Though this piece is a bit of an infomerical for Wharton, I thought it would interest you given the last blog post and what we will be discussing in class tomorrow. Many startup companies are mentioned in the piece. I don't know how you find a job with a startup, but it is pretty clear that those companies are much less likely to attend job fairs at campuses such as ours.
By the way, the piece is in LinkedIn. If you don't yet have an account there, you might consider getting one.
Monday, September 30, 2013
Thursday, September 26, 2013
Early Feedback Survey
If you have a few minutes could you please complete the linked survey. People should now be pretty familiar with the work patterns in the class. So it is a good time to take the class's temperature and see how things are going. I'll share the results in class next week.
Tuesday, September 24, 2013
The Chronicle piece I mentioned plus one other
This is the essay in today's Chronicle about regulating the use of social media by university employees at Northern. I'm going to guess that policy will be rescinded in a few months, because as articulated it sounds unworkable and because they likely will get a lot of negative publicity from this piece. But who knows? Sometimes in those circumstances people dig in their heels.
The other piece is something I wrote five years ago when I was full time administrator. It is called Gift Exchange or Corruption. It is directly relevant to our discussion about opportunism in the workplace. The use of the expression Gift Exchange here is a reference to Akerlof's paper that is mentioned in the Syllabus. In this use it is a productive thing that promotes high quality work. Corruption is obviously a different matter. The question is whether you can tell the one from the other and is that easy or hard to do. My discussion suggests there are quite a few subtleties in trying to parse the two.
The other piece is something I wrote five years ago when I was full time administrator. It is called Gift Exchange or Corruption. It is directly relevant to our discussion about opportunism in the workplace. The use of the expression Gift Exchange here is a reference to Akerlof's paper that is mentioned in the Syllabus. In this use it is a productive thing that promotes high quality work. Corruption is obviously a different matter. The question is whether you can tell the one from the other and is that easy or hard to do. My discussion suggests there are quite a few subtleties in trying to parse the two.
Arthur Okun on the Invisible Handshake
I love this piece by Okun because it contains the essence of the implicit contract between a firm and its employees, yet is written in plain English so it should be readily understandable. The underlying macroeconomic question is about "wage stickiness." Why don't wages fall during a slump and rise in a boom? (The do to some extent but not nearly as much standard supply and demand would predict? Okun gives his answer vis-a-vis implicit contracts, which are a very specific type of coinsurance. You might think of them as a certain type of quid pro quo. We won't explicitly discuss this paper in class, but it is a very good paper to read and will give you a sense of how I think about the employment relationship.
On a technical note, if you are on the campus network you should have access to the piece. From home you must use VPN to have access.
On a technical note, if you are on the campus network you should have access to the piece. From home you must use VPN to have access.
Monday, September 23, 2013
First Set of Grades and Tracking Uploaded into Moodle
If you go to the class Moodle site, log in, then scroll down to the Grades area on the left you should be able to see what I uploaded. There are two categories, Excel Homework and Blog Posts. In the Excel Homework category there are two entries, for the the first two homeworks. If you submitted your key into the form you got a 10 for that assignment. If you did not, then it should be blank.
For the blog posts, since I'm not grading them individually, what I did was put an "x" in the comment field. There are three entries here. If you have 3 x's, it means you've done all the blogging.
I will take late submissions still if people want to get caught up. But tracking that is a bit hard for me so alert me to what you've done so I can make the adjustments in the grade book.
For the blog posts, since I'm not grading them individually, what I did was put an "x" in the comment field. There are three entries here. If you have 3 x's, it means you've done all the blogging.
I will take late submissions still if people want to get caught up. But tracking that is a bit hard for me so alert me to what you've done so I can make the adjustments in the grade book.
Friday, September 20, 2013
The homework due 9/25 is now available.
The homework is aimed at getting you familiar with the model of expected utility and how risk preference is embedded in the utility function. It offers a prelude to what we will be doing next.
The homework is due on Wednesday 9/25 at 11 PM.
The homework is due on Wednesday 9/25 at 11 PM.
Thursday, September 19, 2013
More on Transfer Pricing, Budgeting, and Incentives
The class session wasn't completely satisfactory today, especially if one your classmates, whose alias is Oliver Williamson, is right about not being able to tie the theory well to realistic scenarios. So I'd like to take the reverse tack in this post - start with a couple of quite realistic scenarios and from there go to how those are being managed and bring in the pricing issue at the end. The two scenarios I'd like to discuss are:
(1) energy pricing (mainly electricity) on campus, and
(2) the decline in campus revenue from the State of Illinois in it's budget and what the campus is doing to adjust to that reality.
* * * * *
The campus is an energy producer via Abbott Power Plant. It is also an energy consumer. Indeed consumption outstrips production so the campus is a net importer of energy. It purchases the remainder of its consumption from commercial providers, such as Ameren. This situation, then, is remarkably similar to the M&R textbook model of transfer pricing in the presence of an outside market.
Historically, the energy bill has been paid off the top at the campus level with unit (college and departmental) budget officers aware of the aggregate number only, but not knowing how much their unit contributed to the aggregate demand. One obvious reason for why this funding happened off the top was because in older buildings there were no meters to measure usage on a per building basis. The newer buildings do have the meters.
Now, while staying on the general topic of energy production and consumption, let us turn to how the campus might promote "green efforts" (meaning energy conservation) and what role pricing can play in doing so. You likely have some understanding of this based on your own experience, if you lived in campus housing in your first year, where the energy bill is bundled in with your overall housing payment, and then moved into an apartment, where the energy bill is separate from the rent. I have had many students tell me over the last few years that they practiced conservation more once they moved into an apartment. (They kept their apartments cooler in the winter and warmer in the summer than was the practice in the dorms. ) The conservation was a consequence of trying to economize on the energy bill.
