in "power over."  It's a good read for a slow Sunday.  And it makes one wonder whether the gridlock we see in Congress today is because there is nobody of Johnson's ilk anymore.

A current example of "strutting"

This one backfired, but the intent is clear enough.

Less Is More

During the middle of today's presentation, it occurred to me I should have given more guidance on how to conduct these sessions.  In today's session Big Bang "covered" the entire chapter in B&D,  with slides both on the examples and all the points in the chapter.  That approach gives breadth but not much depth.  It would be better for the subsequent presentations to focus on some key aspect of the chapter and then get into it deeper.  Try for examples not in the book.  See if you can hit a nerve with the other students in the class.  Also, if your team wants that, you can lead the discussion of the posts, if you think that will help you get into your topic.  Just let me know if you want to do that.

Other Views of Power

I'd like to spend some time tomorrow before the presentation discussing the contents of this post, meant as a reaction to the student posts this week, before we get into the presentation.  B&D are quite comprehensive in their views of power and its sources, but many other people, myself included, take a more limited view, in part because I distinguish "agency," the ability to do things for oneself including in a social context, from power, defined here as getting others to do things for you on your behalf.  Not everyone makes this distinction.  But I think it helps here.  In the process I'll mention some things to read, simply to be well read, not really for the course.

First, there is the animalistic view of aggression, as exemplified in On Aggression, by Konrad Lorenz, where he develops a notion called territoriality.  This is for intra-species competition.  As most of you are aware, I'm sure, there is a related concept called the alpha dog, which implies dominance in a social setting.  Much of this dominance works through intimidation qua posturing, rather than overt acts of violence.  So dogs growl and peacocks strut.

This view of power as aggression translates in a pretty straightforward way to thinking about military power.  Clausewitz, the well known military theorist, wrote On War, around the time of Napoleon.  He is known for having said, "War is the continuation of Politik by other means."  With that it, it is again straightforward to extend aggression into the political arena.  The TV show Hardball, on MSNBC, has its name to reflect that politics can be like baseball.  In baseball, sometimes the pitcher throws at the batter, to get the batter to back off the plate.  (Getting beaned, the batter having the baseball hit him in the head, can be quite dangerous.)  That type of pitching is an act of aggression.  There are analogous actions in the political sphere.  (Think about last summer before the Debt Ceiling limit was raised.)

There is a related source of power that you might call Judo, which uses the strength of the other person to achieve your own ends.  One example to illustrate, after the birth of their first child new parents are anxious about the baby's welfare.  The baby, almost helpless but not fully so, can have power over the parents in certain situations.   Can you figure out how that works?  Incidentally, some of my Facebook friends are moms with pre-teen children so I get to see their posts about older kids trying to play the same game and the parents steely resolve (I don't really believe that) not to let the kids do that.

Let me switch gears and talk about power in a collaborative setting.  Though B&D mention it, it's not really their focus.  For my own edification, I'm now reading a rather old book called Creative Experience, by Mary Parker Follett.  It is freely available online (as page images).  Chapter X is on power, and when that is a legitimate concept.   Follett distinguishes between "power over," which is what we've been talking about above, and "power with" which she believes is integrative, accounting for the welfare of all parties and identifying a solution that incorporates their interests.  She distinguishes such solutions from "compromise," which she treats as a type of surrender.  Some of the posts this week were in the spirit of Follett, though in the examples I don't believe the preferences of the participants were opposed.  If we all agree at the outset, then it is not possible to identify from the example who has the power.  By the way, Follett denigrates power over and refers to it as pseudo power, because the solution it generates tends to fracture eventually.  The Arab spring is an obvious example to make her point.  So she views power with as the only true power.

On a normative plane (how things should work) I agree with Follett.  But from a positive perspective (how things actually work) I have to say much of the exercise of power is power over.  It remains prevalent.  Though Follett's book was originally published in 1924, not everyone has learned their lessons from her.  Alternatively, power over can endure quite a while until the fracture happens.  Many of us have a rather short time horizon to consider our behavior, so power over can seem quite effective.

Thursday's Class/Today's low attendance

On Thursday we will cover B&D Chapter 8 on interpersonal conflict.  I believe it will have the highest take away for you of any class this semester.  However, among the blog posts I read for this weak, you mainly avoided the issue by talking about group projects where other members of the group want to shirk, and you ended up doing most/all of the work. This may not be a pleasing outcome from your point of view, but it might very well be the efficient solution under the circumstances.  So I hope you can think about other examples, where shirking isn't the problem but rather where the problem is disagreement about the goals for the group and/or disagreement about the best way to achieve those goals.  Further the disagreement have had led to some members of the group being angry, in an overt way, or passive-aggressive in a less overt way.  That's what we want to talk about.  It's not fun.  But it's real.

- - -

Today attendance was less than 50% for the first time this semester.  Among the students who didn't show up, I've heard from one.  What's the story with the rest of you?

Conflict so bizarre it's funny

I normally don't take course content from the ESPN Web site, but since next week we will be talking about managing conflict within organizations, I thought this one appropriate.   It shows blood is thicker than water.

