Freedom, Justice, and Economics

Though transit passengers have to go through immigration and customs at the Halifax Airport, all the rest more than made up:

• Going back through security, there was no line. I repeat this astonishing fact: I walked directly up to the x-ray machine.
• After going through security, I went through US immigration. How brilliant to run the checks before departure!
• Wi-fi is proudly supplied free by the airport.
• At the Spirit of the Maritimes pub they happily brewed my decaf coffee fresh. I write this from their high counter facing the runways and pines beyond, with mottled cotton-ball clouds drifting across half the sky, and bright blue in the other half, down to the distant mother-of-pearl horizon.

The New York Times is running a series of articles on environmental degradation in China.  The newest feature (perhaps others too?) is available in Mandarin translation, as both text and audio.

London’s restaurant Archipelago might even have some surprises for foodies from Guangzhou. Surrounded by art and trinkets from around the world (which the menu mentions are for sale), I sat on a tropical throne during dinner there on October 3.

Service was slow but meticulous. Our waiter suggested an inexpensive Malbec that was both excellent and excellent with our food. Without his help, pairing a wine would have been a challenge…

For appetizers we had peacock and crocodile. The former was ground and shaped into a soft, moist meatball/fritter. The latter, the highlight of the evening, was wrapped in a vine leaf and grilled. With a texture between a scallop and the most succulent chicken, the crocodile slipped apart in my mouth.

Our mains of zebra and kangaroo were quite good, but tasted like (sliced) turkey and (cubed) beef. Both were perfectly paired with their vegetables. For dessert we settled for the “chocolate fix,” since they were out of the chocolate-covered scorpions.

In the UK, prices for broadband contracts are generally quoted in terms of an introductory rate and a post-introductory rate. For example, the twelve-month version of BT’s “Option 1″ costs 12.99 for the first three months and 17.99 thereafter. This structure is notable because it pertains to FIXED TERM CONTRACTS. Most of the economics literature on behavioral contract theory, stemming from the brilliant paper of Stefano Dellavigna and Ulrike Malmendier, has focussed on cases where consumers have post-adoption choices about service use. For example, credit card adopters can decide how much to borrow; cell phone adopters can decide how many minutes to talk; gym members can decided how often to work out. In the UK broadband case, subsequent prices are unconditional on use: They are merely the way the firms partition the annual contract price into installments.

BT is not unusual in quoting its contracts in these terms. AOL UK, Tiscali, and Virgin are included in its company (though not TalkTalk and Orange). The quotes generally have a few features:

• The introductory period tends to be 3 months for 12 month contracts and 6 months for 18 month contracts.
• The introductory monthly rate is 20-50% less than the post-introductory monthly rate.
• Firms generally require that early termination results in responsibility for payment of all the contract’s remaining installments.

As I see it, there are two main reasons firms may offer contracts structured this way. First, consumers may be more liquidity constrained at the time of adoption than later during the contract term. However, it seems implausible that differences of a few pounds from month to month, within a given year, would make a difference for the typical consumer.

The second reason strikes me as the correct one: firms want to confuse consumers about the true price of the offered contracts. Firms often advertise the introductory rate, and many of the price-comparison websites report this rate despite its irrelevance.

Two questions come to mind. First, given the way (boundedly rational) consumers make decisions about contracts, how should monopolists and competitive firms design their installments? For example, why is it that we don’t see offers like “FIRST MONTH FREE! Next three months only 4.99! Last 69 weeks 39.21.”  Maybe then termination rates would rise, and enough consumers would get irritated to decrease brand karma.  Also, too much complexity could cause consumers to throw up their hands and turn to a competitor.  (Some consumers might also notice a rip-off when confronted with one.)

The second question I find interesting is how regulators should act in these markets.  For example, should there be limits on how long a non-renegotiable contract consumers can sign to?  Should firms be required to quote their contract offers’ total annual costs?  (Certainly, extended agreements shouldn’t be prohibited entirely, because firms face fixed costs of signing up new customers, which must be recouped over time.)

My feeling on the second question is that regulators should require the most prominent advertised price to be the total price for the duration of the contract.  If the firm wants to offer financing (an installment loan), I suppose it’s fine to let them arrange that offer however they wish– though I would probably end up advising everyone to pay up-front if possible, since installment credit is usually very expensive.  Alternatively, (and almost equivalently) regulators could prohibit contracts that ex ante specify varying payments for materially identical services, forcing the broadband providers to advertise only the weighted averages of their streams of monthly prices.

