What I left out today

I rehearsed (in my head) for this class session quite a bit but as you could see when I had the senior moment before I could come up with "case studies," my mind wasn't fully there today.  So here are some things I had intended to say but didn't.

Developing a sense of taste - what is a good answer?

I only came up with using the Gift Exchange approach to organize the first half of today's session after flailing for two days with other approaches - each of which ended in me scolding you for not taking more responsibility for your own learning.  The problem is, scolding doesn't work.  It ends up more as venting than as effective communication.

Needing to have this sense of taste for a good answer is part of the take away I'd like you to have.  If you develop that feel for a good answer, then the next take away is to develop the habit of letting the sense of taste drive you in your learning and not stopping your inquiry prematurely, before you have an answer that pleases you.

Attendance

Since attendance was not required, those who were regulars gave a gift by being there.  That to me is less interesting than understanding your behavior about attending classes more broadly.  Are there some of you who regularly attend some classes but not others?  Or is your attendance pattern pretty similar across the classes you take?  I have no sense of this now and would welcome feedback on the matter.

Other possible means for gift exchange in class

One thing I think obvious for a course like ours is to tie course matter to things that are happening out in the real world that are related to what we are studying.  This is one reason why I have the Econ in the News and Misc. Tags.  If there were gift exchange on this, some of you might have commented on these posts.  My sense is that there was very little such commenting and I suspect most of these posts were ignored by the majority of the class.

In particular, given my emphasis on Gift Exchange, you might enjoy this piece, which links to a NY Times Magazine piece about Adam Grant, a Professor at Wharton.  The Times magazine article is called: Is Giving the Secret to Getting Ahead?  Sounds pretty relevant to me.

Math via discovery rather than lecture

I don't know if this would interest anyone, but I had thought to offer, for anyone who is interested, to release the Excel workbooks without having the sheets locked - after the due date, so for those interested they can see how the graphs are generated, how the questions get evaluated, etc.  In other words, a complete look under the hood.  Those who want to delve deeper into the models might learn more this way than through traditional means.  This is another one where I'd appreciate feedback, if you have any to give.

Total time spent on the class

I don't know whether this is common knowledge with you or not, but the seat-time model (how many hours per week a class meets) has an implicit model on out of class time - two hours out of class for every hour in class, that most faculty subscribe to.  Thus, overall, our class demands 9 hours per week.  That should be interpreted as an average over the semester, not an exact number each week.  Nonetheless, the research I'm aware on this nationally, evidence from the National Survey of Student Engagement, says that at most universities the ratio is more like one hour out of class for every in class hour, or even lower.  In other words, students have different expectations on the effort front than what faculty have.  Consequently, many faculty, and I'm in this category, think that most students don't put in enough time in their studies.   The system may have evolved in an unhealthy way, to accommodate the student expectation.   It makes students happy near term but produces less learning long term.  

Learning outside the course setting with friends or at work.  

We did a tiny bit of benchmarking with other courses today, but we didn't do any whatsoever about learning informally with your friends via experiences (going to hear live music, for example) or discussion that happens with some regularity (say about those experiences or about national politics or on any other topic that interests you).  Likewise we didn't discuss today any learning that may arise at a part time job you have, though that has been the subject of one or two blog posts this semester.

Because I had a lot of this informal learning as an undergrad, particularly in my junior and senior years at Cornell, I'd be quite happy regarding the total time issue in the previous bullet, if class time was less than the faculty norm because learning outside the course setting was happening with substantial frequency.

Having fun can be quite educational.  Alternatively it can be pure time dissipation with little to no learning happening (think of playing hearts or some other card game to the wee hours of the morning).  So what is of interest is the total picture, including all the learning activities and then consider our course within that.  This would speak as to whether requirements should be raised, lowered, or left where they are.

Thank you

It has been an interesting semester for me.   Unlike last year, I have enough energy this time to write a post like this after the class session.  I appreciate your indulgence in letting me discuss these extra matters.

Reputations: Personal and Organizational

Before getting into the topic of the day -

Excel Homework on Shapiro-Stiglitz Efficiency Wage Model is due Wednesday evening.
One caveat on shirking - don't take it too literally.  It makes the most sense for physical labor where the work is painful or for repetitive work that is "mind numbing".  It makes less sense as a defining characteristic of "knowledge work." Professionals typically don't shirk.  The moral hazard issue there is not that professionals do no work at all, but rather that they want to define the work that they do, while their manager has other ideas.  The "alignment problem" is where moral hazard in knowledge work is likely to manifest.  Shirking per se is not the big deal issue.  We have modeled it as if it is.

The last blog post is due Friday.   In addition to the prompt, I think it useful to consider that post from something we discussed the first week of the semester - it is your human capital.  Has the course given you some new ideas about how to extend your human capital and better maintain the human capital you already have.  In particular on the blogging, do you think you are now capable of writing your own prompt and in offering comments/critique the way I've done during the semester.  Could you apply that to other courses you will take in the future and/or to paid work you will do after you graduate?

Personal Reputations - An Example: Professor Arvan when he was a student

Found with artifacts from cleaning out my parents' condo.
The Generation Gap

An alternative view from several years earlier.
Page from High School Yearbook about It's Academic

email response from Mr. Conrad.