Second Set of Team Presentations

We should allocated these tomorrow, or Thursday at the latest.  These are each from B&D, on the Politics Frame.  They are:

4/12  B&D Chapter 9 on Power, Conflict, and Coalition

4/19  B&D Chapter 10 on The Manager as Politician

4/26  B&D Chapter 11 - Organizations as Political Arenas

Note that we will have discussion of blog posts before the presentations.  The prompts will be relevant for these topics.

Instead of evaluation of comments....

...I constructed this comment matrix.  This is only measuring who commented on posts.  It doesn't say anything at all about comment quality.  We'll discuss this briefly tomorrow.

The Write Stuff

Since the class has been blogging for a while, you can all consider yourselves writers.  Writing is both about the ideas and about how well the ideas are expressed.  On the latter, you might get some insight from this post, the first in a new blog from the NY Times.

Follow up to previous post

This Joe Nocera column is a good read and it is a nice way to tie the Goldman issue to our course, since it point out two distinct ways, with Starbucks the emblem of the alternative approach to Goldman.

Whistle Blowing on Goldman Sachs

This piece is astounding for the frank accusations regarding the corporate culture within Goldman Sachs.  And it's quite relevant to our discussion about moral hazard in organizations.

Why I Am Leaving Goldman Sachs - NYTimes.com via kwout

Asset Equations and Moral Hazard

We didn't fully cover the last slide in the PowerPoint from today.  So I will start with that on Thursday.  It is a puzzle.  Let me see if I can explain the issue here.

The asset equation that I briefly showed is from this document, on page 3.  The important point to note is how we typically interpret such an equation.  The asset value, "A," is measured in current time, that is the value of the asset today.  The return "a₁" happens 1 period into the future.  Similarly, the return "a_t" happens t periods into the future.  In other words, the asset value is the sum of the appropriately discounted future returns.

On the other hand, in assessing the reputation of an individual, we typically look at past performance.   Typically, the rule of thumb is to trust somebody who has had strong past performance and to distrust somebody else who has had weak past performance.

The puzzle is how in one case can the reputational asset be forward looking only while in the the other case where we assess the assess we are backward looking only.  Can that make sense?  If so, how?

Assessment of your work in Moodle

I've now set up two different discussion groups in Moodle.  One is for your individual work.  The other is for your team work.  Each student should now have a written assessment of their individual work called Blog Posts - First Half.  If this functions the way it is supposed to, you should be able to read your own assessment but not see the assessment of any other student.  Please let me know if that is the case.

I've also done an assessment of the Cool Kids' presentation from last Tuesday.  From here on out, I will try to do team assessments a day or so after the presentation has occurred.

Later this week I'll provide some assessments of the comments you've done so far.

The week after break I'll assign the second presentations, which will be from B&D.

A Pretty Appropriate Piece for Tomorrow's Class

This one is from the Washington Post. It's interesting, tongue in cheek, and a quick read.

On a separate point, sorry to be late with the PowerPoint or tomorrow.  It is up now.

Writing Tip

"The road to hell is paved with adverbs."
       -- Stephen King

Notes on Shapiro and Stiglitz

First, I believe the link I gave you previously for the paper is now broken.  You can get it from JSTOR.  Note that you have to be on the Campus network for the link to give you full access and be able to download the PDF.  From home use VPN for that purpose.

Next, let me try to sketch a little picture of "circular flow" that is going on in the background of this paper.  Workers can be in one of two states, employed or unemployed. The equilibrium of the model is stationary - the level of employment stays fixed throughout as does the level of unemployment.  But at each moment in time some workers separate from their jobs, which creates vacancies, and some unemployed workers find those jobs, filling those vacancies.  That unemployed workers want good paying jobs is not surprising, so the filling the vacancies part makes sense intuitively.  That workers with good jobs nonetheless separate makes less sense.  In reality, some workers do retire or quit to move elsewhere and find other work.  But here there is no retirement (everybody lives till infinity, an assumption to keep the modeling simple) and when the quit happens the worker becomes unemployed.   So that doesn't seem to correspond with reality very much.  The reason they need the quit rate, b, to be positive, is so that job vacancies do happen in equilibrium.

With that, the intuitions of the paper are not hard, once you get the drift of the asset equations.  I've written up some notes for that, so you can see how those equations are derived.  From the worker's point of view there are three asset equations to derive - the value of an employed worker that shirks, the value of an employed worker that doesn't shirk, and the value of  of an unemployed worker. It seems intuitive enough that if the firm catches the worker shirking then the worker gets fired. (In reality there are steps of "progressive discipline" with firing the worker the last step.  The aim of the intermediate steps is initially to turn the situation around and make the worker productive, then later to document the cause of dismissal.)  However, in the model with all workers homogeneous, the firm is really indifferent to firing the worker or not.  Again, this is a little fudge to keep the modeling simple.

The heart of the paper is the no-shirk condition and understanding the implications of that.  A good job produces a surplus for the worker over what an unemployed worker gets.  Its the desire to maintain that surplus in the future that motivates the worker to put in effort at present.

On the Relationship between Wealth and Greed

This piece seemed timely.  (And for what it's worth, I drive a Civic and almost never take it to the car wash.)

