Something for Next Semester - A Discussion Group*

If there is interest I would like to start a weekly discussion group in the spring on the general theme of taking the long view on your learning - things members of the group might try to have a greater take away from both the academic side and the intellectual part of the recreational side of undergraduate life.   It would also be a place for group members to drive the discussion, talk about issues they are having and have the group weigh in on how to think it through.  In some sense it is meant as a face to face alternative to the blogging you have done this semester.  

We know each other a bit now from our class so we shouldn't need to spend much time breaking the ice.  The group would be a bit of an experiment on whether outside of a course setting coaching qua thinking "it" through (whatever it is) can be effective for participants.  I've not done a discussion group with students like this before.  I tried this last year, but didn't get any takers.  Truthfully, this probably would be more useful for juniors (or sophomores) than for seniors.  The seniors are too close to getting out of here to benefit from this sort of thing.  Of course, if you are a senior and you're interested, I certainly wouldn't stop you.  

In my ideal we'd block off  an hour once a week.   Size-wise I'd hope for 4 or 5 students. That's about the max where if everyone shows each can participate vigorously in the conversation.  Less would be okay but make the group more vulnerable to no shows.  If more are interested I'd want to accommodate that, but it would move the group closer to a classroom setting and then the participation issue would creep in.  

If you are interested you can indicate that via a comment to this post.  That might encourage others to do likewise.  Alternatively, if you'd rather be the follower than the leader, you can send me an email to indicate your interest.  

Thanks for your attention.  

Final Grades in Moodle and Banner

I've posted the course grades.

Final Exam Results

The exams are now graded.  It may take still an hour or more for me to post the grades.  I want to do that with some care and make sure there aren't clerical errors.  What follows are some comments about the exam itself.

Question 1 was the essay question on the first midterm.  So you had seen it before.  Question 3 was on the final from last year and we reviewed it on the last day of class.  Question 2 was new for you.  It was there, in part, to see what you would do with it.  The means on questions 1 and 3 were right about at 81 (out of 100).  The mean on question 2, was just below 70.  I will talk about question 2 below.

One of the things I found interesting is that the vast majority of students accepted the premise of the question without requiring further definition.  Let's consider possible ways to further define the issues.   I'll begin with this rather famous quote from Thomas Edison.

I haven't failed.  I've just found 10,000 ways that won't work.  

So one issue is that invention takes time and one might be "in process" for quite a while.  How does the time component get managed?  Do we look for success after a fixed time window or let the process play out?  Nobody talked about that.

Another issue is whether the invention is fundamentally new for the entire industry or if instead it is something that has been tried elsewhere but is new for this particular organization.  In the literature on diffusion of innovation, there typically is a difference made between an innovator, on the one hand, and an early adopter, on the other.  Each engage in risks but of a different sort.

Then there might be an issue of whether the innovations themselves could be larger or smaller and hence if the reward or punishment varied, either absolutely or relatively, as a consequence.  People didn't take on that issue much at all.

I'll do one more of these and stop, but know that this list could be expanded without too much difficulty.  There is the question of how innovation translates into productivity and profitability for the firm.  There is a notion called leverage, which in this context means small changes that have big positive impact.  There is a recent book by Atul Gawande called The Checklist Manifesto, where he argues that implementing checklists for procedures that have some complexity to them (his particular interest is in avoiding medical problems during surgery) is a good way to achieve leverage.  In other words, people already know what good practice is, but because they exercise discretion they may deviate from good practice.  The checklists are a way to get people to stick with what works.  In contrast, an article I suggested you read argued for discretion and that overly prescribing procedures would reduce medical success.  So there isn't universal agreement about standardizing procedures being a good thing.

On the incentives themselves, very few people addressed the following question:  What, if anything, happens to the baseline compensation?  Does it stay fixed or does it get adjusted as well?  For our class, that would have been a natural question to ask.  It speaks to the question of whether the employees earn rents or not (in the case of rewarding innovation) or if the punishment is credible (when the punishment is in place for the case where innovation doesn't occur).  A few students recognized that the employee can quit, which limits the size of the possible punishment.

Then one might have asked whether two employees who are in the same job, with similar seniority and with both trying hard to innovate, might nonetheless experience that one succeeds and the other does not - what would the consequences be?  A few people said the reward scheme would make the employees competitive with one another, but I didn't understand that.  That they'd regard it as unfair, however, seems natural to me.  We talked in class about fairness specifically in the context of Akerlof's Gift Exchange model.  Nobody tied these incentives schemes to that, but it stands to reason that if either the reward or punishment scheme were implemented that it would result in less gift giving activity in the organization.

Finally, on other mechanisms, a few students offered up interesting ideas here, but only a few.  One of those is professional development activities (more education) for employees, where promoting innovation is part and parcel of the professional development.  Another is to look for symbolic/cultural ways at work to promote innovation.  Just to show what I mean here, I mentioned in class that I attended something that at the time was called the Frye Leadership Institute. (Frye is somebody's surname, and the institute was named after him.)  A few years ago they rebranded the institute and now it is called the Leading Change Institute.  In other words, innovation is now in the name of the thing.  Symbolic and cultural means are something we discussed but didn't hammer on in class, because they are not economics.  But they can matter.  B&D make that point repeatedly.  It is one of their four frames.

