The visible hand in economics

Archive for the ‘Law and Economics’ Category

With the announcement of deposit insurance by the government for all our dodgy finance companies, being an economist who understands the concept of moral hazard (although in this case it would actually be adverse selection given that I would enter into the contract with government with the intent of exploiting an information asymmetry), I thought I would start my own finance company. Here’s what I figured would go on our ads which will feature a very trust worthy has been celebrity telling you how much you can trust us (any suggestions?).

Agnitio Finance will exclusively invest in the highest risk hedge funds available. We will offer an interest rate on deposits of 30%.  While their will be serious disconnect between the riskiness of our assets and liabilities, don’t worry, we offer extensive deposit insurance, which you don’t actually have to pay for. In fact, you get to share the cost of this insurance with every other tax payer in the country!

Agnitio Finance: Zero Down side

For those of you don’t read stuff.co.nz while they should be working, there are some really interesting tidbits on the latest article about the Warehouse pahsing out the extra concept.

It expected an annualised pre-tax improvement in trading earnings of about $9 million.

i.e. the extra concept has been hemorrhaging money!

Mr Morrice said it was the failure of the hoped-for halo effect – where grocery shoppers also bought general merchandise – that was the main reason for Extra’s dumping.

This has been Matt’s pet topic during this saga (posts here and here). The killer for the halo effect, and the reason why I’ve always believed the Extra concept would fail unless a supermarket owned the warehouse is summed up nicely by Tony Carter from Foodstuffs

“Clearly they did not have the scale”

and Mary Smith of Auckland

“I don’t come here that often. I find their prices expensive compared to the other supermarkets.”

Agnitio

One of the longer takeover sagas appears to have ended with the warehouse having announced its decision to end the warehouse extra format. This will effectively clear the way for either of the big two supermarkets to take over the warehouse. This is because the commerce commission is of the opinion that the warehouse would be a “maverick”. No-one really agrees on what this means so I won’t try and explain it, but given the ambiguity of the term it’s interesting the commission became so fixated on it.

For those of you who don’t know how competition law works you compare the factual of the merger going through with the counter factual of the merger not happening. With the warehouse extra no longer existing going forward, therefore emrger will not eliminate the “third player” from the grocery market and ehnce competition in the grocery market will be no different in the factual then in the counter factual.

Two things to look out for concerning this are

  • The Commission’s response
    They really don’t want this merger to happen
  • Whether or not the supermarket that takes over the warehouse rolls out extra in the future.
    We discussed on the blog before that we (at least I) think competition would actually be increased if one of the supermarkets is able to roll out the extra format.

Watch this space!

Agnitio

A raging debate is going on over at Colin Espiner’s blog on National’s new law and order policy. Given that people are making lots of arguments on both sides, I thought it might be worthwhile laying out an analytical framework for how an Economist might view the justice system. I’m not going to go into whether or not I think National’s policy is good or bad, that’s for you to decide.

Before we go any further I need to understand the concept of a sunk cost, as this will be crucial to my discussion. I’ll let you read the wikipedia definition, but put simply a sunk cost is one which cannot be recovered after it has been incurred. Therefore economic theory states that ex ante you should take into account the sunk portion of the cost of an action but that ex post the sunk portion should be ignored.

I’m going to use the term cost quite loosely here, it can refer to someone being impaired financially as the result of a robbery or suffering emotional harm as the result of a crime. This is not a discussion about the financial cost of running a prison system or anything like that (although I acknowledge that is an important issue).

Now, Let’s talk Justice

Read the rest of this entry »


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