The role of relative market power in compensation negotiations

Justin Fox on the new frontier of executive compensation.

I think Fox's idea that employees could (should?) have a say in determining executive compensation schemes is precisely what both managers and directors are most trying to avoid. It isn't really that revolutionary of an idea, however. One of the ancillary benefits of organized labor is the provision, indirectly, of this sort of input. There was certainly a time in which directors wouldn't dare pay managers 200-400 times that which they paid typical workers. Omitted variable bias notwithstanding, it's likely no accident that this fear began to evaporate with the decline of organized labor.

Also:

Corporate governance and banks: what have we learned from the financial crisis?

Jersey-Number Assignment Equilibrium

Abstract
This paper describes a market model in which property rights for the desired good are not assignable ex ante, using the example of professional athletes and the assignment of jersey numbers when two players have an equal inherent right to the number.

Links of the Week - 24 May 2013

Karl Smith:
Central Bank Competence Is A Technology

Paul Krugman:
The Mythical 70s

James Kwak:
Liberty for Whom?  (via)

How President Obama Won a Second Term -
Political strategist James Carville breaks down where the Republicans went wrong – and what it means for the future

Jared Bernstein:
Government Failure vs. Market Failure

Robert Solow:
It Ain't the Things You Don't Know That Hurt You, It's the Things You Know That Ain't So

Zack Beauchamp:
The Inside Story Of The Harvard Dissertation That Became Too Racist For Heritage

Dylan Matthews:
How our community colleges are falling behind

Economics-Illiteracy Whack-a-Mole: Health Insurance Market Edition

Gene Schwimmer, in a monster of a post, lays out a plan to "exploit - and have some fun" with the new health care law. He's clearly a guy given to intricate, complex plans, but he should've taken some economics classes at some point; he might've learnt something.

Or I could just save the money to do what I should be doing – and will be doing, once Obamacare is gone:  buying my own health insurance, with the services and from the firms that I choose, in a free market.  Though I must confess that the cute-nurse alternative does sound better – actually, a lot better. [emphasis added]

I responded directly to Mr Schmimmer, and I've reprinted my comment below because it illustrates one of the (myriad) ways in which Mr Schwimmer is mistaken.

You almost had me! As a student of economics, I am interested in incentives and rationality. You almost convinced me that, given your particular circumstances, your [Obamacare-avoidance-and-exploitation] plan was sound. I don’t know the ins and outs of filing as a self-employed person, but it seemed as if you do, just as it seemed as if you generally knew what the hell was going on. 

Seemed, that is, until you said that you could imagine a world in which health insurance could be bought in a free market, like a commodity. You see, Mr Schwimmer, in my discipline, we refer to something called ‘asymmetric information.’ Imagine if you wanted to buy a bunch of wheat, say, seven tons. I offer you my seven tons at the market rate, and you’re inclined to take the deal, except you don’t know if my wheat is rotten. Worse yet, you have no way of knowing. So, to hedge, you say you’ll only pay, say, 90% of the market rate, just in case. Then I only want to sell my crappiest wheat to you. Then you want to pay even less. This spiral will continue until there is no market for wheat. Asymmetric information sucks that way. Thankfully, the wheat market can solve this information problem. Presale inspections cover buyers beforehand, and tort law covers them afterwards. 

The market for health insurance has no such natural corrective to its information problem. Physical exams and questionnaires can weed out some undisclosed conditions. But insurers never really know what the hell sort of lives their customers and potential customers lead. Insurers would rather lump a bunch of folks together and let the actuaries figure out how many of each expensive procedure they should plan to pay for each year. This is why group plans are manageable for most folks. 

If an individual wants normal health insurance, outside of a group (such as through an employer), the insurer has really only one meaningful question: ‘Why? Are you sick?’ Since the cost of individual coverage is automatically going to be at least a little higher due to higher fixed costs, the insurer thinks ‘This guy must really be sick, if he’s willing to pay that much for insurance. We’d better charge him even more, just in case.’ Since the insurer is always going to imagine that anyone willing to pay the higher price is expecting to need more coverage than the amount of the premium, the premiums creep up. 