From: Steve Conrad [mailto:srconrad@aol.com]
Sent: Monday, January 05, 2009 12:43 PM
To: Arvan, Lanny
Subject: Hi from Manhasset
Sent: Monday, January 05, 2009 12:43 PM

Hi Lanny, 

Of curse (that WAS a typo, but I think I shall leave it there) I remember that game of TWIXT. My nature is to play games to win, so your win was not with my assistance. You just plain old beat me. You actually caught my business Web site (Math Leagues and Math League Press) just as we are preparing to sell it. We began offering math contests to schools around the country in 1975. Were it not for that, I do not know how I would have sent my sons to the schools they attended (Harvard and Princeton). They are identical twins, as you must recall, and they are both mathematicians, it so happens. Brian, a math professor at Stanford, and Keith, who teaches math at the University of Connecticut, were surrounded by math as they were growing up, so . . . :) 

You must remember James Kraft, right? One of my sons was giving a math talk to a group of mathematicians once and James Kraft walked up to him after the talk and said "I was in your father's algebra class when he was called to leave because you were born."
Brings tears of joy to my eyes. I too recall that very well. 

I had lunch with Robin Block over 4 years ago. After retirement, I returned to playing bridge. I had dropped out of college and was going to be a professional card player when I decided to return and lead a normal life. Anyway, after retirement, I returned to bridge, and my wife and I had lunch with Robin when I was playing in the North American Bridge Ch ampionships when they were held in New York City in the summer of 2004. These days, I am tournament chairman for Long Island, and I spend almost half a year each year teaching bridge on cruise ships (I teach only when the ship is at sea -- when it is in port, I go ashore with the passengers). 

So I see you are in academia. What was your academic field? College administration? :) 

Steve

Conclusion:  Since personal reputations are held by others about that person, that reputation might very well vary by the holder, who brings his or her own memories into it.


Organizational Reputations - An Example: The U of I

Professor Arvan's first encounter with the U of I when he was in High School

New Yorker's view about everything west of the Hudson.

1.  What movie is this from and what does it represent?

From Wikipedia

HAL became operational on 12 January 1997 at the HAL Laboratories in Urbana, Illinois

2.  From a Saturday course on Fortran.
Illiac

3.  A few years later when at Cornell - a friend of a housemate was going to the U of I for grad school to study?    

......... computer science.

Conclusion:  The U of I has a reputation for being good with computers.  This was the reputation Professor Arvan had of the place before he came to the midwest.

Some years later after arriving on campus

Morrow Plots
Undergrad Library built underground
Department of Ag Econ
Morrill Acts

Conclusion:  The U of I has a reputation for being the Land Grant College for the State of Illinois.

Other views of the U of I

What is the movie?

Scene from later in the movie:

Now a view from the world of sports.

Question:  Which if any of the above are part of the U of I's brand?


More generally - What part of the organization is responsible for the organization's brand?  the organization's reputation?

Does it matter for our course that the Web site is not in the illinois.edu domain and lacks I-mark?

Branding for cereal aimed at kids.

What about cashing in on the reputation?

Example - student backpacks.   (Good brands?  Brands to avoid?)

Different example - student laptops?  (Same questions.)

The economics of reputation and cashing in

Experience goods versus inspection goods.  (Nelson)  There is no seller moral hazard with inspection goods.  There is with experience goods.  What encourages seller to produce good quality?

Klein and Leffler - Quality Assuring Price

The economics of reputation from an Industrial Organization perspective

Branding can:
1.  Encourage customers to be loyal.
2.  "Steal" customers from a rival.
3.  Bring new customers into the market.

Competition between firms in an industry is muted  if most of the customers are loyal and there are not a lot of new customers to compete over.  Conversely competition between firms is fierce if there is a lot of business stealing and there are many new customers entering the market.

There can be a tension between having too much competition in an industry and maintaining a quality assuring price.

Student Blog Posts on Organizational Reputation

For the most part the posts focused on a few sectors of industry.

1.  Sporting Goods (Nike, Addidas)
2.  Financial Services - Big Banks (Chase), Local Banks, Credit Card Companies (Discover),  Investment Services (Merrill Lynch).
3.  Technology Companies - Facebook, Google, Apple  - from perspective as consumer, also as potential employer
4.  Misc - Amazon as virtual Walmart, A Conglomerate for Auto Parts.

Let's first ask whether the reputation that was described is shared by other holders of the reputation.  Or do they see things differently?  How do you know?

Next consider these from the IO perspective, then the moral hazard perspective.

Then let's ask whether merger or takeover of a company impacts its brand and its reputations.

Cashing it in a little closer to home

For those who were there today I appreciate your commitment and effort.  You may not know this unless you have an older sibling who also went to the U of I, but we used to have classes scheduled during the week of Thanksgiving - through and including Wednesday of that week.  Of course, attendance would drop.  If you were teaching on Mon - Wed - Fri, as we used to do things, attendance on Monday would be lower than normal and attendance on Wednesday would be quite low indeed.  So they changed the Academic Calendar to give the full week off.  Today's attendance gives some evidence that there is an "endgame problem" even now, an example of what happens in repeated Prisoner's Dilemma with a known last period.  All I can add is that I'm glad our class doesn't meet on Friday.

Now that we have the model of repeated Prisoner's Dilemma to describe both what the cooperative solution looks like as well as what the solution looks like when everyone cheats, I thought you might be interested in considering college education from that perspective.