Are rich people more unethical? - CNN.com via kwout

Internship Possibility

From: Brooks, Alvina P. [mailto:abrooks1@ftc.gov]
Sent: Monday, February 27, 2012 11:25 AM
Subject: Seeking applications for summer econ internship at the FTC

Murphy's Laws of Teaching

This is a cute site.  We'll use one of these tomorrow (from the category Laws of Applied Terror).

Prompt for this week

We've used the term opportunism, taking advantage of the a situation, and a different term, being a good citizen, doing the right thing even when there is a opportunity to do otherwise, as to different sorts of possible behavior at work (or at school).  In this post we want to talk about environments that promote one or the other.  And we will do so taking a bit of an interdisciplinary approach.  To get the requisite background, I'd like you to read these two recent pieces from the NY Times

How to Get the Rich to Share the Marbles
How Companies Learn Your Secrets

The first piece is about cooperative activity that subsequently promotes sharing.  The second is actually mainly about habits and habit formation.  I would like you to transfer the lessons from these pieces to your own work or school experience.  Can you give an example where cooperation has led to sharing?  Can you give a different example, where what might seem to some observers as opportunism was really the consequence of a bad habit?    Might there then be a solution in modifying the habit as in the second piece?

Reminder - Schedule meetings we me

This is just a quick reminder to set up a time for your team to discuss the presentation it will do (that is for teams A and C) and also for you to set up individual appointments for discussing your blog posts and online work (so far only one student has done that).  Please do this via email, suggesting a preferred time and a couple of alternative slots too.

Tips/Notes on Spence and Zeckhauser

There is a lot of notation in the paper that might get you bogged down.  These suggestions are aimed at helping with that.

The model has a random variable, n, with a probability density function, f(n).  This random variable is the random component of wealth.  As stated in the paper, n is a continuous random variable.  This assumption is for slickness in the notation only.  It doesn't materially impact the results at all.  It might help you to understand the economics if instead n is a discrete random variable with a two point support, n_L and n_H. In other words, n_L denotes a low income shock and n_H denotes a high income shock.  Then let p_L and p_H denote the corresponding probabilities.  The expectation of n is given by E(n) = p_Ln_L + p_Hn_H.  Also for simplicity, treat the agent's action, a, as a scaler.

Once you've done these substitutions, you can try to derive the solution via the method of Lagrange multipliers.  Use the separable form of the utility function that is in equation (10) in the paper.  It is the easiest to interpret. I've written up some notes for you so that it is not too hard to reproduce the results. The essence of the article is in contrasting the solution to Case I (No Individual Choice) to Case III  (Individual Chooses Before Nature - Insurer Monitors Only R).  Time willing, we'll then relate the other cases to these two.

Also note that there is a typo in equation (3).  At present it say the utility, u, equals the Lagrange multiplier, lambda.  It should say the the marginal utility of income equals lambda.

Presentation Schedule

These are the dates for the three presentations:

Tuesday March 6 - Spence and Zeckhauser
Tuesday March 13 - Shapiro and Stiglitz
Thursday March 29 - Alchian and Demsetz

Teams need to be be prepared for these presentations for them to be worthwhile.  I hope non-presenters have also tried to work their way through these papers.  It will help with the class discussion.  I will be posting tips/notes for reading the paper so you can make headway into them.

Card Playing

Though the title of the post may seem frivolous, this is meant as a serious message.  I'm guessing that several of you have played poker, and not just penny ante. I wonder if any of you have played bridge.  It is the ideal card game for talking about the issues in chapter 5.

In all card games each player is dealt some cards that they see and the other players do not.  This is an example of private information. After the deal has concluded but the play hasn't yet started, each player knows what is in their own hand, but not what is in the hands of the other players.  In some card games those cards are then revealed sequentially during the play.  The play of the cards can communicate not just what has happened, but what cards remain as private information.  In poker, it is the betting that offers the possibility of communicating.

Bridge is interesting here because it is a team game and the effectiveness of the team depends in part on how well messages that are sent are understood by the partner.  There is also usually a logic to the sequencing of the play of the cards.  Effective teams find the right sequence.

If you have trouble coming up with examples for the prompt this week, it's okay to use card playing as one such example.

Misgivings about information efficiency - what management does and what it should do.

Let me start with some of my own shopping behavior.  I occasionally do grocery shopping for the family  My store of choice is Schnucks, mainly because I understand their layout.  One curiosity I've noticed is that in the aisle with cocktail olives (for martinis) you can also find peanut butter.  I consume both of those items but in my view of the world, they don't go together and I don't consumr them at the same time.  Cocktail peanuts do go with cocktail olives (the appropriate munchie to accompany the martini) but you won't find cocktail peanuts in this aisle.  They are in the aisle with the potato chips and other snacks.  Cocktail olives also go with whatever liquor is used to make the martini.  So you might envision the olives in that section.  But you'd be wrong.  Some people do put cocktail olives into salads, so conceivably you'd find them in that part of the store, but that too is not the case.  For me its a mystery why they are with peanut butter in the same aisle, one I'm not likely to solve soon.