Grades Updated In Moodle

I have done the grade update that now allocates all the points except for the final exam.  Included were 20 points for the remaining Excel (one entry for the Shapiro-Stiglitz model, another entry called Freebie that everyone received), 50 points for Comments on blog posts, and 125 points for Blog Posts Second Half.  With the last there was also some text feedback to accompany the grade.  And I updated the individual blog posts to track your submissions.  Note that I never did enter the submission for the IlliniBucks post, but that has been accounted for already in the Blogs Posts First Half.

I also made a grade distribution of the all the points allocated.  It too can be found in Moodle.  It is a file called All But Final.

So you should know where you stand.

(Students doing Extra Credit projects, those points have yet to be allocated.  I will do that over the weekend.)

Last Year's Final Exam

Final Exam fall 2013

The final this time around will be in the same format.  I haven't written it yet and probably won't till after class on Thursday.

A couple of pieces on Medicine and moral hazard

This is from today's Op-Ed page.  It is called How Medical Care Is Being Corrupted.  The issue is how doctors are compensated and if that impacts how they practice - prescribe medications, recommend treatments, etc.

This other one is about medical research, particularly the war on cancer.  It is called Grant System Leads Cancer Researchers to Play It Safe. It is quite intriguing and might give you an entirely different sense of what moral hazard means.

Excel Homework Due Dec 3 at 11 PM

This is the last Excel Homework.

This homework is on extensions of the basic Shapiro and Stiglitz model, with a particular focus on making the monitoring intensity a choice variable.

You should watch the video presentation of the basic model first.   This is a full lecture on the math of the model.  It takes about a half hour.

xlsx file

Please Read This Essay Before...

...
1) You write the blog post due 11/21 on personal reputations, and
2) Also before class on Thursday 11/20.

The essay has a bit of math that I hope is easy to follow and has quite a bit of discussion of reputational mechanisms as means of enforcing good behavior.  I think you'll like the discussion and I hope it makes sense to you.

The essay was revised last year.  It matched that class quite well.  I originally wrote it for an intermediate micro class I taught in spring 2011.  (Aren't you glad you didn't take 302 from me?) We've done a few things differently this time around but there is still enough there that should fit what we've done.

Another Grade Upload in Moodle Done This Morning

There were grades upload for the last four Excel Homeworks and the last four Blog Posts.  Note that the blog post columns are just for tracking that you did them.  There are no points being allotted.  Moodle requires me in making the columns to assign some points, so each blog post column has 1 point assigned, but you are not receiving those points.  The points you receive for blogging are given in a block.  One block was done at mid semester, which you've already received.  The next block will be done at the end of the term, before the final.

A little celebration today

I bought the cider and doughnuts, so we are on for today.  I hope there isn't any precipitation when heading to class.

For Practice - Midterm 2 from last year

I wouldn't look at this till you've done the Excel Homework on the Principal-Agent Model.  But then, this Exam should be intelligible to you.    Also note, question 2 from last year's Midterm 1 is fair game as well.

In case you are not confused enough about the difference between conflict and an argument...

...this is pretty funny and should be part of your cultural repertoire.

Blog Post About Bargaining Homework/My Laptop

Here is the link to the post The Diffeq From Hell, which I wrote a couple of years ago.  I think it will be most beneficial to you to explain why you have this homework on Bargaining in the first place, and what economic insights the homework is supposed to provide.  You might also be amused by the history of the construction of the Arbitrator's rule, which is documented in that post.  Math-wise, this was the most difficult homework for me to make.  It is ironic that you found it much easier than the prior homework on Adverse Selection in Insurance markets, which may have been tougher for you but was far easier for me - from the point of view of the underlying math modeling.

* * * * *

For those who were in class today and watch me go into a panic attack as system 8.1 installed on my laptop while I wasn't paying attention, this just to let you know that when I got home it seemed it had actually installed correctly, unlike my two previous attempts where it crashed the computer and wouldn't allow it to reboot. So all is well on that score.

Here is wishing you an early Happy Halloween.  Good luck with the trick or treating, but don't eat too much candy if you are successful on that end.

Excel Homework Due Wed 11/5 at 11 PM

This homework is on the simplest possible version of the principal-agent model.  It is this model that produces pay for performance as a feature.  It is important to understand this base model before we delve into various realistic ways of complicating the model.  (Mostly we will talk about that but I might do some additional modeling in class after going over the basic model.)  There is a video I'd like you to watch first.  I should give you the background you need to do the homework.
Video
The actual homework.

Some follow up reading

During the first part of the class where we went over the blog posts and the possible reasons for why one might be charitable to others, I mentioned the book Excellent Sheep, which I'm currently reading. What I've read so far is not particularly uplifting, but you might find it interesting to shed light on your own circumstance.  The focus is on elite college students (think of the Ivy League) and the hoops they must jump through, how that effects them as learners and as human beings.  Outwardly creating the appearance of extraordinary competence, inwardly these students are quite miserable and full of doubt.  To the extent that you are just like the students characterized in this book, it provides an argument that all of you are deserving of empathy, from your peers and your teachers.