In the same way, to get greater conservation on campus, it would make sense that each unit pay for its own energy consumption. This would provide better incentives for the unit to promote a green approach (think about how thermostats are set in offices and on whether the staff member's computer gets turned off when the person goes home at the end of the day) and for the units to monitor on this and otherwise encourage a green effort. The plan is to gradually move away from off the top funding toward unit pay as metering of buildings becomes more common.
It is my understanding, however, that the units wouldn't directly contract with outside providers. The campus would still be billed. Then it would pass those charges along to the units based on usage and an internal transfer price. According to M&R, the internal transfer price should be the same price what the commercial providers charge the university.
Real life is more complicated than textbook models, so here let me bring up some additional real world issues that are not in what M&R present. Actual energy pricing varies seasonally. Electricity is more expensive in the summer. Heating oil is more expensive in the winter. Both of these are explained by what is referred to as a peak load pricing issue. Demand varies seasonally, primarily because of weather variation. But there is also within season variation in the weather. Weather can be reasonably mild, if you are lucky, and energy consumption will be less as a consequence. Or weather can be more severe, which exacerbates energy consumption. The economic question is who should bear the risk from this variation, the units or the campus. There is a further issue that large consumers, like the U of I, can negotiate bulk discounts with the energy providers if the large consumers are willing to, in exchange, do extra conservation during the extreme weather incidents. In the summer, in particular, this is a way for the energy providers to prevent brownouts and blackouts.
In the old way of doing things, the campus self-insured on the issue of extreme weather causing high energy bills. It would hold back funding (meaning it wouldn't budget those funds for other purposes). These expenses fell into a budget category called "unavoidables." If that category got overspent, it meant the campus would have to take the money from elsewhere - fewer new hires, less discretionary money passed down to the units, and other ways to economize on operations to make up the shortfall. I am not sure how this will work when the energy charges are passed down to the units. We have already discussed in class how it is not good for an organization to have such self-insurance happen at the lower rungs of the hierarchy. It leads to an accumulation of balances that is not desirable. So what is wanted is some self-insurance done centrally but in general paying for energy costs in a distributed manner. It will be interesting to see how this gets worked out.
There is one other matter that complicates things. Some units, either because of a research need or a production need, must operate in a temperature controlled environment. (Think of animal research in Vet Med and Animal Science as examples of the research need and campus computer servers offering heavily used online services as an example of the production need.) These units will need to be exempt from green efforts undergone elsewhere on campus. The question then is how to manage the exemption, given the new transfer pricing regime. One possible way to do this is to enhance the off the top funding these units receive so they can better bear the energy costs they will incur.
* * * * *
This next example is more about managing the amount of personnel at the campus level than it is about transfer pricing. Here is some background first.
The campus has four main revenue sources:
(a) Money provided by the State of Illinois that it was originally collected as tax revenue. Among Deans and their budgeting officers, this is referred to as General Revenue Funds (GRF).
(b) Tuition dollars that students pay.
(c) Grants and contracts. Much of this is money from the National Science Foundation and the National Institute of Health to support the research activity on campus. There are funds from other government agencies such as The Department of Education, The National Endowment for the Humanities, etc. And there are funds from Foundations. The SCALE grant that I mentioned in class today came mainly from the Alfred P. Sloan Foundation.
(d) Gifts from donors.
Of these, two were impacted adversely by the financial crisis - (a) and (d). I believe gifts have made a comeback since, a consequence of the rebound in the stock market. And (c) is being adversely affected now by the sequester. Let's keep our fingers crossed that this is temporary. But the state remains in fiscal crisis and further, only state funds are used to pay employee benefits - mainly health care but also life insurance and other benefits. As health care costs have risen, there are fewer state provided funds left over for other purposes. The question is what to do to make up for the shortfall of this funding source.
How GRF funds have been allocated to various colleges can be explained one way in theory and perhaps a different way in practice. Some colleges, notably ACES via its extension service and Engineering too, have as part of their mission to provide services state wide. Some of the state funding can be explained to support this external part of the Campus mission (after all, we are the Land Grant College in Illinois). Another part of the GRF might have been used to reward those colleges that did particularly well in getting grants and contracts. The idea, in a nutshell, is to reward winners. This sort of research funding conveys prestige on the university. So the allocation of the GRF is aimed to create a positive feedback loop for those who do well in this arena. A third usage of GRF is as subsidy for units or activities that are absolutely necessary but that themselves wouldn't otherwise be money makers. This is how, for example, English can afford to teach the introductory rhetoric courses in comparatively small sections, where other departments can't do likewise for their Gen Ed offerings.
That is the theory. The reality on the ground is that units become accustomed to receiving their GRF monies and over time these funds became locked into the unit's budget, at least in the mind of the unit's executive officer. While this lock-in of funding was happening, the reason for the allocation initially becomes more remote as it fades into the past. To other units that are less dependent on GRF, the allocation begins to look less rational and appears more about the Provost playing favorites.
The campus has approached the GRF shortfall in two different ways - one was a quick downsizing via what was called the Voluntary Separation Incentive Program. In this program individual employees who opted in received a severance payment based on how much they were earning. The program succeeded in reducing the number of campus personnel. However, it didn't manage at all who would separate. That was left entirely to the employees to decide. The result is that some areas were more severely impacted by turnover than others.
