Dog Economics

Writer and pontificator Jonah Goldberg has a podcast called The Remnant.  He recently hosted Megan McArdle, currently a columnist for Bloomberg View.  Their discussion included a delightful 2:30 segment discussing dog economics.  Transcribing it would not do it justice. Is it Veblenesque positional goods or search cost efficiency? Forthwith, here it is:




Iowahawk Handicaps the City That Gets the New Amazon HQ

[Updated February 1 to rremove the reference to Miami, Ohio which does not exist.]

You’ve heard that Amazon is choosing a city for their second headquarters. The retail behemoth released its “short list” of the 20 cities January 18.

With tongue planted firmly in cheek, well-known tweeter Iowahawk (@iowahawkblog aka Austin’s David Burge) has enumerated the pros and cons of each location. He swagged the odds for each city.

Atlanta and Austin top his list with 4-1 odds on each. (Hello? Austin? Hometown bias?) That translates to a 20 percent probability. For you non-gamblers, there’s a note at the end of this article explaining the relationship between odds and probability. Way down at the bottom are Miami (100-1), Newark, NJ (200-1), and Montgomery County, MD (250-1). Later I’ll show the complete list. But let’s get to the fun stuff first.

Three of the 20 finalists are located right next to each other. Do you think maybe Jeff Bezos wants another reason to visit the DC area? Remember, he already owns the Washington Post. The Washington, DC area is the sum of the probabilities for Washington, D.C., Northern Virginia, and Montgomery County, MD. (From this point forward, Mr. Burge will be “Dave” and Mr. Bezos will be “Jeff.”)

Many, including me, believe that Jeff has already made his decision. The true objective of having 20 finalist cities is to encourage competition among them for the HQ. This competition includes various tax breaks, tax incentives, and outright payments from the city’s coffers. One important point: Jeff owns houses in both New York and Washington.

Washington DC area map Iowahawk Handicaps the City That Gets the New Amazon HQ

Washington DC area map (click for larger image)

The probability of the Washington, DC area winning is the sum of the probabilities for Washington, DC; Montgomery County, MD; and Northern Virginia. At the very end of this article I’ll explain the relationship between odds and probability.

Dave’s analysis focuses on quality of life for employees. I’ll add comments on three other considerations:

  1. Jeff’s personal life goals,
  2. Strategies for the long-run growth of Amazon, and
  3. Jeff may believe that transplanting a large number of Amazon employees to a state could flip the state from red to blue (Republican to Democrat). This is an intriguing possibility that I’ll discuss when it seems relevant.

That means we have 21 finalists. Here’s a graph of the results. Probabilities are on the vertical axis and the odds are above each bar.

Dave's estimates Iowahawk Handicaps the City That Gets the New Amazon HQ

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The Pros and Cons

The real fun is Dave’s snarky comments on the pros and cons of each city. Later I’ll show you the complete table. Here I’ll look at each city starting with the highest and continuing to the lowest probabilities. Here’s what he said. My perceptive rejoinders follow. From this point forward, Mr. Burge will be “Dave” and Mr. Bezos will be “Jeff.”

1. Atlanta

Atlanta Iowahawk Handicaps the City That Gets the New Amazon HQ

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In 1996 Atlanta hosted the summer Olympics. During the opening ceremony, a bunch of doves were released. The day before one wag noted that this was a bad idea. “You just know there will be a dozen or so rednecks with shotguns outside the stadium.” Georgia is pretty much prime second amendment territory. I suspect the sheer number of rednecks will be a negative for Jeff. Georgia is a solid red state. It’s unlikely that putting Amazon in Atlanta will flip the state to blue.

2. Austin

Austin Iowahawk Handicaps the City That Gets the New Amazon HQ

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Austin is ranked too high. This is the city that banned Uber and Lyft. The capital of the state is also a small oasis of progressiveness in an expansive “desert” hotbed of conservatism. Surprisingly, Dave failed to note the presence of the University of Texas, a college made great by virtue of spending the money of polluters on progressive goals. Among their illustrious faculty is Bob Metcalfe, the inventor of Ethernet. If anything, the presence of U of T should give Austin a boost in the rankings. And, as noted earlier, it’s unlikely Texas will flip from red to blue unless Jeff moves several hundred thousand workers to his new HQ.