During the latter part of the class in discussing intrinsic motivation, I mentioned the concept known as Flow.  The link is to a book by that title.  With little effort, you should also be able to find a TED talk on the subject by the book's author, Mihaly Csikszentmihalyi.  It is my view that if you've learned that on occasion you can find Flow in what you do, and do so while engaged in an activity that brings some joy or value to others, then you're very close to finding your life's work.  And if you learned to do that while in college, then college was a very valuable time for you.

In my own reading, I read Flow after reading Daniel Kahneman's Thinking Fast and Slow.  I did that while teaching our course for the first time, when I only had 8 students and taught it as a seminar (but still there were attendance issues).  You might find this blog post I wrote at the time interesting as it tries to tie the various themes together.  I didn't check all the links in that post but I noticed the particular link to the bat and ball problem was broken, which is why I've provided an alternative here.

Excel Homework Due Wed 10/29 at 11 PM

The homework is on bargaining.  Note that M&R have a discussion of bargaining in Chapter 5.  You should read that.  The model they go through has both the buyer and seller having two types.  In the Excel homework, the model has a continuum of type on each side of the bargain.  In that sense it is harder but also more elegant.  And, I believe, it should give you a better understanding about the relationship between the private information and the inefficiency  created.

There is a fiction in the model that helps to understand what is going on.  The fiction is that there is a third party - an arbitrator - who provides rules for how the bargaining will happen, when trade will occur, and at what price.  The fiction is necessary because the model is static.  Real world negotiations happen over time and to model that correctly one needs a dynamic model.  There are such models, but they are well beyond the scope of our class.  So we will keep the modeling relatively simple and wave our hands about what happens in real world bargaining.

There is a rather extensive discussion in this homework before you log in.  I encourage you to read that carefully and not gloss over it.  It is about how to bargain well and what happens in real-world procurement, which entails a good deal of such bargaining.  There are practical lessons here that you can carry over to your work life, even if you don't engage in procurement.

Homework on Adverse Selection and Tomorrow's Class + Blog Grades Uploaded

Based on last year's class as well as on the observation that nobody has yet to submit a key for the Excel homework due tonight, I would say that conceptually the economic models that are the basis for the homework are more difficult to understand than the prior models that we've done.  So I plan to lecture on those models tomorrow.  I don't have a video on this.  I will cover it only in class, tomorrow.

-----

I have assigned grades for your blog posts during the first half of the course.  There are 5 substantive posts included in this assessment.  I didn't count the bio post you produced about the famous economists who forms the basis of your alias.  Most people are doing a reasonably good job.  There are a few laggards.  I hope we can get everyone to be writing good posts during the second half of the course.

There were a maximum of 125 points allocated here.  In addition to assigning you points, I have also given some comments on your blogging and where I'd liked to see improvement in the second half.

For many students I wrote that you should try to make connections to your own prior posts, class discussion, or ideas from the readings.  You might find this awkward at first, since you are also writing to the prompt.  Now I'm suggesting that you serve two masters and that is harder.  Be that as it may, I encourage you to try it.  You'll get better at doing it with practice.

Also, when you make such connections it is natural to link to the content you're mentioning, using the link tool in the blog editor.  Having your posts with some links in them creates the impression that you've done your homework.  That's a good thing to convey.

From the Econ Department - Internship/Job Possibility - Homecoming Celebration

From: Newell, Melissa Allison
Sent: Wednesday, October 22, 2014 8:08 AM
To: Econ Faculty
Subject: Northrop Grumman Recruiting Event and Homecoming

Hello,

Please feel free to pass along the information below and promote these upcoming events to your undergraduate Economics students (or those interested in the major).  We hope you are able to attend the Homecoming Celebration on Saturday- it is always a great time and a good way for students to connect to the Department and meet others.

Sincerely,

Melissa

Northrop Grumman Info Event

Thursday, October 23

5-6pm

114 DKH

Business Casual Attire

Dinner Provided

Internships and Full-Time Positions!

An Executive from Northrop Grumman (and UI Alumnus) will be presenting on the company and providing information on internships and full-time opportunities!  Even if you are not looking for an internship or full-time job yet, this is a great opportunity to hear about a company who recruits Econ students.

We have Econ alumni working for Northrop Grumman (positions such as Financial Analyst), and they recruit on campus, and are looking for Economics Students.  This is a great opportunity to hear more about the company, ask questions, and network.

Northrop Grumman is a leading global security company providing innovative systems, products and solutions in unmanned systems, cyber, C4ISR, and logistics and modernization to government and commercial customers worldwide.

Economics Homecoming Celebration

Today is the last day to register to attend our Homecoming Celebration: go.illinois.edu/EconHomecomingRSVP

Saturday, October 25

9-11am

Tent on the David Kinley Hall Quad
(DKH Quad is East of the building)

 Attire: Informal - ILLINI ORANGE & BLUE

 Meet other students, alumni, faculty, and staff, and it's free!  Win prizes, enjoy great food, and celebrate an Illini and Economics tradition!

Airbnb and "Helping Industries"

I'm only about halfway with reading the blog posts for this week but I thought this piece tied in nicely to the posts as I've not yet read one that talks about somebody wanting to start their own business after they graduate.  Why is that?  Let's raise that question in class on Tuesday.

