Tiebout sorting and the rights of transients

My brother, an MIT graduate, ran for the city council of Cambridge, MA, among other things criticizing a comment by another candidate that the local college students shouldn't vote because they were only there for a short period of time. On some level this felt fallacious to me, insofar as the college students represent a particular set of interests; if there are 20,000 students at any given time, the 20,000 students who are there might be expected to represent the 20,000 students who will be there in 10 years, and the short time that any one student is there is (exactly) balanced by the large number of different students rotating through.

On the other hand, increasingly as government gets more local, I can think of a compelling case for restricting the franchise to people who have been there a while. In particular, I think we should do so where Tiebout sorting might be expected to operate well — where people have reasonable choice among and information about different communities in which to live — and where the near term is to be traded against the long term in a significant way. Where there are decisions to be made with long-term ramifications — should we raise taxes to build more classroom space? — allowing people to move in, vote for the short-term expedient, and move out before the long-term (relative) cost of that decision is to be borne results in all communities emphasizing the short-term expedients, while requiring that people live in a place for a few years before they vote — or perhaps buy property, or otherwise commit themselves to the community — allows for real sustainable differences in priority (some people want lower taxes and less spending on education, even including the long term ramifications, while others want more) where people with different preferences can sort themselves as Tiebout described.

MIT students have a certain amount of flexibility to live in Boston or Somerville, even if we don't consider choosing a different school to be a real choice; on the other hand, MIT institutionally has much less such flexibility, and the students, faculty, and so on will be affected by the city's policies. It would be good to have that represented somehow, but on many issues, I can see the value to excluding the transients from the decision.

my bizarre market ideas

Teacher evaluations in New York will finally be allowed to be based partially on results, which is a step in a positive direction, if not without any possible flaws. One fear I've heard expressed is that grading teachers based on student performance will make teachers all the more averse to taking on difficult students, and I certainly think that students' incoming performance should be taken into account as well. If it isn't, using exit test scores becomes more arbitrary than if it is, and if teachers can maneuver to select their students, that obviously creates an incentive problem. One of the ideas I've had floating in my head is not to directly take account of students' previous performance, and also to allow teachers (or schools) to select their students, but to do so by bidding on them. Each teacher/school sets, for each prospective student, a standard for success, above which the teacher/school is rewarded in some sense and below which the teacher/school is punished in some sense, and the student goes to the teacher/school willing to bid the highest level of performance for that student.

I could actually defend this against some of the first objections that occur to me, and I'm not averse to doing so, but one of the points of this particular blog is an emphasis on brainstorming, and I have other things I want to do with my time right now.

Election Reform in the UK

One of the chief planks in the platform of the Liberal Democrats in the UK is a meta-plank, taking a position not on an issue directly but on the political process by which people who decide such things are selected. The Liberal Democrats have a middling amount of support spread widely over the UK, and routinely win fewer than 10% of seats available, while their candidates in aggregate get closer to 25% of the votes cast. They would like to, in effect, be able to take some of the votes that one of their candidates gets and shift them to other of their candidates, so as to elect more members of parliament.

Their prefered method of doing so is one of my favorite methods as well, Single Transferable Vote. Imagine that you group 10 districts together into one district that elects 10 people, subject to the rule that each voter gets one vote. Any candidate that gets at least 9.1% of the vote is guaranteed to win one of the positions. On a first pass, candidates might split the vote; perhaps two very similar candidates each get about 5% of the vote. If one the one with fewer votes drops out, leaving those voters to go to their second choice, they're likely to push the other candidate to 10%. Similarly, if one candidate gets 20% of the vote, some of those voters might be swayed to move to another, similar candidate, such that these 20% can elect 2 members of parliament instead of just one. Single Transferable Vote is a way of doing much of the necessary strategy automatically.

Instant Runoff Voting, which the Liberal Democrats call Alternative Vote, is the same process for a single member district. In this case, though, it simplifies to a process that many people find easier to understand: voters turn in ballots listing their top choice, their second choice, and so on; if no candidate has a majority of first-choice ballots, the candidate receiving the fewest votes is dropped from the race, and votes for that candidate are redistributed to the highest remaining choice, until a single candidate gets a majority. The Liberal Democrats have offered, as their second choice, that (for example) 10 districts would choose 15 members of parliament, with 10 elected using IRV in each district, and another 5 awarded to parties that received fewer members of parliament from those 10 districts than the proportion of their vote; if 3 parties each get 1/3 of the vote in those 10 districts taken as a whole, and two of them elect 4 members each in the district elections while the other only elects 2, then that last party gets to name another 3 members to parliament, and the other two each name 1 more. The exact numbers can be changed around, but this is roughly the way members of the Scottish National Parliament are elected. I dislike it because I think it gives parties too much power, but the UK is pretty far gone in that direction anyway.

For a single member district, IRV is worse in a number of ways than Condorcet's method and its variants. A "Condorcet winner" is a candidate who would get more votes than each opponent in a two-race against any of the other candidates on the ballot. If approximately 2/5 of the voters list their preferences as A, B, then C -- where A, B, and C are candidates -- and approximately 2/5 list C, B, then A, while 1/5 list B, A, C, then A will win an IRV election, while B would beat candidate A (with 60% of the vote) if C dropped out, or if C's voters ranked B first on their ballots in spite of their true preferences. If one of the objections to the current system is that people are given a single vote and often find it in their interest to vote for someone who is not their first choice, then IRV doesn't fully solve that problem. As might be clear from the example, Condorcet's method tends to pick compromise candidates; it also fully solves the "vote splitting" problem, in that if there is a Condorcet winner with a lot of candidates running, then if some of the candidates drop out that can't affect the winner of the race. IRV, like the first-past-the-post system, is prone to drop candidates because other candidates are like them. Still, I think IRV would be an improvement over FPTP.

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.