U of Texas Longhorn Logo Iowahawk Handicaps the City That Gets the New Amazon HQ

U of Texas Longhorn Logo

3. Boston

Boston Iowahawk Handicaps the City That Gets the New Amazon HQ

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Boston is ranked way too high. Hellacious traffic jams combined with killer winters will create high employee turnover. I suspect Dave has never visited the illustrious town. Driving is impossible. Seriously. Boston streets were laid out following the original cow paths to the Boston Common. And the drivers are, well, nuts. If you visit that fair city, take taxis. This is one town where I would stay away from Uber and Lyft. You want a pro behind the wheel. And as for the weather, Boston is located directly along the freeze line. That means during the winter it warms up during the day and melts the snow. At night, the temperature drops and that water freezes. The street layout and drivers are bad enough. Add slick roads and, well, you really can’t imagine what it’s like. And summers can be bummers, too. One summer when I lived there it rained every single weekend. It started raining on Friday and stopped on Monday. I swear I am not making this up. ($1 to Dave Barry.) Finally, Massachusetts is a solid blue state (notwithstanding its occasional flirtation with a Republican governor or senator). There’s no point in making an already blue state even deeper blue.

Boston College logo Iowahawk Handicaps the City That Gets the New Amazon HQ

Boston College logo

Not many people know that Boston College was the first university in Boston. Remember, MIT and Harvard are both in Cambridge. But there are a plethora of universities in the area. MIT is, of course, excellent. Harvard is OK.

4. Washington, D.C.

Washington DC Iowahawk Handicaps the City That Gets the New Amazon HQ

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As noted earlier, Jeff’s personal preferences may well come into play here. But for purely business reasons, Washington DC is ranked way too high in fourth place. To which I say, “Really??” Traffic as bad as anywhere in the country combined with a mass transit system that rivals New York City for unreliability should put our nation’s capital further down the list. Also there are terrible public schools and a local government that shuts down when a single snowflake falls. I promise that $500 will not buy you the time of day from any member of Congress.

And there is no point to trying to flip Washington DC from red to blue. The District of Columbia has exactly zero electoral college votes.

Finally, I need to remind Dave of this quote from John F. Kennedy.

Kennedy quote Iowahawk Handicaps the City That Gets the New Amazon HQ

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5. Toronto

Toronto Iowahawk Handicaps the City That Gets the New Amazon HQ

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Toronto seems ranked just about right. For one thing, I shouldn’t have to remind Dave that size doesn’t matter. And he’s wrong about hockey. The Toronto Maple Leafs are currently in third place in the NHL’s Atlantic Division.

Toronto Maple Leafs logo Iowahawk Handicaps the City That Gets the New Amazon HQBut, of course, the characterization of Canada’s Prime Minister is apt. I believe Lizzy (@Lizzie363) was the first to name Mr. Trudeau “Zoolander”. One overlooked positive is for those who vowed to emigrate to Canada if Mr. Trump was elected president. If Toronto is selected they can fulfill their promise and work for a large U.S. company. It’s a win-win! But Toronto, like every other city and province in Canada, has no votes in U.S. elections. That counts against them using the “flip the state from red to blue” criterion.

6. Pittsburgh

Pittsburgh Iowahawk Handicaps the City That Gets the New Amazon HQ

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Pittsburgh is ranked a bit too low. The few times I’ve visited I’ve found it to be a pretty nice town. And Carnegie-Mellon is a first class university.

In many respects, Pittsburgh is what Portland (OR) was 30 years ago. Real estate prices are low. The downtown is gradually being taken over by hipsters. And Pennsylvania is always in play politically. The drawback is the state’s large population, 12.8 million. Adding 20,000 Amazon workers won’t make much difference.

But the state sure is friendly. Here’s the home page..

Pennsylvania Welcomes Amazon Iowahawk Handicaps the City That Gets the New Amazon HQ

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Yes, that’s a link to a chunk of the website extolling the virtues of Pennsylvania to Amazon.

An additional plus is proximity to Cleveland (133 miles by car). The Cleveland Clinic is a world-class medical facility. Amazon employees will need that after numerous falls on the icy streets have destroyed their knees.

7. Dallas

Dallas Iowahawk Handicaps the City That Gets the New Amazon HQ

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Dallas is ranked about right. Pluses include actual Texas conservatism, business-friendly regulation, and the terrific Texas business climate. On the downside, winters can be hellacious. On my visits I’ve been impressed by the way the downtown buildings funnel the ice-cold winds. Plus I thought Dave would know that the eponymous TV series was fiction. And don’t get me started on the nightmare called “Dallas – Ft. Worth International Airport.” I’m still trying to figure out which circle of hell it belongs in.

Another plus is proximity to many athletic teams ranging from high school through the professional ranks. Dallas ranks right up there with Toronto: both have professional hockey teams.

Dallas Stars logo Iowahawk Handicaps the City That Gets the New Amazon HQ

Dallas Stars logo (click for larger image)

Jeff ain’t gonna turn Texas blue unless Amazon expands very, very rapidly.