There has also been a more deliberate attempt at reducing overhead via a program called Stewarding Excellence (VSIP was actually a component of Stewarding Excellence) which is still ongoing regarding implementing recommendations. You can think of Stewarding Excellence as making recommendations about consolidating smaller units on campus that seem to have a like purpose, in an attempt to reduce overhead, or to eliminate some units entirely, if they seem redundant or if their mission is no longer central to the mission of the campus. In case it is not obvious, members of such units don't want to merge with another unit, nor do they want to be downsized into oblivion. So none of this is easy to accomplish. But given the revenue situation, the organizational structure issues must adjust to the new realities.
* * * * *
In this last section, let me return to when off the top funding is good and when cost recovery is the preferred mode of funding. There are some issues that we didn't get to in class today on this point that might help to better understand these concepts.
Many people refer to the "Library Model" when talking about off the top funding. Library services are free to the end user and particularly the electronic services (eJournals, electronic databases, and eBooks) are really public goods. One person's consumption of these services in no way blocks the consumption of the service by others on campus. For public goods, it is better that they are free to the user than that here is a usage charge.
This itself is only a partial explanation of why the Library receives off the top funding. An alternative is the each unit would pay the Library to produce collections in its area. So, for example, the Economics Department might pay the Library to subscribe to economics eJournals and other electronic economics content. The issue here is that there are economists elsewhere on campus, in Business, ACES, Education, Engineering and elsewhere. Those people have interest in these journals. How does that interest get aggregated into the Library's purchasing decision? Similarly, some of the database content is multi-disciplinary in its offering. For both reasons, this is an argument for aggregating at the campus level (off the top funding) rather than having individual units pay.
So that is the good with off the top funding. The bad about it is that it doesn't adjust well at all to dynamic changes in usage patterns, either growth or shrinkage. Cost recovery is much better for that. If usage is growing and downstream units with users want to support that, the upstream provider will get more revenue devoted to the activity. Likewise, if usage is waning, the upstream provider will receive less revenue. So cost recovery is better at making the revenue spent on the service match the usage. But it is less good at providing access of public goods.
Those are the tradeoffs.
(1) energy pricing (mainly electricity) on campus, and
(2) the decline in campus revenue from the State of Illinois in it's budget and what the campus is doing to adjust to that reality.
* * * * *
The campus is an energy producer via Abbott Power Plant. It is also an energy consumer. Indeed consumption outstrips production so the campus is a net importer of energy. It purchases the remainder of its consumption from commercial providers, such as Ameren. This situation, then, is remarkably similar to the M&R textbook model of transfer pricing in the presence of an outside market.
Historically, the energy bill has been paid off the top at the campus level with unit (college and departmental) budget officers aware of the aggregate number only, but not knowing how much their unit contributed to the aggregate demand. One obvious reason for why this funding happened off the top was because in older buildings there were no meters to measure usage on a per building basis. The newer buildings do have the meters.
Now, while staying on the general topic of energy production and consumption, let us turn to how the campus might promote "green efforts" (meaning energy conservation) and what role pricing can play in doing so. You likely have some understanding of this based on your own experience, if you lived in campus housing in your first year, where the energy bill is bundled in with your overall housing payment, and then moved into an apartment, where the energy bill is separate from the rent. I have had many students tell me over the last few years that they practiced conservation more once they moved into an apartment. (They kept their apartments cooler in the winter and warmer in the summer than was the practice in the dorms. ) The conservation was a consequence of trying to economize on the energy bill.
In the same way, to get greater conservation on campus, it would make sense that each unit pay for its own energy consumption. This would provide better incentives for the unit to promote a green approach (think about how thermostats are set in offices and on whether the staff member's computer gets turned off when the person goes home at the end of the day) and for the units to monitor on this and otherwise encourage a green effort. The plan is to gradually move away from off the top funding toward unit pay as metering of buildings becomes more common.
It is my understanding, however, that the units wouldn't directly contract with outside providers. The campus would still be billed. Then it would pass those charges along to the units based on usage and an internal transfer price. According to M&R, the internal transfer price should be the same price what the commercial providers charge the university.
Real life is more complicated than textbook models, so here let me bring up some additional real world issues that are not in what M&R present. Actual energy pricing varies seasonally. Electricity is more expensive in the summer. Heating oil is more expensive in the winter. Both of these are explained by what is referred to as a peak load pricing issue. Demand varies seasonally, primarily because of weather variation. But there is also within season variation in the weather. Weather can be reasonably mild, if you are lucky, and energy consumption will be less as a consequence. Or weather can be more severe, which exacerbates energy consumption. The economic question is who should bear the risk from this variation, the units or the campus. There is a further issue that large consumers, like the U of I, can negotiate bulk discounts with the energy providers if the large consumers are willing to, in exchange, do extra conservation during the extreme weather incidents. In the summer, in particular, this is a way for the energy providers to prevent brownouts and blackouts.
In the old way of doing things, the campus self-insured on the issue of extreme weather causing high energy bills. It would hold back funding (meaning it wouldn't budget those funds for other purposes). These expenses fell into a budget category called "unavoidables." If that category got overspent, it meant the campus would have to take the money from elsewhere - fewer new hires, less discretionary money passed down to the units, and other ways to economize on operations to make up the shortfall. I am not sure how this will work when the energy charges are passed down to the units. We have already discussed in class how it is not good for an organization to have such self-insurance happen at the lower rungs of the hierarchy. It leads to an accumulation of balances that is not desirable. So what is wanted is some self-insurance done centrally but in general paying for energy costs in a distributed manner. It will be interesting to see how this gets worked out.