The following quote is taken from the piece cited below.  It is about something called The Disengagement Compact.  It is not uplifting to read about.  But ask yourself whether it is descriptive of some (perhaps many) of the courses you've taken.

What We’re Learning About Student Engagement from NSSE: Benchmarks for Effective Educational Practices. By: Kuh, George D.. Change , March/April 2003, Vol. 35 Issue 2, p24-32, 9p;

And this brings us to the unseemly bargain, what I call the "disengagement
compact": "I'll leave you alone if you leave me alone." That is, I won't make
you work too hard (read a lot, write a lot) so that I won't have to grade as
many papers or explain why you are not performing well. The existence of this
bargain is suggested by the fact that at a relatively low level of effort, many
students get decent grades--B's and sometimes better. There seems to be a
breakdown of shared responsibility for learning--on the part of faculty members
who allow students to get by with far less than maximal effort, and on the part
of students who are not taking full advantage of the resources institutions
provide.

I will add to this that in my observation many students seem to feel they've been tasked to memorize the instructor's lectures and to more or less confirm that expectation many instructors write exams that reward such memorization.  So this is how the Disengagement Compact may play out - a feigning of learning with little of substance actually happening.  To the extent it is widespread, it suggests massive cashing it in.

I don't want to end on a downer right before the holiday, so let me try to tie learning in a different way to being successful on the job.  The meta skill that all good students should acquire is the ability to satisfy their own curiosity to a substantial degree.  Different students might come up with alternative ways to do this.  The more extroverted might do it by networking with people and feel comfortable going to the right source who can then steer them to the information and answers the student is looking for.  The more introverted might do it via their own self-initiated investigation. Both approaches have merit and probably people need to learn how to do it both ways.

In class on Tuesday, we talked about an intern or a new employee taking the initiative and going beyond the work that was assigned.  I brought up that there is an issue about how to identify appropriate work - work that the worker has the competence to do well and work that the company will value when it has been completed.  So there is a puzzle in the identification and its exactly that sort of puzzle that should make the intern curios.  The meta skill described in the previous paragraph fits this situation to a tee.  It is not something that is acquired overnight.  There should be a lot of practice with it.  College is a good time for that.

Have a wonderful holiday and I'll see you back in class on Tuesday December 3rd.

Something cutsie and fun

It occurred to me after class that I didn't spend time on how one might create a bonding experience for others.  Managers sometimes need to to this for their staff, so it is an important thing to consider and think through.

This is one example I was involved in.  It is a seven minute video done in summer 2007 for the Educause Learning Technology Leadership Program, which that year was held in Madison Wisconsin.

Here is a little setup of what is in the video.  Heather Stewart of NYU and I were leading a session (there were 50 attendees from campuses around the country) on "presenting data."  I had not been involved the previous year with the LTL program, but Heather was and did a similar session then.  It didn't go well so she wanted to try something new. We discussed what that might be over several months.  Finally in one call we each shared our experiences of presenting in front of the Provost and how frustrating that was.  So we hit on an idea of a video to show such a presentation - one full of mistakes.  The ideas was to get the audience to enjoy the video for itself and then after to deconstruct it, find the errors, and have the audience offer up better ways to go about things.

In the video, Heather plays the learning technologist who will be making the presentation.  She is very good and "emotes" well.  I play her boss - the Campus CIO.  I'm something of a jerk in this movie and kind of throw her under the bus rather than prepare her properly for the presentation.

There are two others in the video.  The Provost is played by Perry Hanson, who was then the CIO at Brandeis (he has since retired).  He calls himself James Dean in the movie.  He ad-libbed that.  The other is Kathy Christoph who plays the Provost's budget officer (CFO).  Kathy was the head of Academic Technology at UW-Madison at the time and hosted the program.  (She too is retired now).

The conference started on a Monday afternoon and there was a banquet that evening.  We shot the video after the banquet to use in a session on Tuesday - so there is a just-in-time aspect to it and it is certainly a low budget thing.  Heather and I let Kathy know about it a week or two ahead of time because we needed Kathy to provide logistics support to make it work.  We only told Perry about it, however, at lunch on Monday just before the Institute started.  He was delighted to help and went with the flow.

There is a little bit of hiss in the video but otherwise it plays reasonably well on my PC using Windows Media Player.  I just tried out the link and it works that way.  If you right click on the link and launch the application requested it should play.

mms://winstreamer.doit.wisc.edu/ltde/provost512K_Stream.wmv

This is the link to the Mac version.  I don't know if it is live or not, but you can give it a try. 

rtsp://qtstreamer.doit.wisc.edu/ltde/provost512K_Stream.mov

The audience really liked the video (perhaps because it is so campy) and the session went really well.  Indeed, even though Heather ended her participation in the LTL program after that year, they continued to use the video for the next two years, where Malcom Brown and I lead the session.  Malcolm was fine doing that even though he didn't appear in the video.  It worked pretty well in those later sessions too.

One last comment - I know nothing about video production.  But it was my idea to draw the clock on the white board and make that part of the movie.  

Enjoy.

Sorry about the technology snafus today

Below is the graph from the Excel embedded in the PowerPoint.  It has the IC constraint explicit.  It is  the dashed upward sloping curve in black that is to the left of the main diagonal.  To satisfy the constraint you have to be on that curve or to the left of it.

Note that the IC constraint goes right through the cross point of the two indifference curves.   That means you don't really need all three curves to determine the optimal contract that induces high effort.  You only need the high effort indifference curve and one of the other two curves to determine the solution.