Start Helping the Helpers - NYTimes.com via kwout

Excel Homework Due Wednesday 10/22 at 11 PM

This one is on insurance under private information.  A person could be a low risk (low probability of loss) or a high risk (high probability of loss) but there are no distinguishing features that lets the insurance company know which type an individual is.  The individuals know which type they are, but if low risk types get better rates than the both types have incentive to claim they are low risk.  The market must somehow address this incentive problem.

I didn't have a chance to talk about this today, but we will make some simplifying assumptions on the supply side to make the equilibrium analysis easier.  In actual insurance, there are costs - writing policies, determining whether claims are legitimate or not, etc.  And sometimes insurance companies will not pay on a claim.  For example, in a car accident where both parties have their own insurance and where the accident was clearly the fault of one driver only, sometimes the goal of the insurance company for the driver who was not at fault is to collect from the other insurance company and there can be disputes about that.  We abstract entirely from all this reality in our models.  Our focus is to understand how the market addresses the incentive problem, not to understand all other aspects of insurance.

Extra Credit Projects

This is an experiment for me and perhaps something of interest for those in the class who are eager for getting deeper into the subject matter or are looking to self-insure on their grades.

The experiment part is for me to see whether projects of this sort should become a regular part of the course, the next time it is taught.  Here is what I have in mind:

1.  You indicate an interest in doing a project by sending an email to me indicating that.  This must be done within the next two weeks.  Before you do this, note that the project will entail real work on your part.  If the end product shows little to no evidence of such work, you will not receive any credit for it.

2.  Once I've received the email from I will suggest a paper for you on which your project is based.  Alternatively, in your email you can suggest a paper that interests you either from those I've mentioned previously in class or in the online presentations.  As an alternative to a paper, you can review a Nobel prize lecture, such as the one by Herbert Simon or the one by Oliver Williamson.

3.  Your first draft will be a review of the paper you read.  I will give more specific instructions on what needs to be in this review and how you should set it up.

4.  I will provide comments on the first draft and based on those you will produce a second draft/final submission, but the form of this will be like the PowerPoint presentations I've provided at the beginning of the semester.  The paper part will be in the notes area.  Each slide will have a title and an image to illustrate the ideas.  A link back to the image source will be included in the slide.

I will then grade the submission via points.  The maximum possible is 50 points.

References for Post Midterm Reflection

Post to class last year:
Figuring It Out/Demonstrating Personal Commitment to the Class

Campus Strategic Plan:
Goal 2 - Provide Transformative Learning Experiences

From the Tomorrow's Professor eNewsletter - MindsetsToward Learning
Book - Mindset by Carol Dweck

Bloggingheads.tv - Glenn Loury and William Deresiewicz
Book - Excellent Sheep by William Deresiewicz

Quote from Fahrenheit 451 by Ray Bradbury:

We need not to be let alone. We need to be really bothered once in a while. How long is it since you were really bothered? About something important, about something real?

The Exams Are Graded

They will be returned in class tomorrow and we will spend some of the class time going over the test.  I will update the Moodle grade book only after the class session.  I hope you will attend tomorrow.  I believe the session will be quite beneficial to you.

Tirole Wins Nobel Prize in Economics

Here is a snip about the announcement from the NY Times.

Jean Tirole of France Wins Nobel Prize in Economics - NYTimes.com via kwout

And here is a photo of me holding the textbook by Tirole and his frequent co-author Laffont on Procurement and Regulation.  In the early 1990s, I taught out of that book in a graduate course on Regulation.

My Prediction for the Nobel in Economics

The announcement should be next Monday.  I've been predicting William Baumol as the winner for the last 10 years or so.  He hasn't won it yet, but I've got no reason to change my prediction.

Excel Homework Due Wednesday 10/15 at 11 PM

This is the homework on the Math of Risk and Risk Preference.   While you might be able to grind through it without viewing the content in the previous post, my expectation is that you will have done so.  It will greatly increase your understanding of what is going on.

Also, if you are an eager beaver in the crowd and do the homework before class next Tuesday (I applaud the eager beavers in the class) note that when you get to line 86 of the spreadsheet it says we have covered these ideas in class already.  We should get to those ideas on Tuesday, if only briefly.

Preliminaries on Probability and the Economics of Risk

Each of these should be reviewed before doing the next Excel homework, which assumes that such a review has been performed.  They should be familiar already, based on what you've been exposed to in Econ 202 and 203.  There may be some new stuff on risk preference.  I'd be curious to learn what is old hat and what is new for you.  Note that there is a bit of overlap between each of these.  Nonetheless, I strongly encourage you to review them all, so you have a firm understanding of the fundamentals. The second one emphasizes and algebraic approach.  The third, a graphical approach.  You should be familiar with both.

Notes on the Math and Philosophy of Probability  (This is a pdf file.)

Increasing Risk and Risk Aversion (This a video in YouTube.  You can find a link to the PowerPoint file on which it is based in the description of the video.)

Expected Utility and Jensen's Inequality (This a video in YouTube.  You can find a link to the PowerPoint file on which it is based in the description of the video.)

