Durham's Bull

How Valuable is Insider Information?

In a word, very.

It still takes money to make money, but good information doesn't usually have issues attracting investors.

The Myth of the Superstar

Why has CEO compensation risen so much in recent years? 

Many would have us believe that success is simply a function of having the best talent.  Superstars create value, and if you don't have the superstars, you're screwed. 

"Sound companies should be much bigger than any individual," is the essence of a recent Financial Times article decrying the notion that superstar individuals are responsible for success.  At the margin, yes, but success is much more about processes than people. 

Successful firms are those which have the discipline to think in institutional ways about complex problems, rather than putting all of their eggs in the basket of having the most intellectual horsepower.  Aptitude matters, but discipline matters most. 

Loss Vegas

So it turns out that gambling is a luxury good.  Who knew?

Homes Selling at a Discount to Construction Costs

This is ridiculous.  Most of it is happening from the Rust Belt and Midwest, with a few outliers like Greensboro, NC. 

Economic explanation?  I don't have a good one.  My best shot is that construction firms are still above their average variable costs, and therefore it still makes sense to produce to try to recoup some of the fixed cost, even if they can't get all of it back. 

For example, a firm bought a piece of capital (crane) and are making monthly payments on it.  Unless someone is willing to buy the crane off of you, you need to do something with it to make your payments, even if it costs you in the short run.  Some cash flow is better than none.

All of this is assuming that you expect the construction business to rebound in the not too distant future.  Simply eyeballing it, these places do not look like the places where home prices saw the most growth (and more recently the largest decline), and so this might not be too bad of an assumption. 

Another interesting scatter plot would have the percentage of houses selling below construction costs by area vs. IQ/Per Capita Income/Education Levels in those areas.

B-School and Insider Trading

"We find that portfolio managers place larger bets on firms they are connected to through their network, and perform significantly better on these holdings relative to their non-connected holdings. A replicating portfolio of connected stocks outperforms a replicating portfolio of non-connected stocks by up to 8.4% per year."

An all too believable paper from Lauren Cohen, Andrea Frazzini, and Christopher Malloy from the latest NBER Digest.  There are some really striking figures here beyond the jump.

So maybe that strategic management class was worth it after all...  Perhaps it's a good time to go to business school.

Market Failure? Think Again

"The Ford Motor Company, which devoted itself for nearly 20 years to putting millions of Americans into big pickup trucks and sport-utility vehicles, is about to drastically alter its focus to building more small cars."

Markets at work.

Open-Source Science

Outsourcing innovation from the Times.

Anyone Need a Long, Paid Vacation in Brazil?

Engineers wanted. 

More interesting from an economist's perspective are the ways in which self-interested capitalism spurs other desirable outcomes like education.

"That reality is leading thousands of Brazilian companies into the education business. Some teach basic literacy and arithmetic to janitors and manual workers. Other more advanced courses help factory and production line workers better understand math, science and composition. And major companies are increasing the amount of on-the-job training they give to engineers and professionals."

In reality, this is nothing new.  In spite of all of the talk of "new social compacts," and "corporate social responsibility," otherwise "greedy" people have been quite socially progressive for a long time thanks to the rigors of the iron cage. 

GMU Economics Professor Peter T. Leeson has an entire research agenda focused on elucidating the inherently progressive nature of capitalism.  His recent work has focused on how the demands of piracy broke down existing social barriers like racism, sexism, etc. long before the Martin Luther King or Susan B. Anthony.  "An-arrgh-chy: The Law and Economics of Pirate
Organization," was the first non-mathematical article published in the Journal of Political Economy in over a decade.

How Sweet It Is...

...to be a union worker.

"...G.M., Ford and Chrysler are obligated to pay workers more than half of their regular take-home wages, plus health benefits, with state unemployment benefits picking up a portion of the rest."

In today's Times.

So why are The Big Three getting hit so hard?  The only thing that has kept them afloat for the past twenty years has been their trucks.  With gas prices as they are, truck sales are sinking like a stone.

One has to wonder why they wouldn't have done a better job of diversifying over the past couple of decades.  Surely they understood the risk of gas prices, right?

  The reality is that they did, and they have diversified.  American cars are much, much better than they were a decade ago.  Unfortunately for Chrysler, Ford and GM, perception always lags reality. 

That said, there are two sides to every story;  it's a good time to bargain hunt for those of you in the market for an American-made sedan.

Response to John Schwenkler on Busing

In response to my recent post on busing, John Schwenkler of the wonderful Upturned Earth writes the following:

"I'd be all for opening up intraregional busing to competition from the private sector. But just as road construction and maintenance can't be made completely private - though I do favor privatizing highways when possible - cheap busing is as much of a public necessity and legitimate government concern as roads, sidewalks, and public parks. In general, and as I said in the original post, I think that rail systems - because of the huge infrastructure investments they require - are a less good option, and are also a better case where involving private initiative to at least a considerable extent is a good idea. But busing is too essential, especially for the poor and elderly, for it to be free of public financing and government involvement."

to which I responded:

"I'm not so sure I buy it. I work for a very large private company that looked into getting into the private road business - building the road, as well as maintenance, forever - and it would have been very profitable. The reason we didn't get into it was existing interest group politics, not profitability. Every local municipality is beholden to their neighborhood civil engineering firm.

If access was really the issue, we could issue travel subsidies for the poorest of the poor, and EITC's for those who pay taxes. We're going to have to do it anyway once we start pricing carbon."

Schwenkler asks to for more background on the idea of privatized roads.  The following is my most recent repsonse:

They were mostly highways in the Midwest, but it wouldn't take too much of an imagination to envision the model applied to the city.  The fundamental source of profitability was that the company developed a composite that lasted much longer than conventional asphalt.  Consequently, while fixed costs would be large,  maintenance would be very cheap.

The idea would be to charge by the mile in the same way most toll roads do - with sensors that you can stick to the inside of the windshield.  Customers would have to purchase the sensor initially, and then would be billed at the end of the month for total usage. 

As far as equity is concerned, I can easily imagine "gas stamps" for the poor that would be a political goldmine - subsidies for those who drive most, and handouts to large companies,

This goes without mentioning one of the most important benefits of private roads: a reduction in the overall environmental impact due to traffic pricing. 

I should note that I sounded as if I objected to all public financing, and then clearly advocated subsidies.  I should have said that I object to the government picking winners.  I don't mind government financing, as long as it leaves room for choice.  Choice is the mechanism for generating competition, which actually lowers prices.   Charles Murray has a great example of this sort of pragmatism in his most recent work in public policy, In Our Hands.