There is one other matter that complicates things. Some units, either because of a research need or a production need, must operate in a temperature controlled environment. (Think of animal research in Vet Med and Animal Science as examples of the research need and campus computer servers offering heavily used online services as an example of the production need.) These units will need to be exempt from green efforts undergone elsewhere on campus. The question then is how to manage the exemption, given the new transfer pricing regime. One possible way to do this is to enhance the off the top funding these units receive so they can better bear the energy costs they will incur.
* * * * *
This next example is more about managing the amount of personnel at the campus level than it is about transfer pricing. Here is some background first.
The campus has four main revenue sources:
(a) Money provided by the State of Illinois that it was originally collected as tax revenue. Among Deans and their budgeting officers, this is referred to as General Revenue Funds (GRF).
(b) Tuition dollars that students pay.
(c) Grants and contracts. Much of this is money from the National Science Foundation and the National Institute of Health to support the research activity on campus. There are funds from other government agencies such as The Department of Education, The National Endowment for the Humanities, etc. And there are funds from Foundations. The SCALE grant that I mentioned in class today came mainly from the Alfred P. Sloan Foundation.
(d) Gifts from donors.
Of these, two were impacted adversely by the financial crisis - (a) and (d). I believe gifts have made a comeback since, a consequence of the rebound in the stock market. And (c) is being adversely affected now by the sequester. Let's keep our fingers crossed that this is temporary. But the state remains in fiscal crisis and further, only state funds are used to pay employee benefits - mainly health care but also life insurance and other benefits. As health care costs have risen, there are fewer state provided funds left over for other purposes. The question is what to do to make up for the shortfall of this funding source.
How GRF funds have been allocated to various colleges can be explained one way in theory and perhaps a different way in practice. Some colleges, notably ACES via its extension service and Engineering too, have as part of their mission to provide services state wide. Some of the state funding can be explained to support this external part of the Campus mission (after all, we are the Land Grant College in Illinois). Another part of the GRF might have been used to reward those colleges that did particularly well in getting grants and contracts. The idea, in a nutshell, is to reward winners. This sort of research funding conveys prestige on the university. So the allocation of the GRF is aimed to create a positive feedback loop for those who do well in this arena. A third usage of GRF is as subsidy for units or activities that are absolutely necessary but that themselves wouldn't otherwise be money makers. This is how, for example, English can afford to teach the introductory rhetoric courses in comparatively small sections, where other departments can't do likewise for their Gen Ed offerings.
That is the theory. The reality on the ground is that units become accustomed to receiving their GRF monies and over time these funds became locked into the unit's budget, at least in the mind of the unit's executive officer. While this lock-in of funding was happening, the reason for the allocation initially becomes more remote as it fades into the past. To other units that are less dependent on GRF, the allocation begins to look less rational and appears more about the Provost playing favorites.
The campus has approached the GRF shortfall in two different ways - one was a quick downsizing via what was called the Voluntary Separation Incentive Program. In this program individual employees who opted in received a severance payment based on how much they were earning. The program succeeded in reducing the number of campus personnel. However, it didn't manage at all who would separate. That was left entirely to the employees to decide. The result is that some areas were more severely impacted by turnover than others.
There has also been a more deliberate attempt at reducing overhead via a program called Stewarding Excellence (VSIP was actually a component of Stewarding Excellence) which is still ongoing regarding implementing recommendations. You can think of Stewarding Excellence as making recommendations about consolidating smaller units on campus that seem to have a like purpose, in an attempt to reduce overhead, or to eliminate some units entirely, if they seem redundant or if their mission is no longer central to the mission of the campus. In case it is not obvious, members of such units don't want to merge with another unit, nor do they want to be downsized into oblivion. So none of this is easy to accomplish. But given the revenue situation, the organizational structure issues must adjust to the new realities.
* * * * *
In this last section, let me return to when off the top funding is good and when cost recovery is the preferred mode of funding. There are some issues that we didn't get to in class today on this point that might help to better understand these concepts.
Many people refer to the "Library Model" when talking about off the top funding. Library services are free to the end user and particularly the electronic services (eJournals, electronic databases, and eBooks) are really public goods. One person's consumption of these services in no way blocks the consumption of the service by others on campus. For public goods, it is better that they are free to the user than that here is a usage charge.
This itself is only a partial explanation of why the Library receives off the top funding. An alternative is the each unit would pay the Library to produce collections in its area. So, for example, the Economics Department might pay the Library to subscribe to economics eJournals and other electronic economics content. The issue here is that there are economists elsewhere on campus, in Business, ACES, Education, Engineering and elsewhere. Those people have interest in these journals. How does that interest get aggregated into the Library's purchasing decision? Similarly, some of the database content is multi-disciplinary in its offering. For both reasons, this is an argument for aggregating at the campus level (off the top funding) rather than having individual units pay.
So that is the good with off the top funding. The bad about it is that it doesn't adjust well at all to dynamic changes in usage patterns, either growth or shrinkage. Cost recovery is much better for that. If usage is growing and downstream units with users want to support that, the upstream provider will get more revenue devoted to the activity. Likewise, if usage is waning, the upstream provider will receive less revenue. So cost recovery is better at making the revenue spent on the service match the usage. But it is less good at providing access of public goods.
Those are the tradeoffs.