Add caption

Review of Tuesday's class session

It is unusual for me to do this so here is a brief explanation why.  The content of Tuesday's class is fair game for the essay part of the next midterm.  Some of it, both the triangle principal-agent and the stuff about procurement, you won't find in either textbook.  So for those who missed you need to get some exposure to that stuff.

I am doing this from recall of our class discussion.  That may be imperfect.  If you read this and were in class yesterday and you find something important is omitted below, please make a comment to this post that includes those ideas.  Also note that the order of things as I present them may not completely jive with the order in class yesterday.  Such are the pitfalls in doing this entirely from memory.

* * * * *

The Triangle Principal-Agent Problem

I took this by borrowing from the economics of regulation, where there is something called the capture theory.   This theory was posed by Chicago School economists as a different critique of regulation.  It said that regulation can be ineffective, even if it is desirable, because the regulator can become captured by the industry it is supposed to regulate.  As an example, I suggested that perhaps Congress has been captured by Wall Street.

The example was meant to illustrate that capture happens mainly by means of bribes.  In the case of Congress this would be via substantial campaign contribution or other perqs given by industry to members of Congress.  We also discussed the "revolving door" problem where regulators get offered plush jobs by the industry after they step down from government,  though we also noted that in some cases such hiring is efficient because the person has expertise that is otherwise scarce.

We then qualified the circumstances where the triangle problem arises.  These cases don't fit all the criteria needed to generate the triangle problem.

(1)  There is an employee who has a boss and the boss has a boss, so the employee is indirectly under the boss's boss and may sometimes take orders from the person two rungs above.  In this case it is possible that the orders from on high conflict with the orders from directly above.  The example we gave is where a TA may say some things that contradict what the instructor has said.  Who is the student to follow?  This is not a triangle problem because it can be resolved by realignment happening between the instructor and the TA.

(2)  There can be triangles but in non-work situations.  Love triangles make for good fiction.  Triangles within a family where the parents disagree about what the child should do are a more relevant example.  The triangle is real enough but we wouldn't consider this a situation with a principal and an agent.

(3) An employee tends to a customer's needs, which is just what the employer wants the employee to be doing.  There is no conflict here so no triangle problem.

The triangle emerges when the employee tends to the customer's needs in a way that goes beyond what the employer wants.  In this case we might say the employee is captured by the customer.  Whether capture happens or not, the employee is tugged in different directions, one suggested by the employer, the other suggested by the customer.  I said this feeling of being tugged in different directions is the reality in many work situations, even if the setup is not exactly as it is here.  The reason this is worth discussing is because it is so typical in many lines of work.

We then discussed how capture might happen in this case since it typically won't happen via bribes. We gave three different possibilities:

(a) the employee becomes empathetic for the customer's plight and provides help for the customer as it is the decent thing to do, even if it is not the profit maximizing thing to do.

(b) the employee gets bullied by the customer and rather than cause a to-do acquiesces to the customer's demand because that is the path of least resistance.

(c) the employee gets enjoyment (think of it as a consumption benefit) from serving the client.  So doing this sort of work is for the experience itself.  It is capture when the employer doesn't see how the benefit from that experience can be internalized for the organization.

Procurement

I gave a little setup where the RFP for a major piece of software, perhaps costing several million dollars and still kind of new to the marketplace, had just concluded.  The winning bidder had been determined.  This company was not the market leader and was chosen in large part because it was thought the company would be more attentive to the customer than the market leader would.

I said that one of the big issues was to determine where the preferences of the buyer and seller were aligned and where they were in conflict.  The procurement process would encourage the aligned part to work well and for the non-aligned part there needed to be other mitigation by the buyer to make things work okay.

We started off with the question of whether you (thinking as the buyer) want a long term contract or a short term contract, noting that you are risk averse and are trying to use the process as a way to reduce risk.

One student responded that you want a short term contract because if the product proves a lemon then you can go with another seller after that.  This is certainly true in a retail setting, but it is not the right way to think about a major procurement.  Once you buy from a company there is substantial lock-in, meaning the costs at the back end, getting staff trained on the software, and having the thing up and running are quite large, so you don't want to incur that again.  Further, even if there are problems with the software, users adjust to it.  That is costly for them.  They don't want to have to go through the adjustment process again. So the procurement is a commitment to that particular product, at least for a while.  The question is then are there other things that can be done to reduce risk given that you are committed to the product.

A long term contract, even one that allows for some price increases in the maintenance portion (this allows the buyer to get upgrades in the software) and the service portion (this allows the buyer to get help when there are problems) offers the benefit that out year expenditure on the software can be predicted.  Knowing what you will spend up front is a big way to reduce risk.

We then discussed whether you want to get bargain basement prices or if you're willing to pay more.  I argued that what you want to avoid, if you can, is the company going out of business or it getting taken over by the market leader.  Either of those outcomes will likely mean that your software will reach end of life and those dreaded switching costs will have to be incurred.  At bargain basement prices the company is not making money, so going bankrupt is a possibility.  I didn't say this in class, but at too high a price, the company starts to look like a cash cow and that encourages a takeover possibility.  So what you want is some middle ground.

I then made a brief departure and talked about a management practice called "No Surprises" which means if you have bad news get it out when you learn about it; don't wait till the last moment when it will get out on its own.  The reason for this is that users will have time to adjust to the news.  Users will not be happy at first and as the messenger you might bear the brunt of their ire.  But they will get over it.  Getting the bad news out early is a way to maintain trust.