Renters would seem to be a natural constituency of the Labour Party in the UK. Why doesn’t Labour relax rules that limit construction, rules that primarily benefit owners? More or less, I conjecture the answer is that a huge share of rental housing is government-owned “social housing.” Despite substantial recent privatization of social housing, 18% percent of the UK population continues to live in these units, while only 12% of the population lives in private rental housing. I tend to support policies that promote universal access to affordable housing, but supporting growth of the private rental sector should be part of this strategy.  Right now Labour captures renters’ votes by bolstering social housing instead.

Kiva.org is a fascinating organization:  it allows individual members of the public to provide credit to microenterprises of their choice around the world.  (Disclosure:  My wife and I received a gift of a $200 Kiva credit, which we lent out.)  The candidate microenterprises are listed by local microfinance institutions (MFI’s) that are Kiva partners.  The local MFI’s actually receive the funds, disburse the loan, and collect repayments.  Kiva loans earn no interest for the lender but do entail risk:  the individuals who chose to lend to a given microentrepreneur don’t receive their money back if that microentrepreneur defaults.

Kiva has many characteristics of a charity.  Resources are transferred to needy individuals in developing countries.  Lenders are motivated by the prospect of using their resources to do good.  Lenders accept the possibility of defaults, and accept that they will earn no interest on their loans.

In addition, Kiva has characteristics of a financial intermediary, like a bank.  Most banks, however, pool the deposits they receive and then make loans out of that common pool of funds.  In fact, this is what is typically meant by the term “financial intermediation”:  by undertaking this pooling, an institution mediates between borrowers and lenders, and shares default risks among all of the people who lend to it.

Standard economic models would imply that Kiva is inefficient:  lenders via Kiva could, it seems, have their risks pooled.  Since Kiva does not do this, the lenders must be compensated for the risk they continue to bear, driving down the amount they’re willing to lend and driving up the interest rate they require as compensation.

Despite these indications of inefficiency, I see two reasons the current arrangement might not be completely baffling.  First, when I was in Gujarat in April, I met a Kiva representative who said that Indian financial sector regulations– which substantially circumscribe opportunities for foreign entities to operate in India– effectively kept Kiva out, too.  I suspect that a variety of other regulations also act as constraints.  Presumably under the current structure Kiva is not considered a US depository institution, for example, avoiding tomes of requirements.

Second, it could be the case that individual lenders enjoy the connection to individual borrowers; and/or that individual borrowers are more intrinsically motivated to work hard at their enterprises, in order to repay, when they know individual lenders have placed faith in them. This reason would be more fundamental to the Kiva approach; to the extent financial sector rules liberalize (or, perhaps, differ across country borders) and allow intermediated microlending from Western creditors to LDC borrowers, we may learn whether the intrinsic aspects are operative.

All in all, I’m not concerned about Kiva’s strategy:  It’s much more important to give LDC borrowers access to world capital markets in any form than it is to protect developed-country lenders from risk.  That said, it would make more sense if mainstream Western financial institutions could provide debt or equity to Kiva, diversifying lenders’ portfolios.

All trip long, the famous Swiss meticulousness did not disappoint.

• Most chalets were of the traditional style, with shutters, overhanging roofs, and a prominent gable or two; flower gardens exploded autumn’s pretense with color.
• I could set my watch by the trains, the buses, and the local shops’ opening hours.
• By homes, small cow sheds, and stopping points along major trails, wood was invariably stacked, cross-hatched, covered with corrugated iron, awaiting its chance to warm a hearth.
• Bergweg signposts, white-red-white, stood proudly along mountain trails, ready to remain visible in feet of snow to come.
• As the train from Gstaad descends into Zweisimmen, it makes a hairpin turn in a tunnel.  My wife thinks the engineers were drinking one day and challenged each other to pull off the u-ee.  If so, such gambling is common:  from Gstaad to Montreux we were treated to additional 180’s on buried tracks.

All this impressiveness noted, toward the end of our hike from Lenk to Lauenen, we passed a small old man in a stocking cap fighting to saw a 2×4 by hand.  The place was no idyll for the poor, and a century had somehow passed him by.