8. Chicago

Chicago Iowahawk Handicaps the City That Gets the New Amazon HQ

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Illinois? Are you kidding me? Ranked way too high at number 8, Chicago does not belong in the top 15. High taxes, a state government that regularly sees governors sentenced to prison, a shrinking population, and way too much influence from Chicago in Springfield. Now let me tell you about the murder rate. In fairness to Dave, he used to live here, so part of the relatively high ranking is probably caused by sentiment. Also, he still owns his former residence in Chicago.  Is this just a ploy to boost its value?

Despite having a Republican governor, both Chicago and Illinois are dominated by a Democratic political machine. Like Massachusetts, Jeff shouldn’t try to make a blue state even deeper blue.

You may remember former governor Rod Blagojevich.

Blagojevich Iowahawk Handicaps the City That Gets the New Amazon HQ

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His Wikipedia page lists this as his current address:

Blagojevich address Iowahawk Handicaps the City That Gets the New Amazon HQ

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That’s right. He’s the guy who tried to auction former President Obama’s senate seat. He’s currently serving a 14-year sentence.

9. Nashville

Nashville Iowahawk Handicaps the City That Gets the New Amazon HQ

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Nashville is the sleeper of this bunch. It should be in the top three. Start with a bonus: the city is a mere 212 miles from Memphis, making weekend visits to Graceland easy. Memphis was the original hub airport for FedEx.  According to the official history, that city was chosen for its central location and having an airport with very few weather delays.

I once worked with a guy who travelled a lot. He lived in Los Angeles when we worked together. A few years later he moved to Nashville. A big plus is a first-rate international airport. Those musicians need to be able to get to and from the Grand Ole Opry.

Tennessee’s population is 6.7 million. The state is red and getting redder. There’s little chance of Jeff reversing this trend. Here’s some data from 270towin.com

Tennessee Voting History Iowahawk Handicaps the City That Gets the New Amazon HQ

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I’ve been to Nashville twice and was impressed with how easy it is to get around and the high quality of its hotels and restaurants. Plus there’s plenty of convention space. And Tennessee has a low cost of living, business-friendly government, and some nice schools (Vanderbilt, for example, is located in Nashville). I would take Dave’s 20-1 odds and bet on Nashville.

10. Northern Virginia

Northern Virginia Iowahawk Handicaps the City That Gets the New Amazon HQ

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One criticism of Dave’s odds is that Washington, DC, Northern Virginia, and Montgomery County, MD are basically the same place. Therefore they should have similar odds. That is, at best, misleading. There is more to location selection than pure geography. But it still disturbs me that three of the 20 sites are Washington, DC and its suburbs. Jeff Bezos will not be happy with the taxes and regulations in any of those places. But here we are. Does Amazon really need a supply of cyanide and/or strangling wire? Offsetting that issue is Virginia’s numerous excellent wineries.

On the other hand, Virginia is a swing state that has been trending slightly blue. This has been largely caused by federal government workers living across the Potomac River in Alessandria and other suburbs. Another 20,000 Amazon workers might hasten the trend to blue. Again, from 270towin.com

Virginia voting history Iowahawk Handicaps the City That Gets the New Amazon HQ

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11. Raleigh

Raleigh Iowahawk Handicaps the City That Gets the New Amazon HQ

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Raleigh is just out of the top ten. That seems about right to me. The Raleigh-Durham area is home to Duke University and the University of North Carolina. College basketball and car racing are huge here. Raleigh is 156 miles from Charlotte, home of the Charlotte Motor Speedway and the NASCAR Hall of Fame. Perhaps Jeff is thinking about buying an NBA team and would use a Raleigh-based headquarters to scout college talent. Another plus is very affordable real estate and access to North Carolina wineries, all 131 of them.

But it’s still located in North Carolina. The thin veneer of civilization is especially tenuous once you get out in the country. And, with a population of 10.7 million, the state has remained solidly red in presidential elections since 1980 with one exception. In 2008 the voters chose former President Obama.

12. Philadelphia

Philadelphua Iowahawk Handicaps the City That Gets the New Amazon HQ

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The real mystery here is why Philadelphia is even on this list. The 12th place ranking is way too high. Philadelphia government is about as corrupt as it gets, at least in the U.S. Pennsylvania politicians are second only to Illinois in ending up in jail. In 2016 former state Attorney General Kathleen Kane was sentenced to 10 to 23 months in prison for operating a political payback scheme. From the Wall Street Journal

Ms. Kane, 50 years old, was convicted in Montgomery County Court outside Philadelphia in August on nine counts, including perjury and obstruction of justice, for leaking grand jury documents to a local newspaper in a bid to embarrass a political foe and for lying about it under oath.

Kathleen Kane Iowahawk Handicaps the City That Gets the New Amazon HQ

Kathleen Kane (click for larger image)

Unless Jeff plans to go the bribery and corruption route for his new HQ, he should probably avoid this place. Although it is affordable in much the same way that Detroit is affordable.