Stores like Schucks now generate a huge amount of data via the checkout process.  Every item has a bar code on it.  Every item gets scanned at checkout.  This is an incredible boon, not just to getting through the line quicker, but also for inventory management.  The store gets a much better sense of what merchandise it is moving and what remains on the shelves.  So for restocking standard items, this is fantastic.  Does it help the store think through where items should be located?  I know from the little I've read about marketing in grocery stores, that the buyer should see fresh produce when he first walks in and that milk and fresh meats should be in the back of the store.  There are known buyer behaviors that support these product location choices.   What about other such choices?  Are those choices driven by data - let the numbers do the talking?  Are they driven by some conception of the shopper that may or may not be supported by the data?  Or is it something else?

More generally, with this shopping as only one example of the bigger picture, are we talking only about making small tweaks in an already well defined model?  If we are, does that really require human discretion, or can it all be computerized and run by algorithm?  If it can be done by computer, it would seem more information is better, in contrast to what the book says about information efficiency.  With a higher dimensionality of information, one can be more precise about the actions that need to be taken.  That is one way to think of what's going on.

Now I want to give a completely different perspective.  For this one, you can imagine you are a medical doctor who has a patient come in to see you with a variety of complaints.  One of the things you need to determine is whether it's all minor stuff, some topical treatments and perhaps an inexpensive prescription will do the trick, or if it is a major illness, requiring either substantial surgery or a very invasive treatment regimen.  Further, if it is the latter, you may have to come to a decision rather quickly, because long delay can cause the situation to deteriorate further.  In this same manner you can imagine you are a different type of doctor, the Chairman of the Federal Reserve, with the patient being the entire U.S. economy.  You need to determine again whether the economy is basically healthy or if there are some serious underlying issues that need fixing.

Suppose in particular that you are Alan Greenspan and it is back in late 2004 or early 2005.  If you thought the economy had a serious illness in it back then, could you have prevented the meltdown from happening a couple of years later?

This diagnostician has a huge amount of information at his fingertips.  Much of it is digital in nature but - financial information about prices and quantities regarding bank balance sheets.  But you also have a huge amount of analog information - reflecting the attitudes of the circle you trust and the information that is shared within that circle.

In retrospect, where vision is always 20-20, Greenspan blew it completely on the economy.  According to the macro economist John Taylor of Stanford - the Fed held down interest rates for too long.  That induced the bubble.  The Fed also had regulatory authority it didn't exercise about the subprime market.  Greenspan didn't see the need to change what he was doing, because he thought it was working well.

It turns out that on making the judgment of how the patient is doing, a big part of the issue is the framework that is used to process the available information.  In Greenspan's framework (you can call it a mental model), the higher ups in the big financial houses had a strong self-preservation instinct, not just for themselves but also for the organizations where they worked.  This self-preservation instinct meant these people would self-regulate their own organizations to keep them healthy.  Greenspan therefore couldn't imagine taking on bad debt for near term gain.  He therefore so no reason to sound the alarms.

I call this type of behavior believing in myth.  I think we all do this to some extent.  The issue arises when the myth comes into conflict with some available evidence.  Then something must go.  When it is the myth that goes, I call that behavior being empirical.  One then needs to come up with a different framework to explain what is going on.  You'd like to believe that science works that way.  However, it sometimes happens that what gives is the evidence, and the myth survives. In this case, you have to wait for a catastrophe to see what is happening, and then you can go back to the evidence earlier and note you might have seen it earlier too, had you not been blocked by an erroneous framework.

The Lessons from Tal Afar has this aspect as well.  The crucial question there was whether there was an insurgency or not.  One gets a completely different military strategy when there is no insurgency than when there is an insurgency.  The latter seemed to produce much better results.

It may be that the big thing senior management does is communicate a framework on which to hang all other decisions.  Then information flow from the spokes back to the center can be seen in part as a way to support the effectiveness of the framework or to demonstrate the flaws in it.  If this is right, then a further management task is to make adaptations in the framework or wholesale changes in it, when those flaws become apparent.

Armed with a reasonable framework, then one should be able to determine what resources are necessary and what actions need to be taken to be successful.  There may have to be lots of minor tweaks to the recommendation, to match the situation on the ground, which is likely in flux.  Those tweak things are not the focus of the senior management.  It is middle management that does the tweaking, or the task is automated.

Does the information efficiency concept in the book survive if we're talking about management by selection of a framework?  Perhaps it does, but here the arena is the verification part.  If the complexity is too great, one can't tell whether the framework is useful or not.  In a simpler environment one can tell.  Information efficiency then says to get the simplest framework possible that will really test the whether the framework is applicable.

Where we are this week

Tomorrow my aim is to begin with the PowerPoint from the seventh class session in the middle.  We did the early part on transfer pricing last Thursday.  So we'll start with Management and Coordination by other means than price.  You'll note that price creeps back into the the discussion.  This covers the first part of chapter 4 in M&R.  The inspiration is a paper by Weitzman called Prices and Quantities.  I will also spend a little time here talking about what I know regarding "project management" which I hope will make the discussion a bit more realistic.