Materials in Preparation of Class for Tuesday 9/24
We will be starting in on the economics of risk and uncertainty. These are background materials. There are a couple of videos to watch and a document to read. I hope the document is mostly familiar stuff. If it is not, please let me know. Please review these before class on Tuesday. I expect to do other things and hope this stuff is understood. There will be a follow up Excel homework on this to test your understanding.
Background document on math and philosophy of probability.
PDF File
Increasing Risk and Risk Aversion
Micro-lecture (screen capture video with my voice over).
Associated PowerPoint file.
Graphical Approach to Risk Aversion
Micro-lecture
Associated Excel file.
Background document on math and philosophy of probability.
PDF File
Increasing Risk and Risk Aversion
Micro-lecture (screen capture video with my voice over).
Associated PowerPoint file.
Graphical Approach to Risk Aversion
Micro-lecture
Associated Excel file.
Monday, September 16, 2013
OPML file for tracking student posts
If you import this file into a reader you can track the student posts in the class. Download the file first. Know where you put it. Then open a reader such as Feedreader.com or Feedspot.com. You have to open the Settings area to find the import control. Then simply navigate to the OPML file and click.
Sunday, September 15, 2013
Reactions to First Real Blog Posts
The bulk of the class did submt something interesting to read and react to. If you have still not made the post that was due on Friday, I will read and comment on any submission that comes in until early afternoon tomorrow. Also, a few people posted but on the prompt for next Friday. That's ok. Next time, just go back to the first prompt.
I promised an OPML file for the class, so you can track what the class is doing with blogging. I will deliver on the promise but probably not till tomorrow. I discovered that the reader I'm using makes OPML files but without content (meaning there is a bug in the software). So I need to recreate the student blogs in another reader. That will take a little time. I'll get it done, but probably not till tomorrow.
Let me get to the posts themselves. Reading these and commenting on them is the closest thing I get to what feels like teaching. Lecturing is not teaching. I get very little feedback of what is sinking in and what bounces off the surface when I lecture. For the pure joy of teaching, I would much prefer to have one-on-ones with each of you. Then when you provide your current understanding of the subject matter, I can react to that. The blogging is a reasonably good substitute.
These first posts illustrated how students in the class are still getting acquainted with the concepts and are not yet really understanding them. That's fine. You learn from your mistakes. In particular, on transaction costs, I assume it is a new term for each of you, most of the class is really not understanding what it means. We will discuss this more on Tuesday. Here let me try to clarify the meaning. There are also production costs. Transaction costs and production costs are distinct. Most of you when talking about transactions costs were counting production costs as well. And many of you noted that opportunity cost of your own time. Any economic activity that requires labor input will entail somebody putting in the time. That itself is not evidence of transaction costs.
Let me give a little question here by way of example to illustrate these ideas. If I give the class an exam there are in essence three separate activities, each which take my time. The test must be written ahead of time. The exam must be proctored while the exam is ongoing. And then the exams must be graded afterward. Which of these are production cost and which transaction cost?
The writing and the grading are the production costs. The proctoring is a transaction cost. If students were known to be honest ahead of time, the proctoring would be unnecessary. The proctoring aims to encourage honest behavior by the students but it does nothing regarding producing a graded exam. Likewise, in air travel what the pilots and flight attendants do are production costs. What the TSA does is a transaction cost. Monitoring isn't the only form of transaction cost. Coordinating is a big part of transaction costs. But not all activity that management does is coordination. Some of what management does is production cost in that it supplies a necessary input in production.
These distinctions are subtle and it takes some time to practice with them and get comfortable using them. One way to get at this is by asking if the person being managed were instead a robot, would the cost still need to be incurred. If the answer is yes it is more likely a production cost. If the answer is no it is more likely a transaction cost.
Much of the class wrote about RSOs or Greek Houses, which was to be expected. And there was some discussion of student members acting in an administrative capacity to run those organizations. But most of those who wrote this way didn't ask the core economic question. Is doing this something people want to do in itself or not? Remember the very first day of the semester when we talked about doing cleaning in the apartment and we asked what made people do their share? The same sort of question needed to be asked about the administrative work.
Then many of you wrote that things didn't go as well as might be expected. There are multiple possible explanations for this. One is that people in the positions of leadership, though earnest, didn't know how to do their jobs well. When this is the case it typically means they weren't well trained or didn't have enough prior experience to warrant having the position. Another possible reason is that leadership, while knowledgeable, didn't put in the requisite time to coordinate. Some of you wrote about wanting top down mandates, but more democratic approaches can work. However, they do require that those participating understand what their roles are. That too may require some training. Then, a third possibility is that the structure itself is flawed and even with a serious effort only mediocre outcomes would emerge, at best.
Let me turn from the economics to the writing. The big deal issue here is that you are describing a situation that you know and I don't know. There is then the issue as the writer as to how much information you need to provide to give me a reasonable picture of what is going on. Mostly the error was on not giving enough relevant information. This is not an easy thing to learn. It will take you some time to become proficient doing this. My questions are meant to prod you into taking the task seriously.
Finally, on some of your posts I told a personal anecdote. These were meant to show that I identified in some way with what you wrote about and experienced something similar. In addition, sometimes I did this to offer a different interpretation than what you gave in your post. In social science one can usually identify multiple possible explanations for why something happened. Hypothesis testing is about identifying the more likely explanation. But we don't always have enough data to test hypotheses. So, instead, we argue and entertain plausibility that way. It may be more art than science. But it is still very useful in trying to understand what is really going on.