There is, once again, little hope of turning the state blue and no need to turn Philadelphia any more blue. See the earlier discussion of Pittsburgh for details. I’ll just remind you that fully 59 Philadelphia precincts did not cast one single vote for Mitt Romney in the 2012 presidential race.

13. Denver

Denver Iowahawk Handicaps the City That Gets the New Amazon HQ

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This is the correct ranking for Denver. I doubt very much that access to beer and weed are in Amazon’s plus column. And I have to remind Dave that Denver is the second-highest state capitol in the U.S. (Win bar bets with this one: highest is Santa Fe, NM.) The absence of sea-level oxygen content will mean more frequent rest breaks for employees. But housing is affordable and there is fine skiing. Also the Eisenhower Tunnel on I-70 is worth a trip unless you’re even slightly claustrophobic.

When it comes to voting, Colorado has been trending blue since 2008. With only nine electoral votes, there would be little point trying to turn the state completely blue.

14. Columbus OH

Columbus Iowahawk Handicaps the City That Gets the New Amazon HQ

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I have no idea whether Columbus is ranked correctly or not. But it says something that Dave felt the need to include the name of the state here. In all honesty, I had no idea what his comments mean. But some research revealed the “pros” are all related to The Ohio State University football fandom. According to the Modern Wellness Guide website, Big Nut is a Buckeyes superfan.

Jon Peters [Mr. Big Nut] gained national fame when he painted his face scarlet and gray at the 2003 Tostitos Fiesta Bowl, when the Ohio State University Buckeyes defeated the University of Miami Hurricanes. But Peters, who OSU fans know best as “Mr. Big Nut,” decided to turn his celebrity into something more.

Ever since Mr. Big Nut came to be, Peters, 53, and his wife Terese, 49, have passed out more than 1,000 necklaces every season with scarlet, gray and silver beads. Each necklace has bead blocks reading “OSU Nut” or “Big Nut,” and is handmade with the tens and thousands of buckeyes that the Peters gather with their grandsons every year. People have tried to buy the jewelry, but the Peters refuse payment.

Here’s the man himself all decked out.

Mr. Big Nut Iowahawk Handicaps the City That Gets the New Amazon HQ

Mr. Big Nut (click for larger image)

The Horseshoe is the nickname for Ohio Stadium. So what’s the “i”? At halftime the Ohio State marching band spells out “Ohio” in script. When the word is finished, a sousaphone player prances over to a spot above the “i,” performs a few maneuvers, and bows to the crowd. Hence “dot the i at the Horseshoe.”

.Avoiding the “m” is a tribute to Governor John Kasich’s Buckeye fandom. Here’s the story:

COLUMBUS, Ohio (AP) – Gov. John Kasich wants Ohioans to avoid using the dreaded letter “M” on Saturday when No. 3 Ohio State faces archrival Michigan.

Kasich declared the game day as “Scarlet Letter Saturday” in honor of Ohio State’s rivalry game with the Wolverines. Ohio fans have often found other schools to refer to Michigan, calling the school “That Team Up North” among other epithets and singing songs about their utter disregard for the state.

Lately, Buckeyes fans on Twitter have taken to dropping the letter M from their tweets, even from their own names.

Sigh. The Big-10 12 14 is a strange place. It once had ten teams. Today there are 14. But the conference has not changed its name. Reason enough to avoid Columbus and other places where they can’t count.

Nonetheless Columbus has affordable housing, as well as combining the virtues of being the state capital and the home to a pretty good college football team. But there’s no way 20,000 Amazon employees are going to change the voting statewide or in Columbus.

15. New York

New York Iowahawk Handicaps the City That Gets the New Amazon HQ

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Even in 15th place, New York is rated too high. Dave and Jeff must be pulling our collective legs. New York City is expensive, crowded, and has a public transportation system that is possibly the worst in the country. The failure of public transportation has encouraged the rise of Uber and Lyft. That, of course, has increased street congestion. Both the state and the city have business-hostile governments. Mayor Bill de Blasio murdered a groundhog. The New York Post was all over the story.

Mayor Bill de Blasio has groundhog blood on his hands!

A week after Hizzoner dropped Staten Island Chuck in front of a crowd of spectators on Feb. 2, the winter-weather prognosticator died of internal injuries — and then the coverup began, The Post has learned.

Staten Island Zoo officials went to great lengths to hide the death from the public — and keep secret the fact that “Chuck” was actually “Charlotte,” a female impostor, sources said Wednesday.

de Blasio Fumbles Charlotte Iowahawk Handicaps the City That Gets the New Amazon HQ

Mayor Bill de Blasio Fumbles Charlotte (click for larger image)

However, Mayor de Blasio did not kill Eric Garner (the illegal cigarette vendor presumably referenced by Dave).

