"Duked" Out of A Dorm Room

In Mungowitz’ blog post, he talks about how the Duke University housing lottery is unfair and a bad rationing mechanism. According to his story, Duke put the Iota Tappa Kegga (ITK) frat in a spot that the Baseball Stats Study Group (BSSG) while BSSG was in a spot that ITK wanted. The University refused to allow ITK to pay BSSG to switch dorms but would allow them to trade. Mungowitz addresses the fact that the University should not prevent this exchange because it makes the two parties better and no one worse off. But still the University says (in a vague and badly written letter that inspires contradiction) that the monetary exchange goes against the “intent and spirit” of the University and the housing committee and only a money-free trade would be allowed.

1. If the monetary exchange were to happen, what negative effects would plague Duke and the housing lottery in the future?

2. Should Duke replace the housing lottery with a better rationing mechanism? What if the system came on a first come first serve or force rationing mechanism?

3. Did the University officials do the right thing and if so what were the real reason they prevented the exchange?

This blog post article looks at how a “fair” rationing mechanism of the lottery can turn into a horrible rationing mechanism when “the assignment of a group to a space allocation has zero, zilch, bagel, nada to do with how much that group VALUES that location." In this case the lottery is a bad rationing mechanism. There is no doubt behind this.

Some people say the exchange should have money involved. When people are forced to barter, the trade will take a long time (if ever). ITK would have to go find some group who is willing to trade with no money involved. This time spent is an opportunity cost of time wasted, especially in college. With money involved in the trade, bartering is not needed and a trade can occur easily.

So why did Duke prevent a monetary exchange but allow a trade? The administrators at Duke University are smart enough to realize the law of unintended consequences. If groups are only allowed to trade dorms then there will be very little consequences, all transactions would require a majority vote for a trade. However, if the exchange was monetarily based then there would surely be unintended consequences. The first pick in the lottery would pick the most popular spot on campus or a spot they know someone wants (even though they do not want it) and force people to pay them for the switch. The housing lottery would turn into a game where the first picks in the lottery would attempt to get money. When we put money on a transaction that originally was based off of wants and a need to trade (like paying for Kidneys) there are unintended consequences that follow. Things become a market. Also, the marginal value behind the "best" house that the first pick in the lottery has is amazing and many people will want the dorm. A monetary exchange will cause students to drive up the price as they compete for the best house and the people who won the house in the lottery would gladly charge a high price that they know people are willing to pay. Look there may be many other unintended consequences but Duke still should have come up with a better reason than the exchange goes against “the intent and spirit” of the University. Come on!

Unintended Consequences in the Real World

This week I read George Stigler's An Academic Episode and Joshua Gans' The Most Unusual Day. Both readings explored the Law of Unintended Consequences. Stigler explored the unintended consequences of rules made in a university. Gans looked at the effects of a new birth law in Australia.

Stigler looked at a university in South america run by a man named Seguira. The new rules made it so grad students, associate professors, professors, and assistants could challenge each other to a test and switch jobs and salaries. This caused professors to retire, teach wrong information, and stop research. There was intense competition and rivalry and a mad rush to the library. The rules were repeatedly changed but always had negative consequences. Graduate studies almost stopped entirely. The rules were then obliterated.

Gans looked at a law made in Australia in 2004 that said any baby born after July 1st would get a $3000 bonus. The announcement was made a few months in advanced. This announcement caused birth certificates to be changed and caused all induced labor and caesareans to be virtually stopped. There was a giant overflow in the hospitals. Births were shifted. Was it worth it?

These two examples explained the Law of Unintended Consequences. Unintended things - usually bad - happened as a result of new laws.

Questions remain.
If the Australian government decided to make the announcement on July 1st and not in advance, would there still have been unintended consequences? Is this an example of when there would be no unintended consequences? I also wonder in in 2008 when the baby bonus was changed to $5000 if the unintended consequences happened again.
Also, did Seguira not realize how the new rules could not possibly end well. Did he think people would just work harder with no selfishness? Also what happened when the rules were wiped away? Was there a backlash or more unintended consequences?
Finally, is there an example of a law of unintended consequences where the consequences are good - or outweigh the negatives? We seem to look at a lot of examples of negative unintended consequences.

Class 17 - Making a Deal with the Devil

Today we talked more on the Law of Unintended Consequences. This is when unintended things, usually bad, happen as a result of a law or something that was supposed to be good for society. Last post I talked about the seat belt example. Today we talked about the Endangered Species Act and how landowners who were paying the cost of the act just cleared their lands and now more animals are endangered.

Unintended consequences happen when we use simple rules to try and regulate complex systems.. We have limited information, little feedback, misleading incentives, and short time horizons.

We also talked about how when regulations push against incentives, incentives push back. For example, the Disability Act caused less disabled people to be hired because it would cost the company more.

"Sometimes the devil you know may be preferable to the devil you don't."

We ended the lecture by talking about how trade is NOT zero-sum. There is the pie fallacy - there is a fixed amount of wealth in the world.

Class 16 - Is the Titanic a Sunken Cost?

Today we talked about the margin. The margin is a little bit more or less.

The phrase "Cassie is unselfish" means nothing. It causes the listener to compare it too what we believe is an unselfish person. Someone who knows a saint might believe that Cassie is basically God while someone from a bad neighborhood might believe that Cassie is just someone who won't mug them.

Bruce doesn't release an album every day and men don't say I love you because when they do, the value is so great at the margin. (marginal value).

For example: teachers (water) vs athletes (diamonds).
The skills for athletes are more scarce so at the margin we value athletes more. If 200 of each group disappeared, the athlete group would be more affected (maybe lockouts would happen....) But if there's none of each group, the teachers matter more. Or if there's one of each - we want that teacher more. The total value of the teachers out ways the athletes.
This is why we pay the worker making drugs more than the worker making a bouncy ball even though they might be doing the same work. The skills for the drug guy are more scarce so we value him at the margin.

Then we talked about how oil isn't a resource, but its function is. Like how people pay money for water when it's "free". We pay for the function of having water on the go.

Then we talked about sunken costs - the opposite of marginal costs. No matter how we change our decisions, these costs don't change. They are costs from the past - they are sunk. For example: if Rochester ended the football program, the mortgage on the stadium is a sunken cost - it's already spent, in the past. But scholarships and tickets would be a marginal cost.

Then there's the law of unintended consequences. Seen through seat belts in cars, yes we do save lives but what has happened? People speed more, the cost of driving badly has decreased. The accidents have increased but they are now safer accidents. But who suffers? The pedestrians.