After that I'd like to have a conversation based on your posts for this week - about possibly bringing price in to partially alleviate situations where students have to wait to get something on campus.

Time willing, we'll then go onto the PowerPoint for the eighth class session, the bulk of which is on B&D chapter 3, which introduces the structural frame.  What we don't get to tomorrow we'll get to on Thursday.

I've been having a hard time trying to produce something reasonable on the second half of chapter 4 in M&R particularly the part on information efficiency in selecting the type of controls.  So I will write up my reflection later this evening, to indicate the source of my misgivings.  We'll discuss that on Thursday as well.  Incidentally, the reasons I suggested you read that piece on the Lessons from Tal Afar are tied to the misgivings.  The issues are quite similar to what I wrote about in my Uncertainty paper that is linked on the Useful Links Tab.

The last part of chapter 4 on increasing returns, core competency and complementarities, all of which you can describe with one term, "positioning," should be straightforward enough in conception.  We'll spend some time getting the jargon right and making sure we understand what is at issue.  At the moment there are no slides for that part. I'm guessing we won't get to that till next Tuesday, but if it seems likely we'll do it this Thursday, I'll produce some slides tomorrow.

Also, I promised to have for you the schedule of your presentations.  We'll do that on Thursday.

I'm hoping the weather is not too bad tomorrow.  I hate being out in freezing rain!

A different type of reading for Tuesday

While we will continue on the  issue of coordination from an economics perspective, I also want to cover this piece, The Lesson from Tal Afar, a piece from about six years ago in the New Yorker.  It is about the Iraq War, but I believe it shows the management dilemma very well, which is why we will discuss it.  It also happens to be a terrific read, so you should enjoy it, just for that.

Getting rhythm - Control by folks at the edge

I thought today's class session had a better feel than previous sessions, especially the early discussion where we just talked without the PowerPoint.  The basis for that was your blog posts, which allowed a launch point from which we could push the conversation further.  I will spend some time thinking about this week's prompt with an attempt to sustain and improve on that for next week.  I hope you can also give some thought to how the discussions would increase in value and get the students to do more of the driving of the conversation.

I do want to reiterate here that for students who hadn't commented on other student posts, please do so before Thursday's class.  The expectation is that you will comment on a team member's post and then one other post by a student not on your team.  I'm sure each of you will like receiving comments on what you have written.  And if you do enjoy getting them, it should help you in writing interesting comments.  As with the in class conversation, the goal is push the discussion forward, get the writer to reflect a bit on what they wrote - did he or she really mean what was said, can more context be given to make the point sharper - and if there is an area either of consensus or disagreement to accentuate that.  Perhaps some of it should be brought into the in class discussion.

I next want to give my perspective on the undergraduate student research issue.  Please note this is only my view.  I don't speak for the Econ department on this.  But I do have rather strong views on this matter.  Let's first look at the demand side of this and peel it a bit.  Why do students want to do research projects with faculty members?  Possible reasons are because they expect to do other econ research in the future and this is a way to get started with that, because they would like to engage with a faculty member in a one-on-one basis outside of the class setting, or to earn a credential that presumably will be of some benefit for the student.  All three of these make sense if the student wants to go to Econ grad school.  In our class, I don't believe anyone is in that category.  I can see the second one continuing to make sense otherwise, but if the first one doesn't make sense I don't really understand why the third should.  I'll get to that second one a little more in a bit.

On the supply side there is first the question of whether doctoral students in Econ who want to do research get well matched with faculty.  When I was an active Econ faculty member, this matching was imperfect, with some students not finding a research opportunity.  (Indeed, many students are TAs to pay the bills.  Even if they would find being an RA more rewarding, there weren't enough of those to go around.  Prior to the writing of the dissertation, I believe that being involved in a research project without being an RA is kind of rare.)  There is a different issue about whether the student is well prepared to engage in the research and what training provides good preparation.  I don't have a good general answer for this but for me as the researcher, I'd want the student to have had a course from me already that is relevant for the research and then I'd want the student to have shown me something in the course.  This should be a two-way street.  Each party needs to benefit from the relationship.

Related to that benefit, there is the question of whether incentives are put in place for the faculty member to support the activity.  I'm not current on this so what I say is dated, but when I was fully involved in the department, the metric that one reported on the CV for salary increases or for promotion was dissertation committees involved in and in particular being the student's main adviser.  That did matter.  I don't know if the practice has changed since, but having undergraduate students as  research assistants didn't count.  If it doesn't count, then from the faculty member's perspective this is burden without reward.  I know I've talked a lot about being a good citizen in class, but there are limits to that, particularly if the function otherwise doesn't seem to have value.  Doing the activity so the student has a credential and that being the sum total of the benefit, why bother?  You're a good citizen because you agree with the goal the good citizenship is supposed to promote.