In Higher Ed and in good government, you might expect No Surprises to be the norm.  (The bad example set by the cover up after the Watergate break in giving all the justification that is needed.)   In the business world, perhaps not.  We talked about the case where the vendor (the winner of the RFP) has software that is buggy, perhaps in a way that the client won't discover for some time yet.  The vendor wants to use the client as a referral for potential customers who are considering buying the product.  If it is known that the software is buggy, that might curtail such sales.  So the vendor has some incentive to hold back that information, even if the client would benefit having it for the client's planning.

We discussed what mitigation a client might take to deal with this concealment of information.  Somebody suggested talking with other vendors.  That may have some benefit, but is likely not to tell you what is really going on with the software.  The competitors won't have detailed knowledge of those issues.  We then discussed the possibilities of forming a buyer consortium for the purpose of sharing information about use experience.  I didn't say this in class, but if the use experience suggests a common complaint, then the group as a whole can act in concert and bring the complaint together.  There is more power with the group than with each buyer acting individually.  If the vendor is to put significant resources into resolving the problem, it is more likely to happen this way.

We concluded this part by discussing that the product will evolve over time and determining what the buyer's preferences are in regard to that.  We said that the buyer wants to influence product development in a way where the buyer benefits most.  That means that the when the buyer prioritizes feature changes it wants the vendor to seriously consider those preferences.  We said that while not all changes can necessarily be done in one product development cycle, the vendor actually wants the buyer (and like minded other buyers) to participate in the product development so the product evolution is in accord with what buyers want to see.  This helps to make the clientele loyal and enhance customer satisfaction.  So it is win-win for the seller to involve the buyer deeply into product development.

B&D Chapters 7 and 13 - how to really motivate employees to produce at their utmost

I started this part out with a priming exercise.  I asked students about activities they enjoyed.  I reminded the class that earlier in the semester somebody said they liked to cook.  Many students concurred.  I also said that one student had mentioned enjoying going to avant-garde films at the Art Theater.  A few other students indicated a similar preference.

Then students suggested other activities they enjoyed.  A partial list includes tennis, working out, reading, and driving cars fast (at a raceway).

I then asked whether these activities commanded their full concentration.  There was some agreement that reading a good book and watching an avant-garde film can be completely absorbing.

Because I knew that one of the students was a pilot, I asked whether piloting an airplane was completely absorbing.  He responded that it was like driving a car.  I then I said that driving is completely absorbing when you take driver's ed, because you are still learning how to control the car and that takes concentration.  When you have mastered that, mostly driving becomes an autonomous process, meaning that your mind can be elsewhere and the driving takes care of itself.  You do have to monitor more closely when the roads are slick or when there has been an accident that you need to navigate around.

I asked: for these enjoyable activities would students just do them on their own or did they need some encouragement to do them?   One student mentioned that for working out sometimes it is hard to initiate.  Afterwards he is happy to have done that, but even with knowing that ahead of time, sometimes he wouldn't go to work out.

I responded that much of this is about habit formation.  If you have a routine to do things then you will initiate with them because you have developed the habit to do so.  If you don't yet have the habit formed and must choose to do the activity or not, sometimes initiation is difficult.

At this point I specifically mentioned immersion into the activity.  Somebody then responded that video games are an activity that produces total immersion.  We discussed video games for a bit after that.

Then I said we were ready to discuss Bolman and Deal.  I wrote three words on the board: motivation, intrinsic, and extrinsic.  Intrinsic motivation comes from inside the person.  Bolman and Deal argue that an employee is much more productive when the employee has intrinsic motivation for doing the work.  Extrinsic motivation comes from outside the person.  Economic incentives are a kind of extrinsic motivation.  Put a different way, the issue is whether it is the work itself that is important to the person or if it is what the person earns that is of primary importance.  In some sense, this is like the essay question from the first midterm.  Bolman and Deal come down very much for the third alternative - provide intrinsic motivation for the the employee via giving the employee a kind of ownership in the organization. Chapters 7 and 13 can then be seen as how to's for getting that done.

I said there are really two different things to be done to encourage intrinsic motivation.  One is to get rid of distractions that impede being able to concentrate on the work.  The other is to empower the worker to take ownership.

I then gave a personal view - my own powers of concentration have diminished with age.  A big source of distraction are the aches and pains I have, primarily from arthritis.  I asked the class to come up with other types of distraction that exist at work.

One student said that social networking a la Facebook can be a distraction and there could be a rule at work that employees can't access such sites with their computers.  I responded that B&D would be against this approach.  Rules of this sort are treating employees like children.  B&D say that itself is a distraction and it is better to not have such rules and leave these things to the discretion of the employees.

Another student suggest that conflict in the workplace can be a distraction.  I agreed but tried to clarify this a bit.  Conflict of a personal nature really should be nipped in the bud and is to be avoided.  Conflict about how to get the work should be done is healthy and to be encouraged.  Such disagreements can lead to a better understanding of what the work is about and produce a new synthesis on how people should approach their jobs.

