Friday, 26 August 2016

Sustainable kereru harvesting

Protecting threatened and endangered species is hard. That's because they are common resources - resources that are rival and non-excludable. Rival resources are those where one person's use of the good reduces the amount available to everyone else, i.e. in this case one hunter killing a threatened animal reduces the number of those animals available to everyone. Non-excludable resources are those where you cannot easily prevent a person from obtaining the benefit from them, i.e. in this case it is difficult to stop the hunters from hunting.

There are many proposed solutions to solving the common resources problem (see some of my previous posts on common resources for some examples). However, the most sustainable solution is likely to be making the species excludable, rather than non-excludable. If you can prevent the hunters from hunting, then sustainability of animal populations will be much easier to attain. But how do you achieve excludability?

One option is farming. Have you ever considered why many bird species are threatened or endangered, but chickens are not? It's because most bird species are non-excludable (it's difficult to stop someone shooting or trapping a bird in the forest), but chickens are excludable because people own them (and presumably, chicken farmers watch their chickens at least closely enough that hunters wouldn't try to hunt them). Farmers also have large incentives to ensure that they keep their flocks sustainable (by taking out only the number of chickens that leaves a reasonably stable, or even growing, population).

However, for most birds farming is not an option. Some don't do well in captivity, and most of us would probably prefer that wild populations are kept sustainable, rather than developing increasingly in-bred farmed populations. So, we need an alternative option.

Fisheries in many countries are managed through transferable quota systems. Quotas regulate the number of fish that are allowed to be removed from the sea in a given period of time. The total quota is set by determining a total allowable catch for a year (in theory at least this is roughly equal to the growth in the fishery stock), with some allowance made for recreational fishing. Quotas work well because they make fish excludable (no quota means no fishing) and are backed up by monitoring and enforcement.

So I found this article from last week by Len Gillman (head of science at AUT) interesting. Gillman notes:
The kereru is a native New Zealand species protected under legislation, but despite this protection it has continued to decline in abundance since European colonisation. As an iconic native species, it is treasured by many Maori and Pakeha as something that must be preserved at all costs...
The main cause of kereru decline is predation and competition from mammalian pests, not hunting, and controlling these pests with natural poisons such as 1080 has been shown to promote their recovery. With ongoing predator control, populations increase until they reach a point where, limited by resources, surviving fledglings entering the local population roughly equal those leaving the population due to emigration and mortality.
When a population reaches stability, small harvests can be made without affecting the total number of birds, because those removed by harvest allow more fledglings to survive. This concept is known as a sustainable harvest - it allows a small ongoing harvest without affecting the size of the population. Harvesting quotas would need to be based on kereru numbers and age distributions, considering young birds learn survival skills from older birds, but sustainable harvesting holds great promise.
There are a couple of points to add to this. First, once the sustainable harvest number of kereru have been determined, how would the harvest be allocated? In other words, who would determine who has the rights to harvest kereru, and for how many birds? This sort of allocation problem is key (see here for a similar example relating to water).

Second, to ensure efficiency the rights should be transferable between parties in a voluntary exchange. Assuming that the rights to harvest kereru are only provided to iwi, and can only be transferred between iwi, this would still ensure that iwi who have the most to gain from harvesting kereru would be those that did the harvesting (since they would be willing to buy the rights off other iwi who valued the harvest less). This would ensure the maximum net gain for society (as a whole) from the limited (and sustainable) kereru harvest.

Tuesday, 23 August 2016

Wage segregation, asymmetric information and inequality

Samuel Hammond wrote a post for the Niskanen Center blog that might be one of the clearest and most insightful blog posts I've ever read. Hammond writes about increasing wage segregation in the U.S. labour market, but the insightful bit is to link it to reductions in information asymmetry between employers and workers. I'll refrain from wholesale copying-and-pasting most of the post, which you should read! Here is the most important bit:
How does this apply to technological change, wages, and inequality?
Think back to the naive insurer attempting to “pool” high and low risk types under one premium. Now substitute insurer with employer, and high and low risk types with low and high productivity workers, and the flat premium with a relatively flat wage structure.
Our nostalgic vision of the mid-20th century’s strong middle class is a memory of a wage pooling equilibrium that eventually unraveled. Behemoth corporate employers priced labor in a relatively naive way, given an inability to observe the heterogeneity of individual productivity moment by moment, and the role of labor unions in negotiating wages as a collective. While there was still a premium on things like seniority and higher education, wages were nevertheless fairly compressed.
For workers who contributed substantially more value to the company than they were being paid for, this was a raw deal. Conversely, it was great deal for workers whose productivity lagged. In other words, high productivity workers bore a negative externality by having to partially subsidize low productivity workers due to the inherent opacity of who-contributes-what within team production.
That has changed with information technology that makes it easier than ever to observe and measure individual worker productivity and screen for it accordingly (which may be why the premium from working at larger firms has also diminished).
Wage segregation is of course important because it is one of the causes of the recent increase in inequality observed in the U.S. The previous pooling equilibrium led both high and low productivity workers to have roughly the same wages, because it was difficult for employers to tell them apart. With the (technological) ability to more closely monitor and measure worker performance, the high and low productivity workers can be separated, allowing firms to reward the high productivity workers with higher wages (and not reward low productivity workers).

Now, having said all that it makes me wonder - why isn't inequality increasing in New Zealand for the same reason? As Eric Crampton has noted many times, inequality has barely changed in New Zealand since the mid-1990s. Surely we must have wage segregation here as well? What gives?