I believe these issues are quite different in the laboratory sciences, where the research lab may have some jobs that are suitable for undergraduates, so they can begin their apprenticeship that way.  In Econ, however, I really believe that it would be better to have undergraduates involved with the teaching.  In the 1990s, I heavily relied on undergraduate TAs, who conducted online office hours.  The institution didn't have a credentialing way of rewarding the behavior, so the students earned an hourly wage for doing the activity.  The students treated the activity as a reward, took it seriously, and were effective in that role.  I believe many of the students currently taking the class benefited from the approach.  And they were able to have regular interactions with me.  Further, I only needed to do a modest amount of training for them, because each of them had previously taken the class, so they could see how the model worked from that experience.

I think the institution as a whole should move that model in a big way, but currently it is esoteric.  I could do it in intermediate micro, because that course didn't have graduate TAs.  By teaching a larger lecture (180 students instead of 60 students) I could free up enough resources to pay the undergrads (and have the department net some dollars in addition)!  The practice, however, didn't persist after I became a full time administrator.

One general lesson from this, applicable to our course, is that there are many institutional arrangements, such as the undergraduate research project, that aren't fully engineered to make it work for all parties involve.  When that happens, the organization looks dysfunctional and unfeeling.  I think you're seeing some of that.

Blog Posts and Comments

I heard from one student who was having trouble getting Blogger to post what had already been written.  There are a couple of other posts missing from some students.

Do note this is the first week where comments by students are expected.  They can't comment if they have a post to comment on.

Facebook and Data Mining

This piece is a bit frightening.  I wonder how many of you had to read 1984 when in high school.  It does seem that Big Brother is watching.  Personally, what concerns me is the re-use of these data.  If only Facebook and Google have this sort of information, one might rely on their intense popularity as a means of assuring the data are not mis-applied. But other companies may not have the same incentive.  The stereotyping and out and out discrimination are also rather frightening.  Perhaps we should have some discussion of when it is appropriate for a vendor to use buyer characteristics as a way to price and when it isn't.

PowerPoint for seventh class session posted

We will cover this stuff on Tuesday after we conclude our discussion about market failure, which is from the PowerPoint on the sixth class session.

I will try to get the PowerPoint for Thursday up later today.  If it is not up by the time the Super Bowl starts, expect it to be available before noon tomorrow.

Suggested Papers for Class Presentations

As I mentioned in class today, I believe we should start on student presentations when get to chapter 7 in M&R and then have one presentation for each of the chapters - 7, 8, 9.  As I hope you can already tell, we are taking a zooming in and then zooming out approach.  When we zoom in, we  focus on a specific topic in some section of the chapter.  When we zoom out we do a more broad brush approach that tries to connect those topics.

The zoom in requires doing reading (or viewing) beyond the textbook.  Below are the particular papers I suggest we do along with a little context.

Chapter 7 - Spence and Zeckhauser, Insurance, Information, and Individual Action.   This is an early paper on insurance when there might be moral hazard.  It is good for delineating the issues and seeing how the results change depending on what can be verified and when.  A note here is why this is relevant to the firm.  In an employment relationship there is productivity risk and revenue risk.  So there is a question of who bears that, employer or employee.  The employment relationship is different from the insurance situation in that in the former there is team production.  That's not discussed here.  We'll get to it later.  So here were think of the employment contract like insurance.

Chapter 8 - Shapiro and Stiglitz, Equilibrium Unemployment as a Worker Discipline Device.  If there is such a thing as involuntary unemployment, that means the workers must strictly prefer having their current job to getting laid off and then looking for another job.  They can't be indifferent between the two.  If that is true, then economists would say the workers earn a job rent.  There is a puzzle about job rents - why doesn't the employer reduce the wage?  This paper says it is counter productive to reduce wages.  There is something called an efficiency wage, paying the worker more than the opportunity cost, because the worker will be more productive then, sufficiently so to justify the wage differential.  But if there are efficiency wages like this, the worker must suffer some duration of unemployment if laid off.

Chapter 9 - Alchian and Demsetz, Production, Information Costs, and Economic Organization.  (You need the Campus VPN to access this paper.)  This paper argues that the firm exists because of team production rather than reduce transaction costs.  It then elaborates on the team production point of view.

Students may find each of these papers challenging, but I believe with some persistence and a little help you can make good meaning from them.  Have a look when you can and discuss with your teammates.  Next week we'll try to assign teams to presentations.

I'll do something similar in a few weeks with regard to chapters in B&D.

New Version of PowerPoint for Sixth Session

I made an amended version of the PowerPoint today, with some additional slides and with all those omitted symbols included.  You can see the slides at the link, but to get the speaker notes, you have to download the original.

The PowerPoint for the sixth class session is now available

Note that it gets through market failure.  We'll do the stuff on transfer pricing next week.  That means the stuff for next Thursday should be mostly review of intermediate micro.

Also note that partly to simply get the thing done and partly because of the nature of the topic, there is a lot of text in the slides themselves, which is something I normally don't like.  If I have time, I may go back to them and update in my preferred style, where I can.

Update on PowerPoints for the week

I know I've promised to have PowerPoint for Tuesday and Thursday done this evening.  The one for Tuesday is available.  But I'm pooping out now and rather than do something of lower quality, I'll get the Thursday one done by tomorrow morning.  Sorry for the delay.