I promised an OPML file for the class, so you can track what the class is doing with blogging. I will deliver on the promise but probably not till tomorrow. I discovered that the reader I'm using makes OPML files but without content (meaning there is a bug in the software). So I need to recreate the student blogs in another reader. That will take a little time. I'll get it done, but probably not till tomorrow.
Let me get to the posts themselves. Reading these and commenting on them is the closest thing I get to what feels like teaching. Lecturing is not teaching. I get very little feedback of what is sinking in and what bounces off the surface when I lecture. For the pure joy of teaching, I would much prefer to have one-on-ones with each of you. Then when you provide your current understanding of the subject matter, I can react to that. The blogging is a reasonably good substitute.
These first posts illustrated how students in the class are still getting acquainted with the concepts and are not yet really understanding them. That's fine. You learn from your mistakes. In particular, on transaction costs, I assume it is a new term for each of you, most of the class is really not understanding what it means. We will discuss this more on Tuesday. Here let me try to clarify the meaning. There are also production costs. Transaction costs and production costs are distinct. Most of you when talking about transactions costs were counting production costs as well. And many of you noted that opportunity cost of your own time. Any economic activity that requires labor input will entail somebody putting in the time. That itself is not evidence of transaction costs.
Let me give a little question here by way of example to illustrate these ideas. If I give the class an exam there are in essence three separate activities, each which take my time. The test must be written ahead of time. The exam must be proctored while the exam is ongoing. And then the exams must be graded afterward. Which of these are production cost and which transaction cost?
The writing and the grading are the production costs. The proctoring is a transaction cost. If students were known to be honest ahead of time, the proctoring would be unnecessary. The proctoring aims to encourage honest behavior by the students but it does nothing regarding producing a graded exam. Likewise, in air travel what the pilots and flight attendants do are production costs. What the TSA does is a transaction cost. Monitoring isn't the only form of transaction cost. Coordinating is a big part of transaction costs. But not all activity that management does is coordination. Some of what management does is production cost in that it supplies a necessary input in production.
These distinctions are subtle and it takes some time to practice with them and get comfortable using them. One way to get at this is by asking if the person being managed were instead a robot, would the cost still need to be incurred. If the answer is yes it is more likely a production cost. If the answer is no it is more likely a transaction cost.
Much of the class wrote about RSOs or Greek Houses, which was to be expected. And there was some discussion of student members acting in an administrative capacity to run those organizations. But most of those who wrote this way didn't ask the core economic question. Is doing this something people want to do in itself or not? Remember the very first day of the semester when we talked about doing cleaning in the apartment and we asked what made people do their share? The same sort of question needed to be asked about the administrative work.
Then many of you wrote that things didn't go as well as might be expected. There are multiple possible explanations for this. One is that people in the positions of leadership, though earnest, didn't know how to do their jobs well. When this is the case it typically means they weren't well trained or didn't have enough prior experience to warrant having the position. Another possible reason is that leadership, while knowledgeable, didn't put in the requisite time to coordinate. Some of you wrote about wanting top down mandates, but more democratic approaches can work. However, they do require that those participating understand what their roles are. That too may require some training. Then, a third possibility is that the structure itself is flawed and even with a serious effort only mediocre outcomes would emerge, at best.
Let me turn from the economics to the writing. The big deal issue here is that you are describing a situation that you know and I don't know. There is then the issue as the writer as to how much information you need to provide to give me a reasonable picture of what is going on. Mostly the error was on not giving enough relevant information. This is not an easy thing to learn. It will take you some time to become proficient doing this. My questions are meant to prod you into taking the task seriously.
Finally, on some of your posts I told a personal anecdote. These were meant to show that I identified in some way with what you wrote about and experienced something similar. In addition, sometimes I did this to offer a different interpretation than what you gave in your post. In social science one can usually identify multiple possible explanations for why something happened. Hypothesis testing is about identifying the more likely explanation. But we don't always have enough data to test hypotheses. So, instead, we argue and entertain plausibility that way. It may be more art than science. But it is still very useful in trying to understand what is really going on.
Wednesday, September 11, 2013
Coordination Failures and Coordination Mechanisms - Due Wednesday 9/18
Some folks have already started the next Excel assignment. If you have any questions on it, please post them as comments to this post. And if you haven't yet watched the Excel Tutorial video, I strongly suggest that you watch it and view it full screen
Sunday, September 8, 2013
Each of your blog posts should now have a comment from me
I went through the blog posts that I'm aware of and commented on each one. In my records there were 18 of these. There are currently 28 students in the class. If you are in that group of 10 who has not yet made a blog and a post about your alias, it is not too late to do so and I encourage you to get that done. Email me with the url for the blog when you're done.
There were 20 students who completed the first Excel homework. As with the the first blog post, it is not too late to do this for credit. Please try to get it done asap.
I'm going to wait a bit before posting anything in the Moodle grade book. If you've done the required work so far, know that I'm tracking it. I'd like everyone else to catch up first.
There will be another blog post due this coming Friday and you can start in now on the Excel homework that is due a week from Wednesday. Better to stay ahead of the curve, if you can.
There were 20 students who completed the first Excel homework. As with the the first blog post, it is not too late to do this for credit. Please try to get it done asap.
I'm going to wait a bit before posting anything in the Moodle grade book. If you've done the required work so far, know that I'm tracking it. I'd like everyone else to catch up first.
There will be another blog post due this coming Friday and you can start in now on the Excel homework that is due a week from Wednesday. Better to stay ahead of the curve, if you can.
