Michael Sykuta

The Moral Heart of Economics

That’s the title of Edward Glaeser‘s Economix blog post in the New York Times today. In it, Glaeser points out that beneath the mathematics of modern economics is a fundamental moral core of individual freedom. It’s a great read for understanding that economics is more than a set of mathematical models and calculations. The conclusion (below) captures it well, but I suggest you click through and read the whole piece.

Economists are often wary of moral exhortation, as many see the harm so often wrought by arguments that are long on passion and short on sense. But don’t think that our discipline doesn’t have a moral spine beneath all the algebra. That spine is a fundamental belief in freedom

(Not-so) Public Higher Education

NPR reported yesterday on a Government Accountability Office (GAO) report which finds that as of Fiscal Year 2012 (the 2011-12 school year), more of public colleges’ revenues came from students’ tuition than from state (public) funding. The following graph from the GAO report shows the breakdown in revenue sources over the previous 10 years:

As a faculty member at Missouri’s flagship public university, all I can say is, “Welcome to the party! What took you so long?” At the University of Missouri, tuition topped State appropriations for the first time in 2004. According to the FY13 Budget Book for the University of Missouri System (which includes four autonomous campuses and two hospital systems), State appropriations constituted less than 15% of total revenue, with another 2% from State grants. The table to the right shows the breakdown by each “business segment” of the University system. For the flagship campus (MU), net tuition and fees were 40% more than State appropriations. The largest source of income for the University came from “sales and services of educational activities and auxiliary enterprises.” That includes things like Residential Life and Campus Dining (which are also paid by students), Parking & Transportation Services, the University Store (which is much more than just textbooks, but includes those as well), and Athletics (which proudly boasts that it is self-funding from ticket sales, radio and television revenues, licensing, etc.).

The neighboring graph from the University’s 2014 Budget Update shows the breakdown of MU’s Operating Budget revenue, which might be considered the heart of the direct educational expenses. It shows that over the past 25 years, State support has dropped from 70% to just 32% of operating revenue. Meanwhile, tuition has increased from just 27% to 62% of operating revenue. And this over a period of time that operating expenditures increased, so tuition is a much bigger slice of an even bigger pie. Looking at the University as a whole (not just operating), students foot the bill for about 33% of total revenues (including room and board) compared to just under 17% in State funding. And that doesn’t include parking fees or bookstore purchases.

Some complain about the cost of higher education skyrocketing, and total expenditures have increased substantially (largely a result of increased administrative expenses). However, when students complain about the costs of higher education, they are focused on their tuition bills. And tuition has gone up at public universities, no doubt. Since 2000, the average annual increase in tuition at MU is about 16% (much of that in the early 2000s), which is much higher than the rate of inflation. But students (and their parents) need to recognize that the reason tuition rates have grown so much is to offset the decline in State appropriations (which not coincidentally, started hitting hard in the early 2000s). Expenditures have gone up nowhere near what tuition has.

Which is all to say, the myth of “public higher education” is really just that; a myth. Yes, there is still some State funding for “public” universities, but it is an increasingly small percentage. Public universities are now much more dependent on tuition–just like private universities–than on State funds. And while that scale may have tipped just recently across the country as a whole, in Missouri it has been that way for quite some time.

The (Fake) Academic Publishing Game

Last month Vox reported on a “scientific paper” written by Maggie Simpson , et al., being accepted by two scientific journals. The paper, a spoof generated by engineer Alex Smolyanitsky using a random text editor, was allegedly peer reviewed and accepted for publication by two of the many for-profit open access science journals that have sprung up over the past decade.The article (here) provides a nice overview of how rampant the trolling by fake scientific journals has become and some of the economic incentives behind them.

If you’re in academia, you probably receive email solicitations from these predatory journals regularly. I probably delete a handful of solicitations per day from such journals. I just assumed they were bogus, but the Vox article also provided a link to a useful listing of suspected predatory publishers created by Jeffrey Beall. Sure enough, my most recent email was from one of the publishers on this list.

