goonix

Chelsea’s transfer ban and the potential for player hold-up

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FIFA have punished Chelsea by banning them from the signing new players in the next two transfer windows after they were found guilty of inducing Gael Kakuta, a France youth international, to breach his contract with Lens in 2007. The decision means that Chelsea will not be able to add to their squad until January 2011.

Fifa’s regulations on the status and transfer of players state in Article 17, paragraph 4: “It shall be presumed, unless established to the contrary, that any club signing a professional who has terminated his contract without just cause has induced that professional to commit a breach. The club shall be banned from registering any new players, either nationally or internationally, for two registration periods.”

How will this ban affect the incentives of current players registered with Chelsea? The club, being unable to sign new players, will be desperate to hold on to what they already have. The current players, knowing that the club cannot look elsewhere to replace them, will be in the driving seat when it comes to contract negotiation as they can effectively ‘hold-up’ the club to meet their demands.

The precedent for such bans being enforced is not strong, however, with Roma having their ban reduced to one summer transfer window (arguably the less important transfer window in a season) and Swiss club Sion currently appealing their two window ban.

Matt Nolan

Internalities, mechanisms, and booze

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NZIER has released an “Insight” on internalities – specifically stating that this is one way we could justify some of the costs in the BERL alcohol report as being policy relevant.  Eric Crampton discussed the release here.

What are internalities?  Internalities is the name for the cost associated with not being able to “commit” to the best set of actions over time (time inconsistency).  For example, on a Friday morning you might think about your weekend and decide it would be best if you only drank 2 beers that night.  However, once you started drinking you suddenly decided to have more – something you undoubtably regret the next day.  In this case, the inability to commit to the “optimal plan” has costs – costs that are not external but ARE policy relevant (contrary to my slogan here).

Now, both the people from BERL and NZIER that raised the internality issue are correct, and both sets of economists have far more experience and knowledge in the area of time inconsistency (I am only a macroeconomist after all).  However, there is one important point for me here – internalities matter because of commitment, and so mechanisms to aid commitment can be solutions.

Why is this so important?  Well when we look at the impact of a persons action on themselves it is often easier to develop mechanisms to solve this than in the case of “externalities” (where someones action influences an unrelated party).

In the case of alcohol there are a number of “pre-commitment mechanisms” avaliable to improve outcomes.  If we can figure out what the private cost of establishing these mechanisms is, and we see people not use these mechanisms, then we have an upper bound on the relevant “internality” associated with commitment issue!!!

So lets ask ourselves – how costly is it to commit to not drinking too much?  Some mechanisms are:

  • The instash wallet guide suggests leaving your wallet at home and only bringing in a limited amount of cash (when going to town).
  • Buying smaller portions of alcohol (when staying home).
  • Dressing badly (when going into town).
  • Committing to do something the next day which sufficiently increases the cost of drinking during the “temptation” period.

I have seen all these mechanisms in action.  They are costly, but not that costly.  As a result, my impression is that the policy relevant loss associated with the “internality” will be quite small.

Matt Nolan

In defence of the neg

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Both Tyler Cowen and Andrew Sullivan have turned on the attack against the “dating game”, specifically the “neg“.

Now any attack on moral grounds could be justifiable (as could any defence), it is just about personal value judgments. But both authours mention that they see the neg as a suboptimal strategy. On these theoretical grounds I do not think they are quite right.

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goonix

Changing tastes and preferences in the market for NZ wine

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The owner of Montana Wines and New Zealand’s largest wine company, Pernod Ricard, is set to cull its contracts with wine growers in the Gisborne region.

This action is in response to falling demand for chardonnay and sparkling pinot noir wine, both domestically and internationally. Chardonnay exports reportedly fell 12-14% last year alone. The culprit? Chardonnay’s fairer sister, sauvignon blanc. Apparently we are seeing a significant supply-side ‘correction’, as producers respond to a structural demand shock – consumers’ changing tastes and preferences. Indeed, last year sauvignon blanc overtook chardonnay as New Zealand’s most consumed white wine.

Try as they might, Pernod Ricard have not been able to sway the mighty consumer to stick with the product they have contracted for, despite “new product development, innovative packaging, capital investment and changes in wine style”.

I know at least one TVHE author that might be a little disappointed seeing his favourite varietal taking such a pounding. As for me, well I’ll stick with my reds thanks.

Matt Nolan

Question on loss aversion

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I have a question on loss aversion, as I am confused.  I keep seeing loss aversion defined like this:

our tendency to feel sadder about losing, say, $1,000 than feeling happy about gaining that same amount

But this sounds like diminishing marginal utility to me.  I mean, the $1,000 dollars I’m losing provides me with a greater level of satisfaction than an addition $1,000 would provide me with.

My feeling was that loss aversion was a situation where my satisfaction would be lower in a situation where I lost $10,000 and ended up with $40,000 than it would be in a situation where I gained $10,000 and ended up with $40,000 – even though in both situations my endowment was the same.

I thought loss aversion was about an additional payoff relevant factor (namely that the direction of the change in my outcomes is also payoff relevant, as well as the strict outcomes) not an arbitrary way of framing diminishing marginal utility.

If someone could explain where I am making a mistake it would be much appreciated 🙂

Matt Nolan

Quick thought …

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Strict neo-classical economists need to realise that there ARE systematic deviations from tightly defined rationality and as economists we should try to understand these deviations (although preferably deviations can still be incorporated into a more general version of our framework).

Behavioural economists should realise that these deviations are far less common than they believe, and even if they do exist they aren’t necessarily policy relevant.

Example for both sides, the conjunction fallacy.