Professor Arvan

Responding to a blog post

Although you may get an email update from the class blog, please don't reply to that by email.  It would be much better if you went to the blog and made your comment there.  Then the rest of the class can see it.  Save email to me for scheduling an appointment or discussing something else of a personal nature.

Thanks for your cooperation on this.

Professor Arvan

Assessment doc + Where we will begin next Tuesday

There is now a document entitled Proposed Method of Assessment.  It includes what we discussed in classed last Thursday about how students should be evaluated as well as a section on how this translates into letter grades.  Have a look at it at your earliest convenience.  Students are invited to add comments or make modifications to the document.  I will freeze it next Saturday and we'll go with what is there at the time.  

Last class we didn't get through the full Powerpoint for the Fourth Class Session.  We got through slide ten, which is the first on transaction costs.  We concluded class with the nature of transaction costs - the holdup problem.  After each party become locked in with the other, one wants to renegotiate terms in its favor.  

Student Teams

On Tuesday, I'd like to put students into teams, 3 students per.  If there are other class members and you want to be on the same team, we can arrange that without difficulty, given our size.  It's also fine if you simply want me to assign you to a team.

Reactions to the first set of posts

I've now read each post that has been made and commented on every one.  A couple of students have yet to submit.  If they can do that by this evening, I'll comment on those too before class tomorrow.  For the rest of the semester, I hope the reflections come in by Sunday evening (earlier would be even better).  Since we are a small class, students are encouraged to read and react to their classmates' postings.  That will help to make us a community.

Tomorrow in class we'll discuss a hub-and-spokes view of organization.  The reflections of the students  give a similar sort of feel, with each of you as one of the spokes and me as the hub.   I wonder if students see it similarly.  I also wonder how we might make the process more decentralized, so the students have more of the decision power and I have less.  We'll discuss that in class this week, and maybe in subsequent weeks as well.

Here is a general comment about the writing.  In some instances it was bland and lacking specifics.  There was reference to very broad experience rather than to particulars.  There were a couple of exceptions to that, but they were exceptions.  I tried in at least some comments to respond to broad strokes posts with quite specific anecdotes, examples meant to illustrate a broader principle.  I hope in future posting that you too can generate such examples.  It will be more fun to read that way and in the process of coming up with those I believe you'll learn something about the economics.

Many students said they were interested in the class because it seemed an opportunity to learn about entrepreneurship.  Here are some comments about that.

First, nobody talked about an interest in learning management principles, so there is the question whether they meant that when they said entrepreneurship or if they meant something quite different.  On Thursday, we'll briefly discuss the contribution of Ronald Coase, the father or Transaction Costs Economics, and his famous paper The Nature of the Firm. Coase refers to the manager as an entrepreneur.  So the two ideas used to be one and the same.  Nowadays, however, the two are usually viewed differently.  Managers are employees with supervisory responsibility and possible some strategic direction responsibility as well. Entrepreneurs are business owners, risk takers, who start new enterprises and oversee them soon after their gestation.

This second comment is in the spirit of "no surprises," getting bad news out early, something I talked about in class last Thursday.  The course may give you very little in terms of what you want regarding entrepreneurship.  For example, that Coase paper I mentioned in the previous paragraph is concerned with the following question.  The price systems is one way for coordinating economic activity.  The firm is a different way for coordinating economic activity.  Each has its strengths and and weaknesses.  When is it proper for the activity to be coordinated within a firm rather than in a price system?  This is a perfectly interesting economics question and the answer to that question provides good insight.  But that answer may be of little use to an entrepreneur (or to a manager) who focuses on other issues, such as is this a good business opportunity to pursue?.

Put a different way, my impression is that many students want to understand entrepreneurship as an insider understands it.  They want an education in this area to assist them in the doing, after they graduate.  This would be a very practical education.  In contrast, economics of organizations is from the perspective of an outsider, who watches and then tries to come up with principles to explain what is going.  For this to be of any value whatsoever, the principles must be applicable from one organization to the next.  The approach is necessarily theoretical

Not quite seven years ago, when I was the Assistant CIO for Learning Technologies and working in CITES, I wrote a post called Is Economics Worthless?, which you might have a look at because I believe it is relevant today and takes on this subject.  At the time I wrote that, I recall I was expressing frustration about other decision makers in CITES, who seemed to invent criteria to rationalize the decisions they wanted to make, rather than look at the decisions as problem solving, and then evaluating those decisions on how well they addressed the problems that were articulated.  For example, the people who did the Networking had a pricing model for access that I recall was $22 per jack.  It bothered me that demand didn't enter into the pricing.  (Units in the College of Engineering would pay the same price as units in the Humanities.)  Economic theory says demand should matter in a regulated price of this sort, with the more inelastic demand paying a higher price.  But I could never get this point across.   This type of behavior in CITES seemed best explained by B&D's political frame.

Indeed, one of the reasons we are reading the B&D book in addition to M&R is to give some practical ideas about organizations, even if they aren't economics.  We'll definitely spend at least one class session, maybe more, talking about conflict - dealing with somebody who is hard to get along with, who is manipulating, etc.   That's not economics.  But it is super important and you probably won't get that elsewhere.