Monday, 22 August 2016

Profiting from death arbitrage

Add this one to the unintended consequences file. Matt Levine writes in this Bloomberg article:
The normal way to shift the risk of death is life insurance -- you die, the insurance company gives you money -- but there are other, more esoteric versions, and they are more susceptible to arbitrage. One version involves "medium and long-term bonds and certificates of deposit ('CDs') that contain 'survivor options' or 'death puts.'" Schematically, the idea is that a financial institution issues a bond that pays back $100 when it matures in 2040 or whatever. But if the buyer of the bond dies, he gets his $100 back immediately, instead of having to wait until 2040. He's still dead, though. 
But the bond can be owned jointly by two people, and when one of them dies, the other one gets the $100 back. If you and your friend buy a bond like that for $80, and then your friend dies, you make a quick $20.
But what are the odds of that? "Pretty low" was presumably the thinking of the companies issuing these bonds.
At this point you can probably see where this is headed:
 But they didn't reckon with Donald F. "Jay" Lathen Jr. and his hedge fund Eden Arc Capital Management: 
"Using contacts at nursing homes and hospices to identify patients that had a prognosis of less than six months left to live, and conducting due diligence into the patients’ medical condition, Lathen found Participants he could use to execute the Fund’s strategy. In return for agreeing to become a joint owner on an account with Lathen and/or another individual, the Participants were promised a fixed fee—typically, $10,000."
The problem is that the bond issuers priced the bonds as if they were dealing with bondholders of average lifespan. If people of shorter-than-average lifespan are buying the bonds, then the risk of early repayment is much higher than estimated and the bonds are underpriced, providing a profit opportunity. All Lathen did was take advantage of the underpricing of the bonds to pocket some profits, which is exactly what we would expect any rational and fully-informed market participant to do.

Read the full story to hear about the Securities and Exchange Commission crying foul and how they are fighting back. How often would you expect to see the SEC
protecting financial institutions from the negative consequences of the terms and conditions in their own contracts?

[HT: Marginal Revolution]

Sunday, 21 August 2016

Harry Potter and the chamber of scalpers

The Economist had an interesting story this week about ticket scalping, particularly related to the new stage show Harry Potter and the Cursed Child. Scalping is a regular favourite topic for economics teachers, as I have noted before. From The Economist story:
TICKETS to “Harry Potter and the Cursed Child”, the latest, on-stage instalment in the magically lucrative series, have proved harder to grasp than the golden snitch. After 250,000 tickets released on August 4th sold out within hours, fans’ disappointment turned to outrage as stubs with a face value of £15-70 ($20-90) started popping up on resale websites for more than £8,000.
In line with the howls of outrage, the play’s producers called the secondary ticket market an “industry-wide plague” and asserted their contractual right to refuse entry to people turning up with a resold ticket...
Rather than allowing touts to profit, the play’s producers could take a cue from “Hamilton”, a wildly successful Broadway musical, and raise prices for the premium seats until demand falls in line with supply (even at up to $849 per ticket, some argue that “Hamilton” is too cheap). But the Potter producers seem to be more worried about impecunious wizarding fans losing out than about the prospect of touts swiping surplus.
If you are trying to provide tickets at below-equilibrium prices to fans, then you have to expect the entrepreneurial types to buy some (maybe most) of those tickets for re-sale to fans who are willing to pay more than the face price but would have missed out otherwise. The interesting thing is that the actions of the ticket scalpers doesn't change economic welfare in total, they simply redistribute the welfare.

Consider the diagram below. The supply of tickets to the Harry Potter show S0 is fixed at Q0 - if the price rises, more tickets cannot suddenly be made available because the capacity of the theatre is fixed (note the diagram assumes that the marginal cost of providing tickets up to Q0 is zero).

Demand for tickets is high (D0), leading to a relatively high equilibrium price (P0). However, tickets are priced at P1, below the equilibrium (and market-clearing) price. At this lower price there is excess demand for tickets (a shortage) - the quantity of tickets demanded is Qd, while the quantity of tickets supplied remains at Q0.

With the low ticket price P1, the consumer surplus (the difference between the price the consumers are willing to pay, and the price they actually pay) is the area ABCP1. Producer surplus (essentially the profits for the theatre) is the area P1CDO. Total welfare (the sum of producer and consumer surplus) is the area ABCDO. At the higher price P0 due to the actions of scalpers (buying at P1 and selling at P0), the consumer surplus decreases to ABP0, while producer surplus remains unchanged. The scalpers gain a surplus (or profit) of the area P0BCP1, and total welfare (the sum of producer and consumer surplus, and scalper surplus) remains ABCDO. So the ticket scalpers don't reduce total welfare - their actions don't result in a deadweight loss.

If the ticket sellers want to cut out the scalpers, they need to either raise prices (so that the scalpers can no longer profit), or undertake costly measures to destroy the secondary market for tickets. From The Economist article:
Restricting the secondary market is possible, but only with great effort. The government’s review reported that the Glastonbury model, where festival-goers must show proof of identity alongside their ticket, works, but only because the organisers have such tight control over everything about the process, from ticketing to the venue.
I note that the NFL has its own ticket exchange, where ticket holders can on-sell their tickets to other fans (other sports teams are increasingly doing the same). This doesn't stop the scalping, it just shifts it online and allows the teams to take a cut. Perhaps theatre companies need to do the same. If you can't beat them, join them?