16. Indianapolis

Indianapolis

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Indianapolis is 51 miles northeast of Bloomington, home of Indiana University. If you don’t get the reference to high school basketball, go watch “Hoosiers.” And, of course, Memorial Day weekend the city is mobbed with people heading to the Indianapolis 500. And I personally resent the slur against Ft. Wayne. I lived there for a few years when I was a kid. Indianapolis is centrally located, livable, and has a reasonable cost of living. It should be ranked higher, at least with Columbus.

2017_Indy500 Iowahawk Handicaps the City That Gets the New Amazon HQ

Indianapolis 500, 2017 Edition (click for larger image)

17. Los Angeles

Los Angeles Iowahawk Handicaps the City That Gets the New Amazon HQ

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I’m a little surprised that Dave ranked L.A. this low. He’s a fairly frequent visitor to the City of Angels. So he knows about (but didn’t mention) the exorbitant cost of housing, high state taxes, massive state and local regulations, impossible traffic, and a city government that taxes everything it can think of. But he’s ranked it number 17, probably about right.

18. Miami

Miami Iowahawk Handicaps the City That Gets the New Amazon HQ

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Miami, Florida, is a wannabe Los Angeles but with bugs, bugs, bugs. Really big bugs.

The University of Miami Hurricanes athletic mascot is Sebastian the Ibis.

U of Miami Sebastian the Ibis Iowahawk Handicaps the City That Gets the New Amazon HQ

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This guy is right up there with the Stanford Tree in the competition for strangest mascot. It’s worth mentioning that the team’s nickname is “The Hurricanes.” Nothing like a constant reminder that natural disaster is just around the corner and a frequent visitor.

And Florida’s inhabitants are about the weirdest anywhere in the U.S. Go check @_FloridaMan and @_Flor1daWoman. Both accounts have not been active recently. But here’s one example:

Florida Woman Iowahawk Handicaps the City That Gets the New Amazon HQ

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If not for Newark, Miami would rank dead last.

19. Newark NJ

Newark Iowahawk Handicaps the City That Gets the New Amazon HQ

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Fun fact: there is a Newark, California.

There is no way Newark can be on Jeff’s real short list. About the only positive thing is an international airport. But that’s it. The city’s ranking is spot on.

20. Montgomery County MD

Montgomery County MD Iowahawk Handicaps the City That Gets the New Amazon HQ

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I’m not sure why Dave ranks this lower than Newark. Just another one of the three Washington, DC locations. And it is also heavily populated by DC bureaucrats. Montgomery County should be ranked much higher, at least closer to Northern Virginia and Washington, DC.

Odds, Probabilities, and Technical Notes

Here’s Dave’s complete list ranked by probability.

AmazonNewHQ Iowahawk Handicaps the City That Gets the New Amazon HQ

Dave’s picks (click for larger image)

Readers who also have too much time on their hands will notice that the probabilities add up to 112.96 percent. The sum should be 100 percent since (presumably) one city will actually be selected. I’ve used a straightforward method to recalculate the probabilities and odds for each city/region. This does not change the ranking.

mazonNewHQ_AdjustedOdds Iowahawk Handicaps the City That Gets the New Amazon HQ

Dave’s picks with the correct probabilities and odds (click for larger image)

My Guesses

For what they’re worth. I only claim more expertise on this because I suspect I am at least a decade older than Dave and have lived in a few more places.

AmazonNewHQ_MyEstimates Iowahawk Handicaps the City That Gets the New Amazon HQ

My ranking (click for larger image)

A Statistical Note

Odds are expressed in n1-n2 format (e.g., 2-1). That means if you win the bet you receive n1. But if you lose you pay n2. The total value of the bet is n1 + n2. The probability of you winning the bet is
1/( n1 + n2).

There’s a simple way to understand this. Consider 1-1 odds (commonly called “even odds”). Intuition should tell you that you have an equal chance of winning or losing. Which means the probability of you winning is 50 percent. Which is exactly ½.

Getting from odds to probability is pretty easy. The reverse direction – probability to odds – is less intuitive, but no more difficult. Let’s stick to the easiest case where the odds are always expressed as
n1 – 1. Using the previous equation we can see that n1 = (1/probability) – 1.   It gets tricky if you let n2 be greater than 1 because there are many combinations of n1 and n2 that add up to (1/probability). By the way, that’s why 1 is subtracted in this calculation. We’ve assumed n2 = 1.

DIY Odds and Data

Because I have too much time on my hands, I converted his ratings into an Excel workbook, then converted the odds into probability, then sorted the whole mess. The entire Excel workbook, including instructions and sources, can be downloaded via a link from this page. Please, please, please read the instructions and follow them carefully. If you’re better at Excel than me and you make any improvements, I’d appreciate it if you’d send me your workbook. Some notes on your changes would be nice, too.




