core inflation

It seems to me that one potential problem with using "inflation excluding food and energy" as a measure of core inflation is that food and energy both have particularly low income elasticities of demand. The core inflation measured may be more pro-cyclical than overall inflation. Perhaps it's not a big enough effect to be a concern; it should also be noted that any effect that is primarily linear with the overall level of inflation, as this may be, would simply suggest a different calibration by economic agents for the use of the information, and wouldn't actually change the informational content of the data.

rent-seeking cycles

I wonder to what extent loss-aversion causes wars and other conflict. In times of growth, there seems to be relatively less in the way of attempts at rent-seeking, but when things grow scarce — not in any uniform absolute sense, but compared to where they were before — the rent-seeking picks up. For any given agent, it seems to me that whether rent-seeking is optimal is likely to be independent of whether the resources available from productive activity are growing or shrinking, at least supposing the rents to be sought are likely to be growing or shrinking at the same time.

It could be heterogeneity; perhaps the people whose fortunes are suffering the most are the ones doing the rent-seeking. Given that and incomplete information, perhaps people take the growth or recession of their own fortunes over periods of time as informative of their relative position; if everyone's fortunes become dimmer, but everyone only knows that their own fortunes are dimmer, they try to plunder their neighbors' fortunes, not knowing that they, too, have been shrinking.

The Nature of the Firm

I've been reading my Coase lately.

Agency costs are sometimes raised as a limit to the size of a firm; as a firm gets larger, agency costs get worse, and for small firms agency costs are tolerated to realize the benefits of lower transaction costs of other natures. I wonder, though, to what extent agency costs could be a reason for a firm, rather than a net cost.

Suppose I'm producing a finished product from an intermediate created by someone else. I'm bad at determining the quality of the intermediate good; if the finished product is shoddy, I don't know whether I screwed up or whether he did. Someone else, though, is pretty good at motivating the other guy, in one way or another, to produce higher quality intermediates. By joining his firm, I'm outsourcing to him the job of handling the agency costs I face in the vertically separated market structure.

Insurance companies that deal with companies often actively help the companies reduce their risks; rather than pay $50,000 to the insurance company for insurance, the firm pays $40,000 and gives the insurance company the authority to inspect the premises, upgrade the sprinklers, and improve the security system. It doesn't make sense for each company to separately involve itself in becoming expert in loss mitigation of this nature, so they outsource it to a firm that is happens to have a great deal of financial interest in loss mitigation both for this company and for others like it. Any company will have to deal with agency costs, though, and it similarly makes sense for people whose expertise lies elsewhere to allow a firm to deal with their agency costs for them.

institutions and folk theorems

I think a lot of institutions are responses to the folk theorem; a repeated game admits a large number of possible equilibria, for various senses of the term "equilibrium", and institutions are a way to coordinate on one of them.

teaching

If I'm ever teaching introductory economics, I think I might get all of my exams from the internet. I'll print excerpts of blog posts, news articles, and the like, and ask the student to itemize the flaws in the economic reasoning.

10-Q

The SEC should outlaw quarterly filings, on the grounds that they drive too much of a short-term mindset.

TTL cash

There has been some recent move toward creating a bankruptcy chapter better constructed to handle financial institutions; Luigi Zingales was talking about such things in October of 2008 (search for "Bebchuk" — note that his proposal makes legacy counterparties senior to bondholders, who are nominally pari passu), but there now seems to finally be an interest in this in Congress. One idea I've been batting around in my head for perhaps a year now, at least as a tool to help with these things, is the creation of a new kind of credit that the government could issue, which I call TTL cash; I know I've shared it with my brother, but I don't think I've mentioned it here.

The idea is that when a highly-connected company (AIG) gets into trouble, the government lets it go bankrupt, but any creditor who is thereby impaired is given $1 in TTL cash for every dollar the creditor lost to the bankruptcy. The TTL cash is essentially nontransferable (and thus useless) except in bankruptcy, where, in the idea's simplest form, the government redeems it for actual money. The government has not bailed out AIG, or its creditors, but it has bailed out the creditors of AIG's creditors, insofar as they are impaired by AIG's failure; the chain reaction that regulators are eager to avoid is arrested.

The slightly more general case would allow different levels of TTL cash, each of which is redeemed for the next one down; the government could decide instead to bail out the creditors of the creditors of the creditors by issuing level 2 TTL cash, redeemable in bankruptcy for level 1 TTL cash, redeemable in bankruptcy for the real thing. "TTL" stands for "time-to-live", a term used in IP, the internet protocol; each time a router forwards an IP packet to another router it decrements a TTL counter, so that if some routing error causes the packet to wander off in the wrong direction or go around in circles, it eventually gets dropped rather than continuing to be passed around.

This is, of course, still a bailout, but on a practical level the moral hazard issues are much reduced from a standard bailout; everyone is responsible for assessing the credit quality of their debtors, at least to a significant extent. One of the major practical strengths of a decentralized economy vis-à-vis a centralized one is that it recognizes the information-handling limits of agents and asks them largely to make decisions based only on local information. If you lend entities money, or even just enter into contracts with them, you have to know something about their financial condition and their other dealings that affect it; if you have to know everything about their business, including everything about their potential creditors; capping this two levels down under certain circumstances seems to me a reasonable moral hazard price to pay for the benefits of a distributed system.