You should be able to get through all of this in under 45 minutes.  Of course, the less familiar it is to you, the longer it will take to get a good understanding.

Akerlof's Gift Exchange Model - For Tuesday 10/14

JSTOR: The Quarterly Journal of Economics, Vol. 97, No. 4 (Nov., 1982), pp. 543-569 via kwout

Akerlof's theory is rather simple to articulate, as is the debate over how best to do compensate employees to make them most productive.  (Akerlof's model is the basis of one side of the debate.  The model for the other side is the principal-agent model.)  The quintessential issue is whether pay should be performance based and hence vary from individual to individual who hold the same job (one view of compensation that is associated with the principal-agent model) or if instead pay should be position based and not feature such idiosyncratic variation, except perhaps on a seniority basis (the alternative view of compensation that comes out of Akerlof's model).   Of course, those in the second camp don't deny that performance matters.  Where they differ with those in the first camp is on how excellent performance should be rewarded.  For those in the second camp promotion should be the primary reward for exceptional performance.  They believe that within a job classification, the workers need to be managed fairly, which provides the basis for equal treatment.  This is the essence of the view that emerges from Akerlof's model.  

The vision for why this alternative to the principal-agent model produces superior performance was supplied by Dumas père in The Three Musketeers.  It is embedded in the relationship between Athos, Porthos, and Aramis (the workers doing the same job) and D'Artagnan (their manager) and is captured in the phrase, "All for one and one for all."  Akerlof crafts that vision and related ideas from sociology to make an economic model of it.  For the non-economist, it might be framed as collegiality-driven productivity.  Here are the model's basic elements.

There is a minimal performance standard below which the employee will get fired.  There is a performance norm, substantially above the minimal standard, that typifies what workers produce.  The difference between the minimal standard and the higher norm constitutes a gift that workers give to the firm.  Likewise, there is a minimal wage below which workers would quit and find work elsewhere and there is an actual wage above that minimum that the firm pays to workers.  The difference is a gift that the firm gives to its employees.  Gift giving demands reciprocation for it to be sustained.  When that happens all involved feel good about the place of work and productivity is high as a consequence.

There is one more piece to the puzzle in the Akerlof approach.  This regards how productivity is observed and what explains variation in productivity from one worker to the next and for one worker over time.  From the worker's own perspective, this is mainly due to random factors - circumstances beyond the employee's control.  Or, in the case where there is clearly a drop off in a particular employee's performance, it can be attributed to outside of work stresses (e.g., a sick child at home) that are apt to be temporary in nature.  The correct response in this case is not to punish the employee but rather for co-workers to chip in and pick up the slack.  Sometime in the future, the employee who received such help will lend a hand when another co-worker has a similar problem.

Applying the approach specifically to how teachers in K-12 should be compensated, because that has gotten a lot of attention in public debate, the principal-agent approach is consistent with pay performance pay based on student test scores, while the Akerlof approach would avoid that in favor of seniority based pay.  An advocate of the principal-agent approach but with an open mind might grant that collegiality-driven productivity can be a good thing, as long as the fire burns within all the workers, but will argue that eventually a worker burns out and turns into dead wood.  That is not temporary.  It is a permanent change.  Then the follow up argument is that seniority based pay sustains the dead wood, who act as a drag on the entire system.  One needs, instead, a time-consistent way to purge the system of the dead wood.  Performance based pay does that.

Akerlof's model does not address that critique.  I will provide my own answer below, but before I do  let me take a slight detour.  The Akerlof gift exchange model is essentially social in nature.  There is a different reason to depart from performance based pay that is intellectual in nature and is particular to knowledge work.  This other view is articulated by Daniel Pink in this RSA Animiate video and focuses on psychological explanations for productivity.  There can be performance anxiety or, if you prefer, writer's block. High performance is achieved when intrinsic motivation is strong and the individual becomes so involved in the work as to entirely lose a sense of self.  Making extrinsic rewards overt moves the individual's focus away from the intrinsic motivation and thereby lessons productivity.  Better to have the economic rewards provided up front so that one can put them out of mind when the real work commences.  While I have critiqued this video on how it represents the economics, I concur with its representation of the importance of intrinsic motivation. 

Burnout then can be thought of as the disappearance of intrinsic motivation.  The response on the burnout issue is to look at the causes for why intrinsic motivation should disappear.  One possible cause is a sense of plateauing in the work.  There is little left to learn, no inherently new challenges.  For the most part it is a rehash of what's come before - been there, done that.  This cause is consistent with the principal-agent view.  When it happens, it would seem to make sense that the worker should move onto a new challenge; do something else, especially if one has a sense that new challenges would rekindle a fire in the person.  There is, however, a different cause that is also possible.  It is that the individual confronts organizational barriers that seem arbitrary and anti-productive and those barriers repeatedly thwart the individual's creative efforts.  Eventually, the individual wears down from not seeming able to accomplish sensible change.  Gallows humor becomes part of the routine as the individual loses the desire to fight the system.  This second cause might reasonably dictate that more fundamental organizational change is necessary.  The burden shouldn't be placed on the individual to accommodate organizational inertia.