We then talked about pay.  I asked when pay can be a distraction.  Students agreed that happens when people feel they are underpaid.  In fact, B&D argue that pay should be generous to avoid this issue.  I argued that it is a little bit harder than this.  An employee who is part of a highly successful project that become visible to various competitors might very well find job offers coming in because these rival companies will want to see a similar sort of project happen at their own firm.  At this point what had been very generous pay no longer is.  So some reconsideration of what the employee earns must happen if the employee is not to go elsewhere. Until that concludes the employee may again feel underpaid.  The issue happens periodically.  In between pay is out of the employee's mind and the employee can concentrate on the work.  When pay becomes prominent you can think of that as a way for the employer to re-initiate the employee into the work.

We turned to how to empower employees.  B&D argue for democracy in the workplace.  This implies a flat org structure rather than hierarchy.  It also means that employees can on their own change how work gets done, with an eye to making the organization more productive.  A student pointed out that this can lead to coordination issues, when all employees are so empowered.  Indeed it can.  I responded that there are trade-offs here.  But B&D argue that most American companies err on the side of top-down approaches.  They may give lip service to allowing employees to contribute their ideas, but in practice don't encourage it.  Note the parallel in this B&D argument with them also saying (in Chapter 8) that Argyris and Schon's Model 1 proliferates among upper level executives.  A democratic workplace really demands Model 2 to be in place.

We then talked about executive pay and executive function in this context.  B&D argue that very high multiples of executive pay to pay for the lowest paid employee are inconsistent with a democratic approach to the workplace. They say that such multiples are as high as 400 for some American companies.  They recommend much lower multiples, say no more than 10.  They also recommend that the executives be treated just like every other employee - no executive dining room, required to make a new pot of coffee when they've had the last cup from the previous pot, fly coach instead of first class, etc.  In other words, in a democratic workplace executives don't take some of their compensation in the form of job perqs.

I gave a different sort of argument for keeping multiples reasonably low.  Employees want to know that the executives are in it for the long term and are not trying to take as much as they can out of the company in the near term with the intent to gut the company (lead it to bankruptcy or to a takeover of some sort).  If everyone is in it for the long haul then employees are willing to contribute their part, but otherwise not.

We concluded with a brief discussion of the symbolic approach and the ideas in chapter 13.   To get the class into the right mindset, I asked whether any of them had been in stage productions while in high school.  The aura that happens in such a production is what B&D have in mind in chapter 13.  I asked about whether students had some disagreement in the rehearsals leading up to the production.   Students responded there were some.  But they were able to get past these, because people were willing to surrender themselves to the larger goal - making the production a success.

We then talked a bit about friendships forming in such a setting.  And then that partly to blow off steam and partly because that is what you do with friends, joking around happens and other type of play becomes part and parcel of doing the work.  B&D stress certain rituals become a way to encourage making the group really tight.  They also say that the group will come up with a language just meant for members to describe the group activities.  In other words, it is not just work.  The experience needs to be amplified to make it like a club that people want to join.  Clubs have rites of passage.  They exist to make make club members closer to one another and to respect each other more.

That concludes the review.  If you have questions or comments about it please post them here.

Figuring It Out / Demonstrating Personal Commitment to the Class

I sensed a good deal of skepticism in class today about my message that students should embrace a "figure it out" approach.  A reasonable counter argument is might be as follows.  We're not planning to go to econ grad school.  Why should we learn these models from Milgrom and Roberts as extended by Arvan?  We'll never use those models after this class.

For the most part, that is true.  However, figuring it out is a meta skill that has many uses completely outside of economics.  Consider the following, from a blog post I wrote about a year ago (not related to this course).

Then I recalled one of my favorite lines from George Orwell: 

          To see what is in front of one's nose needs a constant struggle. 

This is the first sentence of the closing paragraph in an essay about people's intellectual schizophrenia, particularly in regard to political life.  By this Orwell is talking about maintaining truth in a proposition that we should know is false simply by reviewing other things we already know to be true. This essay is a very good read and serves as a rather frightening warning about all the stupidity the collective mind seemingly can lock onto.  If you juxtapose Orwell with Kahneman, you come to the inescapable conclusion that what you don't see may very well include things that you did see before but are now buried in memory.  It's not just the potentially knowable things that we've not yet experienced that matter.  It's also those things we know but don't immediately come to mind.  (Why don't those things come to mind?)

Now let me bring that down to issues that we've discussed in our class.  We've talked about trust relationships since day one.  For example on that first day we talked about why in your apartment you do housework you might not like to do much and why your roommates do likewise (and not shirk).  More recently we talked about Akerlof's Gift Exchange model and today we briefly discussed that Haidt piece on whether the kids would share the marbles.  

What we haven't yet discussed much at all, but there is no time like the present to get started thinking about it, is that not everyone is trustworthy.  Some people are predatory in that they take advantage of other people being too trusting.  Bernard Madoff is a very well know such predator.  It therefore becomes a crucial life skill to determine whom you should trust.  What the Orwell piece says is that while it isn't easy to do this, sometimes you can determine somebody is trying to scam you, by putting together what the person is saying now with other information you know.

On Madoff, in particular, read this particular Wikipedia entry on Harry Markopolos, who figured it out quite early on but wasn't listened to by the SEC.  This paragraph is telling on how he figured it out.