Friday, September 6, 2013
Sidebar Items - Moving to Plan B
I had been using a Blogger gadget called Blog List for both the Upcoming Items and the Student Posts. Unfortunately, the Blog List didn't seem to be updating. So we need to move to Plan B for both of these.
I've already replaced the Upcoming Items with the Class Calendar in Agenda view. You need to click on the item to get the description and then you have to scroll to the bottom of the item and get more details to have the links work. So it is not quite as good as what was there before - if that updated. But at least what's there now will stay current. Further, from here on out I will just update the calendar so this will be easier for me to manage.
For the student posts, the simplest thing is probably just to provide a link to each of your blogs. When everyone has gotten theirs set up, I will switch to this. (If you want to track posts you can use a reader as I suggested in class yesterday.) In the meantime maybe the technology gods will smile on this and the thing will start to update.
Tuesday, September 3, 2013
Is there such a thing as a timely death?
Coase has passed away. This obituary should resonate with the class, given our discussion today.
Murphy's Laws of Instruction
"Corollary: Every instructor assumes that you have nothing else to do except study for that instructor's course."
Very true. From here.
Very true. From here.
Pride in community as an alternative to opportunism
Economics is known as the dismal science for a reason. Scarcity is not fun. We prefer abundance. And sometimes pursuit of economic self-interest, rational as that may sound, can be too myopic and as seen by others might appear petty or even larcenous. So I thought I'd extend the discussion we had in class today by giving some real examples of the opposite sort of behavior and what happened as a consequence. Partly, this makes sense if people follow the herd, whether that is rational or not, so that if you can redirect the herd you might achieve very good consequence. Another part is that most people feel a need for reciprocation when they receive an unanticipated kindness. If true, then by doing a few acts of unanticipated kindness for different people you might then begin to move the herd in a different direction.
Before getting to my examples, which will seem mundane by comparison, you might want to have a look at a couple of Economics in the News pieces from last summer. This one is about a company called Airbnb.com which is in the business of offering an alternative to hotels, which can be somewhat impersonal and unwelcoming for the frequent traveler, and instead staying in somebody else's home or apartment, which if things go right would be preferred by both the traveler and the person letting the space. But things might go wrong, what then? In class I mentioned (I think on the very first day) that relationship capital can address this sort of Prisoner's Dilemma problem. If you read the piece you might ask whether Airbnb's real business is establishing relationship capital where it previously didn't exist (in contrast the Hotel chains have a reputation to live up to and in that sense are known entities and the travelers fork over their credit card when they register to cover charges they might incur). And, if that is the case, the fascinating thing is how it is done.
The other piece is even more apropos. It is a profile about a professor at the Wharton School of Business, Adam Grant. It's called Is Giving the Secret to Getting Ahead? It was the featured piece in the Sunday Magazine so is a little long. But it is a fun read. One thing seems for sure. It would be much more enjoyable to live in a world where everyone followed Grant's lead than in an alternative world where everyone behaved opportunistically. But that is true in an ordinary Prisoner's Dilemma as well. So if you do read the piece, you should keep in your head the question how this sustains.
Now let me turn to my simple examples. This first one is almost too trivial. I view change, which I keep in my pockets that not infrequently have holes in them, as not quite money. I never know where it is or how much of it I have. In contrast, the bills I have in my wallet are there and not all scattered about, so for me that is real money. That's some background. A few months ago I was at the post office waiting in line, when a woman at the counter was engaged in a transaction where she didn't seem to have enough money and she started to get quite distressed. She wanted to finish her business then and there and not have to go home and then come back. She was short all of $.36 or something like that. It wasn't very much at all. I was kind of surprised that the people behind the counter didn't help her out. She was a little elderly. But they didn't. So I gave her a couple of quarters. No big deal at all for me. Really. But she was so grateful after. She wanted to give me something in return. I waved her off. I had no agenda at the time other than to relieve her distress and send my own stuff.
This next one is when I was a teen growing up in NYC, in a residential neighborhood in Queens, with individual houses. The house I lived in faced 56th Avenue and dividing the road headed east from the road headed west was a "mall" a weedy area about the same width as one of those road, surrounded by a curb. This was before pooper-scooper laws went into effect and one main use of the mall was as a place to walk your dog. People from several block away would have their dogs on a leash and while they walked in the street so as not to step in it, the dogs would do their business. You may have learned about the Tragedy of the Commons in other classes, but it has a different sort of description. Yet this too was a tragedy and it made the neighborhood more shabby than it otherwise should have been.
A couple of the neighbors, young working guys, started to take care of the mall. This beyond taking care of the lawns for their own houses. Nobody asked them to do this. They did it on their own, definitely a pride thing. The mowed the mall, raked out the dog poop, and planted some small trees. Now I live across the street from a park and the City of Champaign pays people to do this sort of work there. These guys did similarly, but without pay, just because they wanted the place to look better. And people reciprocated, either by walking their dogs elsewhere or by scooping the poop. I was too young at the time to realize I should have helped them. And my dad was too old (and a diabetic) so also didn't help that way. But we sure did appreciate their effort.
Before getting to my examples, which will seem mundane by comparison, you might want to have a look at a couple of Economics in the News pieces from last summer. This one is about a company called Airbnb.com which is in the business of offering an alternative to hotels, which can be somewhat impersonal and unwelcoming for the frequent traveler, and instead staying in somebody else's home or apartment, which if things go right would be preferred by both the traveler and the person letting the space. But things might go wrong, what then? In class I mentioned (I think on the very first day) that relationship capital can address this sort of Prisoner's Dilemma problem. If you read the piece you might ask whether Airbnb's real business is establishing relationship capital where it previously didn't exist (in contrast the Hotel chains have a reputation to live up to and in that sense are known entities and the travelers fork over their credit card when they register to cover charges they might incur). And, if that is the case, the fascinating thing is how it is done.