While the article focuses on the problems these journals create for trust in scientific publications, the credibility of real peer reviewed scientific research, and evaluation of a given scholar’s publication resume, it fails to mention the complementary cause of the problem: Continue reading “The (Fake) Academic Publishing Game”

A GMO Rose By Any Other Name?

An interesting article in today’s New York Times on how some companies are circumventing regulatory barriers in developing new plant varieties by using “genetic editing” rather than “genetic engineering,” which is often referred to as GMO. The difference? Not the outcome (a plant that’s DNA is changed to express different traits); just the way in which the genetic change is produced. From the article (emphasis added):

Regulators around the world are now grappling with whether these techniques are even considered genetic engineering and how, if at all, they should be regulated.

“The technology is always one step ahead of the regulators,” said Michiel van Lookeren Campagne, head of biotechnology research at Syngenta, a seed and agricultural chemical company.

The problem stems largely from defining (and regulating) genetically modified plants not based on the fact that they are genetically modified, but based on the technological process by which they are modified. Humans have been manipulating plant genes for millennia; more recently using (a growing number of) technologies in the lab rather than long, drawn-out, and less-precise processes in the field. That poses a problem for regulators and critics who need to carefully circumscribe what kind of genetic modifications are, and aren’t, considered acceptable.

Meanwhile, the real question is whether a (genetically modified) rose by any other name (or technology) would still smell as sweet.

The Price and Quality of Wine, Part II

After my previous post on the relation between the price and quality of the top red wines and the top wines under $50 in Vivino’s 2014 “People’s Choice” rankings, I got curious about the price-quality relation for the top white and sparkling wines. And I must say, i was a bit surprised.

For the Top 100 white wines, there is actually a moderate correlation between the quality rankings and prices; with a correlation coefficient of 0.51. Price isn’t a perfect signal for quality. In fact, the seventh best white wine cost only $27, just more than half the average price of $52.48. But price and quality are at least somewhat related overall, with the top five wines ranging from $244 to $404 and 21 of the last 25 wines below $50. As expected, the variance in price relative to the average was less than for the reds (std dev of 63.84).

However, if you’re looking for sparkling wine, it’s much safer to let price be your guide in judging quality. Price and quality rating have a correlation coefficient of 0.715, suggesting a fairly strong correlation between the two. This is completely opposite the case of the reds (recall, the price-quality correlation for those was just 0.053). And while the range of the Top 100 sparkling wine prices was considerable, from a high of $476 to a low of $10, the variance was lower relative to the average than for either the reds or the white (std dev = 95.779, average = $126.78)

Now, there are some caveats one should make about inferring too much from such a simple comparison. But the basic lesson is pretty straight-forward: if you’re shopping for quality sparkling wines, let price be your guide–at least in an ordinal sense. You’ll have to judge for yourself how much the additional quality is truly worth (i.e., is the quality of a top 10 wine five times better than the quality of the lowest 25, as their price difference would suggest?). If shopping for whites, price is a bit less reliable a guide, but not wholly unrelated. If shopping for reds, however, be careful about reading too much into the quality of the wine from the price on the bottle.

The Price and Quality of Wine, 2014

The makers of the Vivino app, which allows wine lovers to rate and share reviews of wines, produced their Top 100 lists for 2014. According to their website, over 13 million users rated over 3 million wines. Based on those reviews, they produced lists of the Top 100 reds, whites, sparkling wines, and “Under $50” wines. The lists included the average price reported by their users (another feature included in the app). Naturally, I thought it would be interesting to see how well prices correlated with the quality rankings.