In his interview with Steve Kroft of 60 Minutes, Markopolos said the biggest warning he'd noticed during his initial 1999 analysis of Madoff was that he reported losing months only four percent of the time. To Markopolos' mind, no one could possibly be that good given the volatility of the markets. "As we know, markets go up and down, and his only went up," he said. Markopolos noted that during his tenure at Rampart, he traded with some of the biggest derivatives companies in the world, and none of them dealt with Madoff because they didn't think his numbers were real. He admitted that he had some financial incentive to eliminate Madoff, as the two competed against each other from 2000 to 2004. However, he said, he felt compelled to pursue it because "when someone's competing on your playing field, who's a dirty player, you want him tossed off the field." He assailed the SEC once again for ignoring his warnings, saying that the only reason Madoff was caught was because he ultimately collapsed under the weight of his own lies.

What Markopolos did requires the ability to make inference from the data.  (Freakonomics is a book that talks about that skill a lot - if you read it, recall how Levitt detected whether instructors were cheating on behalf of their students.)   It also requires substantial critical thinking/problem solving/deductive reasoning.  Our class should help you prepare for that second part.  I'm less sure that the statistics classes you take help with the first part, but that you must have some Sherlock Holmes type skill in assessing what is going on is crucial if you are to make headway on the issue of assessing whether somebody is trustworthy.  It is not something that a Gladwell "thin slice" analysis (from Blink) is good for.

Finally on this point, there is the following issue.  If figuring it out is hard to do, will you persist at it?    The life skill I discussed above comes from extensive practice.  I don't want to fool anyone by suggesting you'll get all the practice you need in our class.  You won't.  It's just a place to start.  The answer on the persistence front is that this is more about habit formation than it is about deliberate choice.  If you develop a routine for doing it, you will do it.  If it remains an option to exercise or not, you probably won't.  But a funny thing happens in the developing of the habit.  After a while it becomes enjoyable.  It's not just a compulsion to do the routine.  It's a reward to make sense of something that is puzzling, so having the challenge placed in front of you is something you start to welcome.

Not that this sort of delight will come from slugging through the algebra of the econ models we do, but sometimes it helps to know what sort of pot of gold you'll find if you follow the rainbow.

* * * * *

I said in class today that students would do okay grade-wise in class, even if their exam scores are middling, as long as they do the other out of class work that is required and do so in a serious and timely way.  This means the blog posts come in when they are due and they show you've thought about the prompt, the comments on other student posts happen with enough time so the student can respond before we discuss the posts in class, and the Excel homework is also completed before the deadline.

If you do those things I will know you are trying.  Then I will complete my part of the bargain.  The commenting on your teammates blog posts, in particular, is the sort of thing that is like Haidt's sharing of the marbles example.  It is something that improves the learning of your fellow students and in that way makes the class better for me too.

If you don't do those things, I will be much less empathetic to your situation.  This, too, is in accord with what Haidt reports in that piece.

And I can say, purely as a matter of logistics, that tracking late submissions is a pain.  I'd rather put my efforts elsewhere.

I forgot to talk about Moneyball and its implications

Moneyball - the book, not the movie - is an excellent vehicle for getting at some of the issues regarding inference that we were discussing in class today and particularly on the question of whether there are systematic biases and therefore on if you understand those biases you can find "deals" in the labor market if you know where to look.  There are some things in the book that are particular to baseball, but other things generalize.  We'll consider both of those here.

First a little backdrop.  The book is now about 10 years old.  Some of the story survives intact even now.  Other parts have been severely criticized.  The book is about the Oakland Athletics and, in particular, their General Manager, Billy Beane.  He had essentially an impossible problem to solve.  The A's were and still are a low budget team, meaning they keep a payroll for the players that is in the bottom 25% or so of major league franchises.  Sometimes this is explained by saying that Oakland is a small market team.  I don't completely buy that explanation because Oakland is quite near Silicon Valley and there is a huge urban sprawl in the vicinity.  Perhaps a different and more plausible explanation is that the San Francisco Giants got there first, so they have the primary loyalty of people in the area.  In any event, ownership has pursued a modest payroll strategy.  This dates back to when Charley Finley was the owner.  He had a deserved reputation as a cheapskate.  The A's were the best team in baseball in the early 1970s.  But then free agency came along and many of the good players on the A's went elsewhere.

There is no mystery on how to keep payroll down in baseball.  That is accomplished by playing mostly young players who are not yet eligible for free agency.  Perhaps you also have a handful of veteran players, to serve as glue for the team, but the core has to be comprised of younger players who aren't paid very much (by Major League standards).   The issue is: how can you possibly win when playing mainly younger players?  Identifying top talent is difficult with lots of inherent risk.  It is on this issue where Moneyball provided two ideas that now predominate in the game.

The first regards the "high school phenom" and whether to draft such a player.  (There is an annual draft in Major League Baseball just as there is a draft in Football and Basketball.)   Finding a player in high school, or even in college, who can do well in the Major Leagues is like finding a needle in a haystack.  Such players are rare.  If the players you look at are all players who have outlier great performance in high school, they will look exceptional when compared to their competition.  The first insight in Moneyball is that some players no longer look like such outliers when they step up a level or two in the competition.  College baseball is much more competitive than high school baseball.  If a player is an outlier in College, that is a far sharper indicator that the player will do well in the Major Leagues.  The book argued that it was foolhardy to draft high school players, because it was too risky.  It is now common practice to draft college players.