If there was only a way to get everyone into one big pool… Wait! There is! And my guy Mitt came up with it! I didn’t even know back when I voted for him that he had such a good idea! In fact, it worked so well that I resolved to vote for the next guy who wanted to try it. Along came my guy Barack! I’ve gotta admit, it got a little hairy there when my two guys were up against each other! Mitt made that really easy when he pretended not to remember that good idea he had way back when. 

Anyway, Mr Schwimmer, enough laughs. A lot of people yell and scream about ‘free markets,’ thinking that ‘free market’ is an antonym for ‘government intervention.’ You should read up on what ‘free market’ really means. I’m talking about many buyers and sellers, low entry costs for sellers, perfect information, reasonably balanced market power. Every one of these is violated by the ‘free market for health insurance’ you imagine. Now if you hate the ACA just because you want to hate it, or because you hate the President, or just because you hate government in general, that’s your right. Just don’t pretend like there is some sort of economics argument backing you up.

Public Healthcare Finance in the United States: A Literature Review

This paper will review three recent papers that discuss the future prospects of public health finance in the United States. Most commentators agree that the current long-run growth path of public healthcare spending in the US is unsustainable. Each of the papers examined here address this problem from a different perspective, and their conclusions are, in some cases, extremely different. Each paper, however, constructs a useful framework within which to analyze what exactly is meant by the notion that “rising healthcare costs are a problem,” provides valuable insights necessary to crafting a solution.

Links of the Week - 17 May 2013

Moby Ben, or, The Washington Super-Whale: Hedge Fundies, The Federal Reserve, and Bernanke-Hatred
Brad DeLong

Att. Jason Richwine: You're Not the First Guy to (Wrongly) Believe Immigrants are Dumb
Dana Goldstein

Full Employment: Is Labor-Saving Technology Making It Harder to Get There?
Jared Bernstein

Markets, Power, and Economic Policy
Jared Bernstein

Mark Thoma and Noah Smith on the motivations for austerity.

Central Bank Competence Is A Technology
Karl Smith

Stereotyping in Europe

via Tyler Cowen.

Quote of the Day - Chris Hayes on Inequality, Broadly

"Along with all of the other rising inequalities we've become so familiar with -- in income, in wealth, in access to politicians -- we confront now a fundamental inequality of accountability. 

"We can have a just society whose guiding ethos is accountability and punishment, where both black kids dealing weed in Harlem and investment bankers peddling fraudulent securities on Wall Street are forced to pay for their crimes, or we can have a just society whose guiding ethos is forgiveness and second chances, one in which both Wall Street banks and foreclosed households are bailed out, in which both inside traders and street felons are allowed to rejoin polite society with the full privileges of citizenship intact. 

"But we cannot have a just society that applies the principle of accountability to the powerless and the principle of forgiveness to the powerful. This is the America in which we currently reside." 

-Chris Hayes

via

Image of the Day - Productivity and Employment

via Jared Bernstein

Agency Costs in the Mortgage Securitization Market

Many theories exist that purport to explain the Financial Crisis of 2008 and the subsequent recession, the aftereffects of which are still felt in 2012. While the story of the private mortgage security market is  part of the overall story  of the Crisis, no single facet of the Crisis taken in isolation can possibly explain the entire narrative. Nor is the story of private mortgage securities simply a story from the last decade, a footnote to the Crisis and its run-up. Mortgage securities have existed in the United States for over forty years, and mortgage securities created by private firms for thirty. And despite their potential to create havoc, mortgage-backed securities (MBS) are an essential component of housing finance, and are likely to remain so for the foreseeable future.


[This paper has a lot of equations, and the formatting constraints of this platform make posting it in its entirety not feasible. Please follow this link if you'd like to read the whole paper.]



The list below is a miniature bibliography. "Miniature" in the sense that I have no pretense to completeness. I will just post links below that are relevant as I find them. Feel free to suggest something in the comments.

Did Securitization Lead to Riskier Corporate Lending? João Santos

Did the Rise of CLOs Lead to Riskier Lending? Vitaly Bord and João A. C. Santos

Did Securitization Lead to Lax Screening? Evidence from Subprime Loans Benjamin J. Keys, Tanmoy Mukherjee, Amit Seru, and Vikrant Vig

Links of the Week - 10 May 2013

Another big one this week. -ed.