It is this second cause that forms the basis of for tying the motivational issue to the organizational ones.  The Akerlof gift exchange approach must happen within a dynamic organization that makes organizational learning paramount.  (See Senge's The Fifth Discipline.)  Employee burnout might still happen in such organizations, but it would be far rarer.  When it does happen the appropriate organizational response should be job reassignment rather than immediate severance, this in accord with the gift exchange view.  Collegiality, in tone and actual practice, then characterizes good jobs and is at the heart of how the organization remains productive.

The above is in accord with my experience as a campus administrator.  In my years working in learning technology, everyone I've encountered knows the benefits of collegiality for productivity, though I expect that the vast majority of them were not acquainted with Akerlof's gift exchange model.  Performance based pay seems logical and in certain instances (sales, in particular) even those who believe in collegiality will acknowledge the benefits of performance based pay.  But, as it de-emphasizes collegiality in favor of individual performance, in other contexts performance-based pay can be counter-productive.  

On the Economics of Overbooking

While this may seem unrelated, it provides the essence of the allocation side in our Illinibucks hypothetical.

Airline overbooking policy well known and so, too, should be its creator | News Bureau | University of Illinois via kwout

Algebra of quality choice under transfer pricing

This is now a completed post.  It includes a link to a PowerPoint with all the algebra.  I've made an animated version of this PowerPoint and then made a screen capture movie of that with my voice over.  You may find it sufficient to watch the embedded video below.  Alternatively, you may want to full screen the video so you can read things more clearly.

Grades Updated in Moodle

There were two more Excel homeworks and three more blog posts since the last update.

Manager Decision Making Styles

I said in class today that on Thursday we would talk more about organizational structure from B&D Chapter 3 - 5, but also about management.  For the latter, I plan to make some reference to this paper, which more or less says that middle manages look heads down, but upper level managers look heads up.  That will be a good metaphor for us.  

R0602F_pdf.fm - The-Seasoned-Executives-Decision-Making-Style-reprint-.pdf via kwout

The Traffic Helicopter Theory of Management

This is not in the the book (I invented this particular labeling of this sort of managerial behavior).  It is similar to playing the Whip (honest broker) for a committee, except now it pertains to how a little unit interacts with the entire large organizations.

The Traffic Helicopter Theory of Management

Out with a (big) bang

This has nothing to do with economics, let alone our class, but I thought it was cool and that you'd be interested in it.

Researcher shows that black holes do not exist via kwout

Midterm 1 from last year

Here is the link to last year's midterm.  It will give you and idea of format and question type for this year's exam.  Content-wise, questions 1 and 3 are stuff that might be on this year's exam.  Question 2, however, is not.  We'll cover that material after the first midterm.

Commenting and Posting - Your Obligation for the Course

This is a reminder that after I have commented on your post I expect you to write a comment in response.  Last week only about half the class did this.  So far very few of you have.

Also, some of you haven't gotten your posts in for this week.  You are late on those.  I will still read them if you get them done by tomorrow.  I will not extend this offer beyond this week.  After this, you simply will not get credit for doing the work.

Something we will talk about on Tuesday

First, we'll briefly mention Atul Gawande's famous essay about infection and hand washing.   It has fundamentally changed how medicine is conducted.  It is not an economics paper at all, but it is a demonstration of how inefficiency manifests in ordinary business practices.

Later we''ll consider this paper by Arthur Okun, which is quite readable by you and gives a good articulation of the implicit contracts view of the labor market as co-insurance based on loyalty between the firm and its employees.

You should have access to this paper if you are on the Campus Network.

JSTOR: Challenge, Vol. 22, No. 6 (JANUARY/FEBRUARY 1980), pp. 5-12 via kwout

Since I reacted to #3 today in class.....

.... you guys might as well see the entire list and apply not just to me but to the other professors you interact with as well.

10 Things Every College Professor Hates - Business Insider via kwout

Useful Links for Tomorrow's Class Session/Class Size Distribution 1996

Paul David's paper on QWERTY

Michael Berube's essay from the Chronicle of Higher Education.

The SCALE Efficiency Projects.

Something left out from yesterday's class.

I ran out of time and/or my memory failed me to talk about this. issue.  We did spend significant discussion time on monitoring.  In that context we considered my monitoring of your blog posts.  I do monitor them on several fronts.  But I don't monitor for plagiarism.

If you have a reasonable guess as to why, you can post as a comment to this post.  I'm quite curious about what you might come up with.  We'll discuss briefly on Thursday before getting into our main topic.

LFS:Plagiarism - UBC Wiki via kwout

Excel HW Due 9/24 at 11 PM

This homework is about coordination failure and coordination mechanisms. The last two worksheets coincide with material from M&R. Chapter 2 pages 43 - end of chapter on the medical intern matching program and all of Chapter 3. Transfer pricing starts on page 79.

Coordination failures can end up being a big part of a course in macroeconomics.  The twin phenomena known as involuntary unemployment and credit rationing might very well be attributable to coordination failures.  So the concept of coordination failure has interest well beyond our class.

Ultimately we will see that one big role management plays in organizations is to provide coordination and coherence.  For modeling sake, it is easier to consider mechanisms, such as the ones describe in this homework, but much coordination happens by the discretion of management (or it doesn't happen at all).  One of the puzzles is how to achieve both decentralization and coordination.  It is an important topic that we will discuss in class.