The second issue relates to the role of the "talent scout" who identifies prospects early, typically based on direct observation of performance, but not in high volume.  This contrasts with doing a statistical analysis on the player's college career and making predictions based on that.  The finding is that the scouts had a mental image of the type of player they want to see.  If the player fits the image the scout would become a booster for drafting that player.  If not, the scout would not advocate for the playe.  But the scout system itself wasn't that reliable.  One could reduce the error by considering the statistical evidence.  In baseball this is called Sabermetrics, a term associated with a guy named Bill James and with Billy Beane.

Beane's personal narrative makes the story more interesting.  As an up and coming player in the Mets organization he had what the scouts were looking for.  Beane came up at the same time as Lenny Dykstra, a squat little guy who didn't fit the mold.  But Beane fizzled out and Dykstra became a star (first for the Mets, later for the Phillies).  The scouts can't observe the inner workings of the player, the passion, the flame that drives the pursuit of excellence.  Dykstra had that in immense quantities.  Beane didn't have that at all.  So the narrative suggests that Beane understood implicitly from his experience as a player that the scouts can get it very wrong, which is what prompted him to take a different approach.

There are other parts of the book that are more controversial and not so well agreed upon.  Most of the book is about identifying good hitting and what it takes to produce a team that will score runs.   Some critics of the book correctly note that at the time the A's had some great pitching and that is what allowed them to stay competitive.  There was much less int he book about using Beane's type of approach to find good, young starting pitching.

Let's now bring this back to general issues of recruiting in the labor market and biases that likely exist.  I did mention the tall thing in class, but failed to point out that it is of interest primarily because height is readily identified.  You could include other appearance variables - good looking for example - and it almost surely would correlate with pay, but we would probably have issues on how you identify what counts for good looking.  Even at a beauty pageant, the judges don't always agree with one another.

Let me move to some other factors where there might be bias.  Late bloomers may be under valued by the market.  Somebody who did poorly in classes as a freshman and sophomore may have turned it around in the junior year.  That person very well could be on the rise, but the gpa might be still rather low and not show the full potential.  Conversely, an early bloomer may have already plateaued before graduation.  In this case the GPA might be reasonably high, but future growth in the individual is less likely.  Under some metrics, this person will look like a good bet when in fact that is not the case.

Another area where the market may get things wrong is for people where English is not their first language.  They may  prove to be exceptionally good and productive people, and there English skills might very well improve, but the market may penalize them, in a similar way to how it might punish shy people.  In effect, this would say more about the provincialism of the recruiter than about anything else.

If you understand where the various biases in the market are then you might pursue a counter strategy whereby you deliberately recruit under valued people, both to identify talent and to not pay an arm and a leg for them when you've found a good person.  A belief that markets are efficient would suggest that such an approach to recruitment can't last long.  That the Oakland A's remain highly competitive, a decade after Moneyball appeared, suggests that perhaps the market is not quite as efficient as its proponents would like to have you believe.

Some stuff for tomorrow's class session

On wage setting as an application of ideas from the insurance model

Canonical question:  Do wages attach to the job (pooling equilibrium) or the individual (separating equilibrium)?

One story for pooling equilibrium - Akerlof's model of partial gift exchange.

JSTOR: The Quarterly Journal of Economics, Vol. 97, No. 4 (Nov., 1982), pp. 543-569 via kwout

The link is to a fascinating book review on how these issues play out with regard to rewarding K-12 Teachers, contrasting the Diane Ravitch view with the Michelle Rhee view.  

Apropos student blog posts:

In all affairs it's a healthy thing now and then to hang a question mark on the things you have long taken for granted.

Bertrand Russell (1872 - 1970)

PowerPoint on IlliniBucks and Transfer Pricing

pptx file 

pdf file

Background Materials for Class Session

Roy Radner - paper on competitive equilibrium under uncertainty preceded The Market for Lemons by 3 years......but nobody understood it's implications.  It was too abstract to communicate the core ideas successfully to a wide audience.

George Akerlof - The Markets for Lemons was rejected first by the American Economic Review (AER) then by the Journal of Political Economy (JPE).  It was ultimately accepted in the Quarterly Journal of Economics (QJE).  It was a key reason why Akerlof won the Nobel Prize.  

Akerlof on Lemons.pdf via kwout

John Rawls - Justice as Fairness (Philosophy essay which gives some basis for arguing that the pooling equilibrium is socially preferred to the separating equilibrium.)  

* * * * * 

Background activities for building a people network

1.  Doing favors

2.  More generally, acting in the social interest.

3. Schmoozing or Soft Skills - intelligent, empathetic, and engaging conversation.  People need to argue, to express their point of view and get serious feedback on that.  The goal is not to win the argument.  The goal is to increase the understanding of the people in the conversation.   This, in turn, requires being prepared via outside reading, or other conversations, or experiences, or still something else so that one can add to the original expressed view and likewise so one can form an opinion on one's own.   

Q:  How does one learn how to be good in one-on-one conversation?  We're not talking about interviewing for a job here.  We're talking about informal conversation over your favorite beverage with a friend or colleague. 

A:  Need to be a generalist so can interact with a wide range of people.  This requires A LOT of practice.  College affords a fantastic opportunity to get started on this.  

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.

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.

JSTOR: Challenge, Vol. 22, No. 6 (JANUARY/FEBRUARY 1980), pp. 5-12 via kwout

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.

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.

For follow up to the live class session

If we don't cover everything that was planned or, more likely, if some ideas occur to me after class that were relevant for the session, I will post here.  We can decide later to follow up with them in a subsequent class session or if we'll do that online.