The other piece is even more apropos. It is a profile about a professor at the Wharton School of Business, Adam Grant. It's called Is Giving the Secret to Getting Ahead? It was the featured piece in the Sunday Magazine so is a little long. But it is a fun read. One thing seems for sure. It would be much more enjoyable to live in a world where everyone followed Grant's lead than in an alternative world where everyone behaved opportunistically. But that is true in an ordinary Prisoner's Dilemma as well. So if you do read the piece, you should keep in your head the question how this sustains.
Now let me turn to my simple examples. This first one is almost too trivial. I view change, which I keep in my pockets that not infrequently have holes in them, as not quite money. I never know where it is or how much of it I have. In contrast, the bills I have in my wallet are there and not all scattered about, so for me that is real money. That's some background. A few months ago I was at the post office waiting in line, when a woman at the counter was engaged in a transaction where she didn't seem to have enough money and she started to get quite distressed. She wanted to finish her business then and there and not have to go home and then come back. She was short all of $.36 or something like that. It wasn't very much at all. I was kind of surprised that the people behind the counter didn't help her out. She was a little elderly. But they didn't. So I gave her a couple of quarters. No big deal at all for me. Really. But she was so grateful after. She wanted to give me something in return. I waved her off. I had no agenda at the time other than to relieve her distress and send my own stuff.
This next one is when I was a teen growing up in NYC, in a residential neighborhood in Queens, with individual houses. The house I lived in faced 56th Avenue and dividing the road headed east from the road headed west was a "mall" a weedy area about the same width as one of those road, surrounded by a curb. This was before pooper-scooper laws went into effect and one main use of the mall was as a place to walk your dog. People from several block away would have their dogs on a leash and while they walked in the street so as not to step in it, the dogs would do their business. You may have learned about the Tragedy of the Commons in other classes, but it has a different sort of description. Yet this too was a tragedy and it made the neighborhood more shabby than it otherwise should have been.
A couple of the neighbors, young working guys, started to take care of the mall. This beyond taking care of the lawns for their own houses. Nobody asked them to do this. They did it on their own, definitely a pride thing. The mowed the mall, raked out the dog poop, and planted some small trees. Now I live across the street from a park and the City of Champaign pays people to do this sort of work there. These guys did similarly, but without pay, just because they wanted the place to look better. And people reciprocated, either by walking their dogs elsewhere or by scooping the poop. I was too young at the time to realize I should have helped them. And my dad was too old (and a diabetic) so also didn't help that way. But we sure did appreciate their effort.
Monday, September 2, 2013
The First Excel Homework Is Due This Wednesday (September 4) at 11 PM
This homework should be review of efficiency concepts you learned in intermediate microeconomics. It is there as a refresher and to make sure that you are functionally able to do the homework.
There are three worksheets. You must do each of them. The first worksheet asks for you to input your NetID and then select your alias. If you get all the responses correct (which is the expectation) then on the third worksheet you will get a code to use to get credit for the homework. There is a link given. Follow the instructions.
If you are having trouble with any of the questions, you can make a query as a comment to this post. If you've already created your Blogger identity using your alias, you can ask your question that way after you've logged in. Otherwise, anonymous comments are accepted.
There are three worksheets. You must do each of them. The first worksheet asks for you to input your NetID and then select your alias. If you get all the responses correct (which is the expectation) then on the third worksheet you will get a code to use to get credit for the homework. There is a link given. Follow the instructions.
If you are having trouble with any of the questions, you can make a query as a comment to this post. If you've already created your Blogger identity using your alias, you can ask your question that way after you've logged in. Otherwise, anonymous comments are accepted.
What we will do in class tomorrow instead
I plan to review and extend our discussion from last week - mainly about the examples from M&R chapter 1 and additional ones I supply. Then we'll briefly talk about transaction costs, which is the beginning of new stuff. That is in the middle of M&R chapter 2. I will got back to talk about efficiency on Thursday.
I do not plan to go the full time. For those of you who do not watch the tutorial videos ahead of time, you can use the extra time for that purpose.
I do not plan to go the full time. For those of you who do not watch the tutorial videos ahead of time, you can use the extra time for that purpose.
No need to bring your laptop tomorrow!
I went to the classroom a few minutes ago. I still could not get my laptop to connect to the projector. So instead of doing a live demo I've made video tutorials - there is one for how use Excel to do the homework. Even if you are familiar with Excel, I recommend that you watch this tutorial, because the setup is class specific.
There are also two videos for setting up your blog in Blogger. In the first video it assumes you don't yet have a gmail account, so it goes over how to make that (go to mail.google.com and make a new account). If you already have a non-university gmail account you can use that and skip the first step. The next step is to use your Blogger Profile instead of using Google Plus. This way you can set your screen name to your alias, which is what I'd like you to do. It is a way to preserve your privacy while blogging out in the open.
There are also two videos for setting up your blog in Blogger. In the first video it assumes you don't yet have a gmail account, so it goes over how to make that (go to mail.google.com and make a new account). If you already have a non-university gmail account you can use that and skip the first step. The next step is to use your Blogger Profile instead of using Google Plus. This way you can set your screen name to your alias, which is what I'd like you to do. It is a way to preserve your privacy while blogging out in the open.
Sunday, September 1, 2013
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