Excel Workbook Iowahawk Handicaps the City That Gets the New Amazon HQ

I’ve transformed his tweets into an Excel workbook, translated odds into probabilities and sorted the table from highest (Austin and Atlanta are tied for first). A (much) longer article is forthcoming at New Geography. Stay tuned for a link.  To download the workbook, click here.  BEFORE YOU MAKE ANY CHANGES, PLEASE, PLEASE, PLEASE READ THE INSTRUCTIONS AND FOLLOW THEM CAREFULLY.  If you make improvements to the worksheets I’d appreciate it if you’d e-mail me a copy.

In the meantime, here’s the key graph. Probabilities are on the vertical axis, the odds are above eachbar.

Dave's estimates

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George-orwell-BBC

BBC Lampoons Itself By Erecting Statue Honoring George Orwell

The BBC flatly rejected a previous attempt to erect a statue in 2011, on the grounds that Orwell was too left-wing. Irony is now officially dead.

Article appears in The Federalist, November 10, 2017.




Drone Insurance

DIJ is the current market leader in drone aircraft. This morning my lovely wife pointed out that they are offering drone insurance. This made me curious, as it may create moral hazard for the insurance carrier.

The reason is simple. If you know your drone can be easily and quickly replaced at minimal cost, you will probably take more chances when flying the thing. Here’s a recent example from a soccer match in Argentina:

ABC Breaking News | Latest News Videos

Moral hazard can create adverse selection. In this case, the adverse selection might be only high-risk drone owners buying the insurance. That would drive up costs and could create economic losses for DIJ. To make a guess about whether this is the case, we need to look at the details of the actual policy.

Mavic Pro

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For this example, I’ll use the DIJ Mavic Pro. Here’s a pdf of the entire FAQ section. The good stuff is after the photos where the terms of service are defined.

DJI Care Refresh

 

Mitigating Moral Hazard

Economists have spent a lot of time over the past few decades trying to invent contracts that at least reduce the expected cost of adverse selection. We have identified two general contract structures that seem to work. (These definitions are from Jeffrey M. Perloff, Microeconomics 8e 2018 pages 661-663).

State-Contingent Contracts: In a state-contingent contract, one party’s payoff is contingent on only the state of nature.

Profit-Sharing Contracts Even if the principal cannot observe the state of nature or the agent’s actions, the principal may be able to design a contingent contract that reduces the moral hazard problem by making payments contingent on an outcome, such as profit or output. One common contingent contract is a profit-sharing contract, in which the payoff to each party is a fraction of the observable total profit.

DIJ uses both methods to mitigate moral hazard. The state-contingent parts limit coverage in the event that any one of several actions are taken. For example, if you modify your drone with parts not approved by DIJ, your warranty is void. Also you are limited to two replacements in a year. And coverage lasts one year, after which it can’t be renewed. Unless, of course, you replace your drone twice. In that case the policy is terminated after the second replacement.

The profit-sharing part (or, more appropriately for this case, cost-sharing) is the fees the owner must pay for various events. For example (still using the Mavic Pro in the U.S.) the up-front price of the policy is $99. The replacement price is $79 for the first and $129 for the second. And, of course, there is no third replacement. Nevertheless, the retail price of this baby is $999. The most you’ll pay out-of-pocket is $307. To figure out whether this warranty creates moral hazard we need to delve into the details of the state-contingencies.

Does the Insurance Create Moral Hazard?

The excerpts below are from the Terms of Service (see the pdf file above for the complete source).

First, limit the parts that are covered:

4、Which parts can be replaced under DJI Care Refresh?

Mavic Pro, Mavic Pro Platinum and Spark: aircraft, gimbal, camera, battery and propellers.

Second, limit the duration of coverage:

6、Can I renew my DJI Care Refresh when it expires? How many times can I purchase DJI Care Refresh for my aircraft?

No, you cannot. Currently, each product is eligible for only one DJI Care Refresh. The service plan cannot be renewed after it expires.

Third, DIJ keeps their options open. They may ship you a refurbished replacement drone (emphasis added).

7、How do I replace my aircraft under DJI Care Refresh?

DJI Care Refresh is bound to the product’s S/N. If you want to replace your product, contact DJI Support via phone, email, or live chat. Then send your product to a designated DJI repair center under the instruction of DJI Support staff. Our repair staff will conduct damage assessment and send you an invoice. After receiving the invoice, you can either choose to repair your product or replace the aircraft under DJI Care Refresh. You will receive a unit that is new or equivalent to new in performance and reliability after paying the service charge specified in your DJI Care Refresh Service Agreement. The replacement’s S/N will be automatically bound to your DJI Care Refresh plan.

