Sunday, September 25, 2016

Regulating driverless cars

According to WP, the National Highway Traffic Safety Administration is in a big hurry to issue "aggressive" regulations on driverless cars.   The regulations are likely to encompass "how and where they expect their vehicles to operate, how they will interact with other cars and the roadway, how they validate their testing, how they intend to protect privacy and prevent hacking, and how they would share data collected by onboard computers."

Two ways of looking at this.  The good news is that one set of federal regulations will make compliance easier than 50 sets of state regulations.  The not so good news is that the feds are insisting on pre-market approval with testing monitored by an independent party.  This looks like a sure way of putting the US behind other countries in the race to develop this new technology.  

Driverless car experiments are already taking place.  Hopefully the industry and the regulators can wait until there is more certainty about how such cars are likely to operate before coming up with a regulatory framework.  

Thursday, September 15, 2016

An incentive plan fiasco at Wells Fargo

NC State online MBA students have been studying incentive plans this semester.  The main motivation behind such plans is to change employee motivation to generate additional net income for the employer.

This week's revelations about Wells Fargo show how a poorly designed plan can backfire.  WF wanted its employees to cross-sell more accounts, e.g. get someone with a checking account to take out a mortgage.  Employees ended up with aggressive sales targets and thousands of them created new accounts without the customer's knowledge so that they could collect bonuses.

Maryland Smith Professor Clifford Rossi argues that none of the traditional lines of defense against such behavior held.  Line managers did not hold front line employees accountable until it was too late.  Corporate risk management missed all signals as well, ditto for internal audit.  According to WSJ, only 10% of the 5000+ employees who have been fired were at the branch manager level or higher.  No senior officers have departed yet.

While the plan was in effect the number of Wells Fargo products per household rose from 5.5 to 6.4 over a four year period.  And the four year period was 2009-2013, not exactly a time when people were taking out second mortgages to buy a new vacation home.

NYU finance prof Kermit Schoenholtz argues in the New Yorker that enforcement of financial regulations depends on bank self-monitoring.  Right now, that "mechanism isn't working."  Fines are supposedly designed to punish wrongdoing and send a message that banks will pay a stiff price if caught.

Wells has been fined $185m.  Net income in the 2nd quarter of 2016 was $5.6 billion.  The CEO John Stumpf still has his job.

Wednesday, September 14, 2016

Forced grade distributions

Wharton management prof Adam Grant argues in a recent NYT op-ed that colleges should not use forced distributions when handing out grades.  In a forced distributions, there are limits on the number of students who can receive a particular grade, e.g., only 25% can get A's, the next 35% can get B's.  This type of system is in place in core classes at many of the world's leading business schools.

Grant sees two serious defects: one related to fairness and the other related to collegiality.  The forced curve might say there can only be ten A's in a class, but what if 15 students have performed at A level?  What if only five students perform at A level, do the other five get an A anyway?  Experienced professors who have taught the same course year after year are in a very good position to make sure grades are equitable relative to standards, Grant argues.  As for collegiality, forced distributions turn classmates into adversaries in what Grant calls a "zero-sum game."

Forced distributions do prevent grade inflation.  Today over 40 percent of all grades are in the A range.  Grant in essence is arguing whether the cure is a larger danger than the disease.

Closing note:  there are no forced grade distributions in the NC State MBA program.

Sunday, September 11, 2016

Is the NFL leaving money on the table?

So argue two WP economic writers.   Their basic point is that the NFL could relocate some of its teams and create a stronger revenue stream and global brand presence for the league.

The recent move of the Rams from St. Louis to Los Angeles underscores the basic idea: some very large US markets are not being served.  So the article suggests that San Diego Chargers head to Orange County, the Buffalo Bills move to Brooklyn, the Cincinnati Bengals move to Vegas and the New Orleans Saints move to Austin-San Antonio.

But wait, there's more.  Why not move franchises to Jacksonville to London, Detroit to Toronto and Cleveland to Mexico City to create a true global presence?  Better do it quick before Clinton or Trump imposes a relocation tax!

My only pushback is whether relocation makes more sense than expansion.  And why not have games  on Tuesday and Wednesday night?

Monday, September 5, 2016

Big data creates big opportunities for economists

More economists are getting jobs in Silicon Valley to mine insights from data sets that NYT calls a "Candy Store."  Amazon currently has 34 job openings for economists, with top pay of $200k per year plus bonuses and options.  Airbnb recently hired an economist away from Harvard Business School.

In addition to higher pay than they would receive in academic settings, Silicon Valley firms offer economists the opportunity to work with transactional and click data that are not ordinarily available for research.  They can conduct experiments on questions dealing with pricing, promotions and workplace incentives.

At the same time more and more economists are keeping their academic positions and consulting for companies such as Microsoft.  The likely result is economic research that is better executed and more meaningful for businesses.

Friday, September 2, 2016

Taxes due versus taxes collected

Catherine Rampell's WP blog examines the question of how much tax cheating is taking place and how much federal revenue might change if the problem were addressed.  Studies show that the feds collect about 84 cents of every dollar legally owed.  If the IRS were able to collect all taxes legally owed, it would collect an additional $600b, which is larger than the federal budget deficit of $590b.

Rampell recommends simplifying the tax code and increasing the IRS budget for enforcement and customer service.  It will not result in 100% compliance, but would get us closer to that goal.