The Four Noble Truths of Full Employment
Jared Bernstein

This accounting tweak by Fannie Mae and Freddie Mac will mean $60 billion for the U.S. government
Neil Irwin

A Thorough Summary of the Ferguson Fiasco
via Brad DeLong

Fact Finders (2005)
Jonathan Chait

Down the Up Staircase
Jared Bernstein

The Preferences of the Wealthy and Their Role in Our Politics

more from Larry Bartels: 

Democracy and the Policy Preferences of Wealthy Americans (2013) 

Economics Still Matters to Poorer Voters (2008) 

Economic Inequality and Political Representation (2005)

and yet more: Do Politicians Serve the One Percent? Evidence in OECD Countries 

P. Torija (2013)

 Let's get real about the stock market
Antonio Fatás

Heritage study co-author opposed letting in immigrants with low IQs
Dylan Matthews

The Health Care “Market” is So Not a Market
Jared Bernstein

The Political Imbalance Facing Unions in America
Jared Bernstein

Boehner Accidentally Explains Why His Deficit Position Is Phony
Josh Barro

Are Stocks Cheap? A Review of the Evidence
Fernando Duarte and Carlo Rosa

Image of the Day - Tax Burden

Image of the Day: The relative burden on sales and income taxes, by income class.

Remember this when hucksters try to tell you that we'd be better off lowering income tax and raising sales tax. Find your place on this chart and decide if you'd be better off paying more in sales tax and less in income tax.





via

Quote of the Day - Coates

"One of the problems with the idea that America needs a 'Conversation On Race' is that it presumes that 'America' has something intelligent to say about race. All you need do is look at how American history is taught in this country to realize that that is basically impossible."

-Ta-Nehisi Coates

Down the Up Staircase

This is where I was yesterday.

"NC has long been committed to solid education from early childhood interventions through their jewel-in-the-crown system of higher ed, along with maintaining some beautiful natural resources.  The idea that they’ll seduce businesses to come to the state by shifting taxes from income to sales, while continuing a trend toward disinvestment in public goods like higher ed, natural resources, and infrastructure is exactly backwards."

Matching Dilemma

Via The Onion: No One In Limo Going To Prom With The One They Wanted

Perhaps these guys could've done it better.

Links of the Week - 3 May 2013

The Ignoramus Strategy
Paul Krugman

Lee Atwater’s Infamous 1981 Interview on the Southern Strategy
Rick Perlstein

Banks Have Become “Too Big To Fail” Again. Uh-Oh.
Simon Johnson

Tax Day!
Jared Bernstein

How to Save American Finance from Itself
Robert Solow

The incomparable economist
Paul Krugman

Samuelson Memorial
Paul Krugman

Hedging America
Robert Solow

Brad DeLong on "What is Macro?"

Brad DeLong:

This year I am on sabbatical--which means I do not teach. And I do miss it. Thus, from my perspective at least, this next hour is going to be an hour of pure fun.

I hope it will be an hour of pure fun for you all as well.

As Bob Strom said, right now in this MBA class you are transitioning from studying micro to studying macroeconomics. You are moving away from studying that part of economics where you talk about how the market system works well: how supply balances demand to make the maximum possible amount and value of win-win deals, and how people respond to the incentives they’re given to change their behavior. To the extent that things go wrong in microeconomics--to the extent that when you step back and look at the situation you say "Geewillickers! I really wish this had not happened!"--it is because you wish that you or the market system had not given people the incentives that it in fact did.

Practically everything that goes wrong in micro goes wrong because somewhere in the system some people have what we regard as the "wrong" incentives, and have responded to them. In such a situation you frantically scramble to fix it and correct it. And you do so by finding ways to change public policies so that people in fact have the right incentives.

Micro is somewhere between half and three-quarters of economics.

The other quarter or so of economics is macroeconomics.

Macro is different. Macro deals with the fact that sometimes the economy seems to have some sort of a grand mal epileptic seizure. It freezes up. Something goes mysteriously wrong--and wrong not with an individual firm, or an individual industry, or an individual sector of the labor market, but wrong with pretty much the whole thing. This happened to the US economy in 2008 and 2009.


link

Quote of the Day - Ownership Culture

"No one washes a rented car."

-Origin unclear, variously attributed to Larry Summers, Tom Friedman, Jack Kemp, and an unnamed aircraft maintenance crew chief in a book by Thomas Peters and Nancy Austin...

more

still more

Man washing a Zipcar: NCSU, 10 April 2013