Opportunism and the News

Given that the next blog post is supposed to be about opportunism, I thought this piece from NPR apropos.  It is about scientists doing ALS research and how they've responded to a decline in funding across the board.  The answer seems to be ... not very well.

Patients Vulnerable When Cash-Strapped Scientists Cut Corners : Shots - Health News : NPR via kwout

Combating HRTP

Some of you may remember a brief discussion about why there might not be efficiency in organizations.  One explanation was participant impatience.  Then you will recall that HRTP is short for high rate of time preference.  For efficiency, people need to value the future more and not be so concerned with immediate reward.

This creates a linkage between economics and psychology.  The psychologists know how to train yourself to be more patient.  One of the heroes of that research is Walter Mischel.  He is famous for his experiments with marshmallows and young kids.  If you haven't heard about those, you'll enjoy reading the linked piece.

Learning How to Exert Self-Control - NYTimes.com via kwout

First grade upload into Moodle

This morning I did a grade upload, mainly to verify that I can do it when I need to in the future.  But it also serves as a check for you to make sure you've gotten credit for the work you've done.

There were three columns where there is information.  Two of those are Excel Homework: one is for the Tutorial, the other is for the Homework on Efficiency.  If you did them and submitted your key into the online form you got 10 points per assessment.

The other column is for the Blog Post where you supplied bio information about your alias.  There are no points for that.  What you should see is an "x" in the feedback column.  This indicates that I know you wrote that post.  At mid semester, I will make a grade assessment of your blog posts in the first half of the course.  Until then, however, all I will track is that you've done them.

Professor Arvan

Before Next Tuesday's Class

I have just started to read your posts that are due today.  When you've gotten my comments, please think about them some and then write a response, also as a comment.  Partly, this is to see how you are processing what we've been talking about.

I am deliberately belaboring our discussion on transaction costs, in part because it is the heart of the matter so it would be good for you to have a solid understanding of transaction costs, and in part because the way you learn concepts in other classes may not be a good way to learn them here.  Here you must see whether the concepts make sense to you by applying them to situations you've experienced.

I want to make Tuesday's class a kind of collective response to your posts.  So I don't know yet how we'll proceed then.  I'll try to decide that over the weekend.  In general, the sessions on Tuesdays will very much depend on what you write in your posts before that session.  So the general idea is action (your posts) and then reaction (class discussion).  Therefore one other way to prepare for class might be to read some of the posts by your classmates and the comments there.  Yet at present you have no guide as to which ones to read.  So for this time around it will be hit or miss.

I would also like to foreshadow for you the prompt next week, which is about opportunism.  In the context of classroom exams, cheating is an example of opportunism.  We said that proctoring is an example of a transaction cost, as it aims to deter cheating.   You might consider what other sorts of transaction costs emerge out of a need to discourage opportunistic behavior.

Optional Survey on Mentoring

This survey is meant as follow up to the previous post.

 

Do You Have A Mentor?

This is from a provocative piece about success factors in the labor market for recent grads.  Ergo the question in the title of this post.  If you do have a mentor, I believe the rest of the class would be curious about how you got one.  If you don't have a mentor, are you doing anything to make that happen?

It Takes a Mentor - NYTimes.com via kwout

Excel Homework on A Strategic Approach to Efficiency

I wrote this homework over the last couple of days.  I've proofread it a couple of times.  But there may still be typos or even conceptual errors in it.  If you find what seems like a mistake, please let me know.  It would be good to have a clean version of this assignment.

As with other Excel homework, if you have a question or comment about it, please post that as a comment to this post.  I'm guaranteeing 24 hour turn around time in response, and probably a lot quicker than that.  And if you are reading the comments and think you know how to respond, by all means do.  The more the merrier and this will create a better sense of class participation.

Future Assignments/Tips from class yesterday

We should now be getting into the routine for how work in our class will be done.  Excel Homework will be due Wednesday evenings most weeks.  Blog posts will be due Friday at noon.

The assigned homework will be given in the calendar a week before the due date, so you can get it done well ahead of the deadline.

Note that for Excel homework, there will also be a post on the main site about it, which is there if you have questions.  You can post those as comments to that post.  You might also be interested in reading the questions of your classmates.  Feel free to respond to those, if you feel you can help.

For the blog posts, note that you have the option to write on something other than the prompt - as long as you feel it is relevant to what the class is covering.  It may take you a few posts according to the prompt before you value this option.  But then know it is available to you.  It is always best to write about something that you feel strongly about.  This is meant to encourage you to do just that.

* * * * *

This is just a reminder that in class yesterday I demonstrated the Split tool in Excel.  It is found under the View Menu.  If you mouse over one of the split bars and double click on it, you can remove it that way.  For our homework there may be some advantage to split the pane into an upper and lower view.  There probably won't be an advantage to having a left and right view.  You can also adjust where the split occurs by clicking on the split bar and dragging it.

I also did a quick demo of using the Blogger editor for spell check and to put in hyperlinks in your posts.  Doing both of those things is good practice for any sort of blogging, really for any writing online.

