The Electric Commentary

Wednesday, June 29, 2005

Freakonomics Catches On

Bryan Caplan and Alex Tabarrok jump on the bandwagon in the WSJ. They have a fun discussion, and bring up a variety of fascinating material.

From Alex:

Hess and Orphanides define a war as "an international crisis in which the United States is involved in direct military activity that results in violence." Using data from the International Crisis Behavior Project, they compare the onset of wars in first terms when there is a recession with (a) the onset of wars in first terms with no recession and (b) second terms. Stunningly, however, they find that in the 1953-1988 period wars are about twice as likely in first terms with a recession than in first terms with no recession and second terms (60% to 30%). The probability of this result occurring by chance is low.

Need I mention that the Hess and Orphanides model has proven to have predictive power?

And from Bryan:

Since Alex has trounced Krugman for his dangerous policy recommendations, I want to give Krugman credit for coming up with a novel theoretical argument in favor of free trade. Namely: Free trade is especially beneficial for you if your trading partners are idiots.

"Chinese investment in America seems different from Japanese investment 15 years ago," he tells us, because: "[J]udging from early indications, the Chinese won't squander their money as badly as the Japanese did. The Japanese, back in the day, tended to go for prestige investments -- Rockefeller Center, movie studios -- that transferred lots of money to the American sellers, but never generated much return for the buyers. The result was, in effect, a subsidy to the United States."

And one more from Alex:

The existence of the naive, who choose where to rent based on the advertised rental price and not the full price of driving, makes shrouding profitable. But the profits attract entry, leading to an equilibrium in which rentals are priced below cost and insurance and fill-ups are priced well above cost. Why doesn't it pay to advertise and price both services closer to cost? The reason is that sophisticated consumers don't want to buy at cost -- the sophisticated consumers want to buy from the firm that attracts the naive because the sophisticated consumers know to reject the supplemental insurance and return the car after gassing it up themselves, thereby taking advantage of the low rental rate and avoiding high markups. Notice that shrouding doesn't benefit the firms that shroud (competition reduces their profits to normal); instead, it causes the dumb to subsidize the smart.

Readers of this blog should be pleased!

There is a ton more, all of it interesting.


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