There is a further issue at root here, which is the ability to apply rather abstract economic ideas to very concrete situations, and being comfortable doing so.  If you can do that, then the economics may be quite useful.  But that sort of thing takes a lot of practice.  Think about how many laps Michael Phelps had to swim to become an Olympic Champion.  Metaphorically speaking, in this class we're at best dipping a toe into the water.

Nevertheless, I hope you are not too disappointed with this response.  It's pretty standard fare that students want a practical approach to a subject while the instructor prefers a theoretical orientation.  Knowing that at the start of the semester, perhaps each of us can get some of what we want.  

Starting With Textbook Content On Tuesday

Relative to the original schedule I posted last week, we are behind by one class session now.  We will be doing M&R chapter 1 and B&D chapter 1 this Tuesday.

I will update the calendar entries in the next day or so to reflect where we are and what we will cover in the next few class sessions.

Since our course is not a pre-requisite for any other undergraduate course here, I feel no obligation to cover a pre-specified amount of material.  We'll let our discussions dictate the pace in class.

More on Darwin this time on economies of networks

I'm ignorant on issues of human physiology, so I don't really know if this is true or not, but the story is that we each have an appendix that is a vestigial organ.  This means that at some time in our evolutionary history the appendix was functional, but the need that it satisfied disappeared while the organ did not.  Vestigial organs are a feature of the evolutionary approach.  It's not possible to explain them from an efficiency perspective.  (And do note that with the appendix it is possible for it to become seriously inflamed, at which time the person has an appendectomy.  So, even if it doesn't do good, it is possible for the appendix to do harm.)

This idea ha an economic analog which is called "lock in" and is a rather important concept.  Lock in belies a sense of dynamic efficiency.  The most well known example is the QWERTY keyboard.  I wrote a post about that a while back that has links to other very good references on the subject.  By the way, subsequent to writing that post I learned that Colorado College is a place that does have students take one course at a time and focus on that.  I don't know other residential colleges that do this, but it is fairly common with executive education and online learning.

Subscribe by email

There is now a subscribe by email gadget in the left sidebar.  I believe it offers a daily update.  You get all the posts in the last 24 hours in one message.  Please let me know if that's not how it works.

Looking at the Penn State situation through the lens of our class

There is a fascinating piece in the New York Times this morning, about the Penn State Board of Trustees operation in the wake of the scandal.  Of particular interest is how information did not flow as they expected it would and the consequences of that.  We will be talking in class today about lack of incentives to communicate properly.

Sometimes circumstances can be so dire that no incentive could make it so that the person would communicate the truth.  If the person does communicate the truth then it is for reasons of obligation rather than for personal gain.  We'd use the expression - it's the right thing to do.  Normally we don't associate doing the right thing with incentives.

Reconciling The Rationality/Efficiency View With Making Bonehead plays

Econ students are taught about Adam Smith and his notion "the invisible hand" that guides the privately good behavior to produce socially efficient outcomes.  Biology students are taught about a different sort of competition - Darwin's Survival of the Fittest.  Individual "behavior" is genetically determined.  But genes can mutate.  Some mutations produce advantage and those that do tend to propagate.

In the last several years, some economists have been trying to apply Darwin's approach to economic competition.  There are a few reasons for doing do and one is given by the title of this post.  Behavior can be based on traditional belief, which is very much like behavior being determined by genes.  But sometimes we try new things, which is like having a mutation.  When the new thing seems better than the old thing we call it an innovation. One doesn't need full rationality to explain innovations. All it takes is a search for doing better than at present and then learning by experience from the experiment in trying.  Often that learning suggests the next experiment to try.  This view may be somewhat more realistic - humans learn but aren't fully rational.  I find that an appealing approach.

There is a different reason for economists to emulate Darwin.  Robert Frank, an economist in the Business School at Cornell, has been writing about this idea.  This is a very interesting read and won't take you long to get to the gist.  Competition is about individual advantage.  Individual advantage that propagates often also creates advantage for the species. Once in a while, however, traits that create individual advantage can actually be harmful to the species.  In the linked piece, Frank says the latter can happen when the advantage is relative only. The metaphor is that the overall pie is smaller but the individual gets so much bigger a slice that the individual is better off.  So there can be individually good but socially destructive innovation.  This is meant as an argument for some regulation and against laissez-faire.

Follow Up On Today's Class

It occurred to me after class that I may not have motivated the practice of writing weekly reflections particularly well.  It's something I've tried in other courses.  I had particular success with it in an honors seminar, so it seemed like a good thing to do.  Also, I tend to write reflections quite a bit.  Here is one on that seminar class written after the course concluded.  It might give a much better idea of what I'm trying for.

Beware of the typos!  That piece has a fair number of them.

Student Blogs Items

The gadget for Student Blogs in the left sidebar has, for the time being, my blogs, simply so I could get the thing started and verify the feeds work.  Once students make their own blogs I'll add them to the list and then delete mine.

A second post

e pluribus unum.
e pluribus unum.
e pluribus unum.
e pluribus unum.
e pluribus unum.

Just to get the site started

Here is a first post so I can see the look of the site and modify it for the class.