Fourth, be sure not to cover intentional abuse or other malfeasance

II. Exclusions

DJI Care Refresh does not cover the following:

  1. Lost or partially lost aircraft, gimbal or accessories.

  2. Stolen, forgotten, or abandoned product.

  3. Damage caused by flight under unsuitable conditions.

  4. Remote controller, battery of Inspire 2, Phantom 4 Pro and Phantom 4 Advanced, and modification accessories.

  5. Deliberate losses.

  6. Abrasions and shell damage that do not affect the performance of the product.

  7. Direct or indirect losses caused by force majeure.

  8. Replacement requests for damage incurred outside the period of validity.

  9. Extra fees resulting from technical enhancements or performance improvements.

  10. Damage resulting from modifications that are not in accordance with manual recommendations, or the use of incompatible batteries and charger.

  11. Damage resulting from the use of third party accessories, batteries or software.

Fifth, repeat the mantra that there are only two replacements.

Ⅲ.Replacement Service

DJI Care Refresh includes two replacements. If you claim for replacement of your product twice, DJI shall be considered to have fully executed the DJI Care Refresh service. The DJI Care Refresh service will then be terminated.

After replacement, the original product becomes DJI’s property and the replacement product is your property, with coverage effective for the remaining period of the Plan.

Finally, be specific about pricing. The second replacement costs more than the first. And those prices depend on the exact model as well as where you live. The complete list is near the end of the Terms of Service. I’ll include a few examples here.

Ⅶ.Replacement Fee

There are no hidden charges for the replacement service. After you choose DJI Care Refresh, you will receive prioritized service. The cost of two way postage for customers within DJI Care Refresh service areas will be covered by DJI. In other areas, these costs and any associated customer’s duties are at the customer’s expense. In all areas the custom fees are at the customer’s expense. Each time the replacement service is requested, subject to your purchase region.

In NA region (US & Canada):

For DJI Care Refresh (Spark), the first time replacement fee is $49, the second time replacement fee is $69.

For DJI Care Refresh (Mavic Pro), the first time replacement fee is $79, the second time replacement fee is $129.

In the EU region (27 countries):
For DJI Care Refresh (Spark), the first time replacement fee is €49, the second time replacement fee is €69.
For DJI Care Refresh (Mavic Pro), the first time replacement fee is €99, the second time replacement fee is €139.

You get the idea.

Conclusion

DIJ has done a pretty good job of limiting moral hazard. Read II. Exclusions carefully. There’s quite a bit of wiggle room in there. As is so often the case, you’re depending on the reputation of DIJ.

One last note: DIJ has been in business quite a few years. The market outcome is that they are still offering this insurance. That implies they have mitigated moral hazard.




Consumer Reports Fail

Worst appeal to authority in history.  Big-time Consumer Reports fail.  I’ve highlighted the troublesome text.

Consumer Reports Fail




Richard Rubin meets a sacred cow featured

Sacred Cows of the US Tax Code

Over on the Wall Street Journal website Richard Rubin and Heather Seidel have put together a video explaining some sacred cows of the US tax code.  They use actual cows and milk bottles of varying sizes.  If yolu’re having trouble sorting out tax rates, the tax base, and the relationship between the two, this will probably work for you.  Warning: it may be behind a paywall. It’s worth the effort just to see Mr. Rubin wear a cowboy hat.

Richard Rubin meets a sacred cow

Richard Rubin meets a sacred cow (click for largere image)




Ronco Is Going Public. Stay Away From This One.

We intend to use the net proceeds for the following purposes in the following order: (a) first towards credit card fees of up to approximately $600,000 (2% of the gross proceeds from the Offering);

Ronco is going public.  Before I get into the details, I have to issue this warning: this article is for entertainment purposes only. After scanning the prospectus, I honestly cannot recommend this stock. Most of the proceeds will go to paying off debt. One interesting item in the “Use of Proceeds” (p. 29 of the Preliminary Offering Circular) is this →

If you insist on looking further, visit the INVEST page on the company’s website. Download the Preliminary Offering Circular and spent a quality hour reading it in detail. Then do a search on “William M. Moore.” When you get to the multiple signature pages at the end, go back to the top. This time search for “Moore.” You’ll see an interesting difference in the search result on the (unnumbered) third page of the document.  For some reason the company doesn’t want to make it easy for you to find this information.

The Ronco IPO

Ronco is going public with an IPO of 5 million shares. Actually, this is a “Tier 2 Offering” under Regulation A+. The offering price is $6 per share with a minimum “investment” of 20 shares ($120 for the math challenged). This offering is aimed squarely at Ronco’s target demographic for retail sales. If you need another reason to avoid this offering, there’s the fact that the current CEO, William M. Moore, declared Chapter 7 bankruptcy. That bankruptcy was discharged in November, 2007. And, even if the IPO is 100 percent subscribed, Mr. Moore will still control 96.67 percent of the voting power.