I like the idea behind The Fun Theory though I prefer the term Joie instead

I wonder how many of you have heard of this.  I first learned of it 5 years ago when a student I had then posted something which had the stairs as a keyboard example.  That was cool.  Are there things you think might be done to make our class more enjoyable?  And does one need technology for that?

The Fun Theory via kwout

CEO Pay - Market Determined or Rigged Game?

We may talk about CEO pay a little near the end of the course.  But it is a topic that fascinates and becomes a topic that is newsworthy from time to time.  So this recent paper that likened college football coaches to CEOs brought all of that out into the open again.

As I write this, the Illini have fallen behind Western Kentucky.  Speaking as a sports fan rather than as an economist ---- OUCH!

The Price of Glory - NYTimes.com via kwout

Please send me your blog url ASAP

For those who have already sent me the link to your blog and made your first post about your economist, thank you for getting that done.  For those who have not yet done this, please get it done soon.  Your performance in the class will be at jeopardy if you don't have a blog that I can readily monitor.

A little bit of motivation regarding B&D

In class yesterday I lost track of time and we never did get to Chapter 1 of B&D.  So I want to lead with that tomorrow.  To understand why reframing is useful as a thinking tool, consider this quote, one of my favorites.

To see what is in front of one's nose needs a constant struggle.
George Orwell

Sometimes, when things don't make sense from one point of view, reframing the issues helps to get the pieces to fall into place.  We will do a bit of that tomorrow, very briefly go over the Four Frames in B&D, and then turn to what was scheduled for tomorrow's session.

Excel HW on Efficiency and Equity Concepts - Due 9/10 at 11 PM

For some of you this homework will be entirely review.  For others, you may not have seen the Edgeworth Box before.  I'd appreciate learning which is your situation by mentioning it in the comments when you submit your key.

As with the other Excel Homework, if you have a question about the substance of what is going on, please post that as a comment to this post.

Setting Up Your Blog for the Class - Part 2

This is the rest of the tutorial.

Setting Up Your Blog for the Class

The instructions below and in the next post are aimed at setting up your blog so that you post under your alias - nobody outside the class will know who you are - and make sure that everybody understands this is a blog of a student, not of the person from whom the alias was constructed.

The video below was made for last year's class.  It is applicable still, though Blogger has changed a bit since.  Also note, that it assumes you are making a new Gmail account just for this use.  As an alternative, you can use your non-university Gmail account equally well, if you are not already using Blogger with it.

The main thing is to use the Blogger Profile, not the Google Plus profile.  The Blogger Profile is what allows you to post under an alias.  See the image below.

Excel Tutorial - Due Wed 9/3 at 11 PM

This is the first homework, though it really is a preparation for the future Excel homework that you will do.  This one is meant to teach you how to go about doing them, even if you are not very comfortable with Excel.

Go to this link.  Then click the download button the is in the bar above the preview pane.  Save the file somewhere on your computer where you can find it later.

If you have questions about the content of this homework, please post those as a comment to those post.  I will try to respond within 24 hours.  Other students in the class should also feel free to respond.

Note that you get 10 points for completing the homework AND SUBMITTING your key to the Web form that is linked in the homework.

Start of Semester Survey

Please complete this by Wednesday evening.  I will compile results and present in class on Thursday.

Economics of Organizations - Start of Semester Survey via kwout

Moral Hazard and the S&L Crisis

While we will consider moral hazard even in the first class session, we will take a deeper look at it during the second half of the course.  Your textbook has a very nice example of the moral hazard entailed in making bank loans when the deposits are covered by Deposit Insurance provided by the Federal Government.  The piece linked below, illustrates the practical reality of the situation.

Lessons Not Learned - NYTimes.com via kwout

Why this tag?

Sometimes we won't cover everything that I've prepared for a particular session and other times things will occur to me that we should have covered during class or even after class.  We might then bring some of that to the next class and/or I might post about it here under this tag.

Useful for first class - Do we know the best way to learn?

The following excerpt and link back to the original piece offers some food for thought.  Is the technique we use to promote learning really the best?  or not?  A related question, if the answer is that it is not the best technique, is why does the less good method persist?  Because an economics approach typically focuses on optimizing behavior and rationality of the participants, the only way that economics can explain is is for people's beliefs to be errant.  You might then ask yourself whether there are other sensible non-economics explanations for why such behavior persists.

Confuse Students to Help Them Learn - Teaching - The Chronicle of Higher Education via kwout

The Follow by Email tool in the left sidebar

You can receive daily digests by email from the class site by entering your email address.  This works for posts, but not for comments.

NOTE: After you sign up you will receive a verification email to start your subscription.  You must click the link in that email to activate your subscription.

Research on Motivation and Our Course

How to motivate members of an organization to behave in accord with the organization's goals is a key issue for our class.  Economic incentives, when viewed from the psychology perspective, fall within the family of what they term extrinsic motivation.  The piece excerpted below followed by a backlink to the article, argues that for deep learning intrinsic motivation is better.  It's a useful thought to have in mind during our course.  Then the question becomes - when is extrinsic motivation necessary and when does it get in the way of intrinsic motivation?  I hope that by the course's conclusion members of the class will have some sense of a good answer to that question.

The Secret of Effective Motivation - NYTimes.com via kwout