I started with the Under $50 category because, seriously, if I’m going to buy a bottle of wine it’s going to be under $50 unless I’m hosting a Nobel Laureate wine connoisseur, or I’m out for dinner at a nice restaurant on someone else’s dime. Besides, there are WAY too many good wines under $50 to spend more than that for most purposes. Using the ranking score (from 1 to 100), the reported prices have a positive correlation, as one would expect (higher ranked wines have higher prices; lower ranked wines have lower prices), but it’s a pretty weak relationship (0.2075).* This suggests that while a higher price wine may be higher quality, don’t count on it. That ought to make you feel better about grabbing that less expensive bottle for your neighbor’s New Year’s party. The average price of wines on the list was $35.03, which is still higher than you might buy for an evening at home, but the cheapest wine was just $11 (Wild Rock’s The Infamous Goose Sauvignon Blanc Marlborough 2013 at #97) and only one wine hit the $50 cap (Pago De Carraovejas‘ Ribera del Duero Crianza Tinto 2009 at #31).

I was going to stop there, but decided to look at the Top 100 red wines as well. Since there was no cap on the prices, one might expect some very expensive, highly rated wines to push the expected correlation. However, it’s quite the opposite. The correlation coefficient between rank and price is a mere 0.0528, which means virtually NO relationship between quality ranking and price. Of course, the standard deviation was much larger relative to the average price (std dev = 803.5; average = $549.30) than it was for the lower priced wines (std dev = 10.53, average = $35.03). The highest priced wine on the list was $5,455 (yes, that’s right, Pétrus’ Pomerol 1982 at #36) while the lowest was just $81 (Concha y Toro’s Don Melchor Cabernet Sauvignon 2009 at #82). So if you’re looking at wines in the $100+ range, there is a good chance that relative prices tell you next-to-nothing about the quality in the bottle.

One thing that may affect the weaker relationship is the context in which the most expensive wines are likely purchased. I would suspect a good percentage of these were purchased in restaurants, where mark-ups can be quite high and varied across establishments. And one wouldn’t expect a large number of the highest priced wines to be purchased, even among the 13 million Vivino users, so there may a good deal of variance in reported prices and quality that is masked in the reporting of averages. Perhaps the good people at Vivino would be willing to share more of the data for a more thorough analysis.

I opted not to take the time to do the exercise for the Top Whites or Top Sparkling Wines. For one, I generally prefer reds. I would hypothesize that the correlation is probably just as low for the whites and sparkling, but I suspect the variance in price would be lower for each of those than for the reds, since reds are generally better for aging and therefore may have some appreciated (or potential) time value built-in that the whites may not. If you decide to check it out for yourself, please post a follow-up in the comments!

So you want to make sure you’re getting a good bottle of wine at a good price? Crowd-sourcing quality using apps like Vivino (or Untappd for craft brews) is likely a much more reliable source than just relying on price. Of course, a knowledgeable friend or local wine seller wouldn’t hurt either.

* Note: I edited the post to make the correlations more intuitive (higher quality, higher price positive correlations) rather than the negative numbers that resulted from the actual ordinal rank score. I also added in the names of mentioned wines along with a link to the wine’s profile on Vivino.com).

Formula Pricing and Profit Sharing in Inter-Firm Contracts

Roger Blair and Francine Lafontaine have a new paper out on “Formula Pricing and Profit Sharing in Inter-Firm Contracts” (here). They explore the use of profit-sharing contracts for vertical relationships, particularly the case of successive monopoly or the double-marginalization problem. Naturally, their focus is on franchise relations. The abstract follows:

Ronald Coase viewed transaction cost minimization as a central goal of contracting and organizational decisions. We discuss how a solution to the traditional successive monopoly problem that has not been discussed in the literature can economize on such costs. Specifically, we show that when we allow for profit sharing between upstream and downstream firms, a simple formula pricing contract can be used to generate the vertically integrated level of profits. This simple contract, empirically, would take the form of the standard linear wholesale price contracts that are ubiquitous in vertical contexts, even those where we might expect successive monopoly to be an issue. We discuss the advantages of the proposed contract from a transaction cost perspective. We also discuss some of its limitations, in particular the likelihood of misrepresentation of costs, and ways in which such misrepresentation might be addressed in the contract.