Ronco Innovations Ronco Is Going Public. Stay Away From This One.

Ronco Innovations (click for larger image)

Ronco is, of course, the company famous for late-night TV commercials and off-the-wall products. Remember Ron Popeil at midnight on your TV? “But wait – there’s more!” Ronco also invented the infomercial. Anyone who was around in the 1960s and 70s must have encountered Mr. Popeil at least once.

But Wait – There’s More!

Consistent with Ronco’s long history, investors may receive additional gifts depending on how much they lay out. The table below shows the full list of prizes and how much you’ll have to pay for them. Personally, I recommend the $10,000 level which gets you a one-time 20 percent discount at Ronco.com, a free Ronco Rotisserie and a free Ronco Ready Grill with accessories. Oh, wait, I actually recommend an investment of $0.00. Never mind.

Ronco IPO gifts Ronco Is Going Public. Stay Away From This One.

Ronco IPO gifts (click for larger image)

Ron Popeil

Ron PopeilFrom the company’s website:

Ronco was founded by Ron Popeil in 1964, and commercials for the company’s products quickly made Ronco a household name. The names “Ronco” and “Popeil” and the suffix “-O-Matic” (used in many early product names) became icons of American pop culture and were often referred to by comedians introducing fictional gadgets. Popeil became known as the “father of the infomercial” and coined the phrase “Set it and forget it!”

Ron is a native of Chicago and has become a legend in the Windy City. Fifty years and 2 billion dollars later, Ron has walked down Chicago’s Maxwell Street reminiscing over where it all began. After a troubled youth, being shuffled from foster home to foster home, Ron remembers a turning point in his life. “Maxwell Street was a Chicago tourist attraction as well as a place to sell all sorts of goods. The first time I went there, the proverbial light bulb went on in my head. I saw all these people selling products, making sales, pocketing money, and my mind went racing. I can do what they’re doing, I thought, but I think I can do it better” said Popeil.

And “did it” he has. The self-made millionaire is the consummate American entrepreneurial success story. Ron “Ronco” Popeil is no doubt one of America’s most unique inventors. Over the past fifty years, his products have pulled in more than $2 billion in sales. Today Popeil is still going strong, even after selling Ronco in 2004. The iconic Ronco brand and its innovative products continue under the ownership of Austin-based Ronco Holdings, Inc. Ron resides in California where he continues to invent and enjoys spending time with his family!

Even Mr. Popeil is probably embarassed by what’s happened to his former company.  Oh, wait — he’s a billionaire.  Never mind.




Thanks Anyway, Petco, I’ll Pass On This Offer

My lovely wife was browsing the ads that arrived with our daily newspaper.  While studying an insert from Petco she found two offers for BLUE Wilderness dog and cat food. Here are the ads.  (Click for a larger image):

Cat Food Dog Food

 

In case you don’t see it, here are closeups. (Again, click for a larger image):

Cat Food Zoom Dog Food Zoom

 

As if our cat doesn’t scare us enough already.  Thanks anyway, Petco, I’ll pass on this offer




Oakland Public Library Fights Fake News by Giving Customers Access to Major Fake News Site

The Oakland Public Library announced today that they were taking a major step to fight the spread of fake news. They will give all their patrons free online access to the New York Times. To fight fake news they are giving their patrons access to a major source of fake news. Irony is now truly dead.

This from NBC News Bay Area:

With fake news grabbing international headlines, the librarians in Oakland, Calif. want to put a kabash [sic] on the lies.

So they recently negotiated a deal with the New York Times to offer library patrons at 18 of its libraries free, unlimited access to the paper of record, according to Main Library Supervisor Mana Tominaga. The program launched in late November, a couple weeks after Donald Trump was elected president and Buzzfeed, the New York Times, the Washington Post and others began reporting that fake news websites might have swayed voters.

Now, under this new scenario, patrons have full access to the Times, and can search to their hearts’ delight and read whatever they want for free. In addition the libraries have limited numbers of 72-hour passes that can be used outside of the library.

Oakland libraries negotiated a deal that will cost $5,000 a year out of an annual operating budget of $26 million – about $1.8 million of which is spent on books, videos and other materials, public records show.

And, with the competence we’ve come to expect of local public institutions, it turns out you don’t even have to own an Oakland Library card. Go to http://www.oaklandlibrary.org/ and search for “New York Times.” You’ll see this:Oakland Library Search Results

Click the link noted and, presto, you get the full New York Times. No need to log in or even have any city or county library card!

But you better be quick. I predict the Times will shut down access in a hurry once they read this.