Shameless Self-Promotion
I have a couple of recent publications that may be of interest to some of you.
A couple of folks have expressed interest in my recent Energy Law Journal paper on manipulation. Here it is: my policy recommendations are at the end.
Cato just released a Policy Analysis I did on clearing mandates. The link is here: you can download the paper from that page.
Very cogently argued – especially to a non US layman. Why does analysis like this so rarely make it to the statute book?
Comment by Andrew Webster — July 23, 2010 @ 3:00 pm
Thanks a lot, Andrew. Truly flattered. Re “why?” Well, what pops into my mind is a remark that Judge Richard Posner made when asked about how Congress would react to his controversial work in law and economics were he to be nominated for the Supreme Court. He said something to the effect that he had no expectation that the “Congressional intellect” was capable of understanding it. Not putting myself on Posner’s level to be sure, but I am similarly skeptical that Congress has the intellect to understand even more prosaic things, like what I propose.
Thanks again.
Aren’t we being somewhat elitist here 🙂
So there are instances where expert knowledge can and should be used?
Comment by Surya — July 23, 2010 @ 5:41 pm
Expert knowledge has many uses, but predicting the outcome of the political process and
the secondary effects is not one of them. Businesses are just trying to make money, that is what they
are for. The Obamanians have signaled that their goal is to appropriate that money
for their own uses.
Comment by SR — July 23, 2010 @ 9:27 pm
Surya–obviously there are many places where expert knowledge can be used, and should be used, but one must avoid the Fatal Conceit. Indeed, the whole point behind a good deal of what I write about manipulation is how to design regulations that economize on scarce knowledge and information. Focus regulatory/legal attention on kind of conduct that is demonstrably destructive and can be understood readily with standard tools. And most importantly, target action at times where information is best. Indeed, part of the motivation for my work is to find ways to improve the operation of the market while allowing the market to do what it does best–discover and utilize diffuse information. This work was done always with informational considerations and the Fatal Conceit in mind.
Craig, I have read your paper – which is quite interesting and I recommend it. Part of the problem looks like some sort of social dilemma that the outside position hedgers face. Each individual wants to lay off the risk, but if as a collective they do it, they leave themselves vulnerable to a corner. Or have I missed the point completely?
Comment by michael webster — August 3, 2010 @ 9:24 am
Thanks, Michael. You’ve hit an important element. Hedgers face a trade-off between liquidity and basis risk. Customized but illiquid hedges minimize basis risk: trading in a standardized contract imposes basis risk, but the network economies of liquidity mean that transactions costs are typically lower than when trading a customized contract. The increasing returns aspects of liquidity mean that there is a “tipping” process whereby many hedgers utilize the standardized market and live with the basis risk. But the disadvantage of trading in the standardized market is that you are also vulnerable to corners that exploit “out of position” hedgers and increase the basis risk that they bear.
My intuition suggests that even absent manipulation, too few traders utilize the standardized product because there is a positive externality. Manipulation (an opportunistic, rent seeking behavior) exacerbates that inefficiency.
Thanks a lot for the comment. Just typing out my reply has given me an idea for a paper formalizing this intuition.
This is interesting because my naive intuitions are precisely the opposite! Look forward to seeing your paper.
Comment by michael webster — August 4, 2010 @ 10:14 am